Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Free Trade vs. Balanced Trade
By Raymond Richman, Howard Richman, and Jesse Richman, 9/28/2016

During the 2016 presidential campaign, trade has become a major economic and voting issue. For decades both political parties, in general, and Hillary Clinton, in particular, have supported expansion of free trade through trade agreements that reduce tariff rates. In contrast, Donald Trump has upended that politics, seizing the Republican nomination with the promise to renegotiate trade agreements so that they balance trade.

As a result, the two alternatives in this year’s election are free trade vs. balanced trade. These are not necessary mutually exclusive. Indeed, there have been periods of world history in which trade has grown more free without getting out of balance. Especially notable were the 1840-1870 and the 1950-1997 periods. Those were the two golden ages of globalization in which tariff reductions around the world greatly benefited and integrated the world economy.

But the 1840-1870 period was followed by a period, much like the present, in which world trade became more and more unbalanced. The European countries were experiencing worsening trade deficits and eventually had to choose between free trade and balanced trade. Those that chose to balance their trade through tariffs resumed their economic growth, while those that stuck with free trade continued to stagnate (see Paul Bairoch's 1993 book, Economics & World History: Myths and Paradoxes). The United States faces a similar choice today.

The U.S. economic growth rate has followed the U.S. trade balance downward, as shown in the following graph:

The slow U.S. economic growth rate of the last 17 years is unprecedented. From 1999 through 2015, the average U.S. growth rate was just 2.1% per year, as compared with over 3% for almost every ten-year period during the previous five decades. And the first two quarters of 2016 (not shown on the chart) have been even lower -- just 0.8% and 1.1% growth. There are six primary reasons why trade deficits slow economic growth:

  1. They subtract from demand for American products. The negative trade balances since 1976, shown in blue in the graph above, have directly subtracted from each year’s GDP.
  2. Loss of manufacturing jobs. When imports exceed exports, there is a net loss of manufacturing jobs.
  3. Less investment in new factories. When foreign governments (with the help of their central banks) manipulate exchange rates to keep the dollar’s exchange rate high and their exchange rates low, they reduce incentives to invest in American factories.
  4. Less technological development. R&D is often related to current production and therefore needs to be near to factories. Also, “learning by doing” occurs in factories.
  5. Loss of economies of scale. As we lose factories, we lose economies of scale.
  6. Slower recoveries. Any stimulus leaks abroad as larger trade deficits.

The burden of the slower economic growth has fallen disproportionately upon America’s blue-collar middle class. They have lost highly-productive manufacturing jobs and have been forced to take less lucrative jobs in the service sector. This is a major reason why median U.S. family income, after subtracting for inflation, is lower today than it was in 1999.

The Problem of Mercantilism

Most of the problems of international trade are related to the fact that a number of countries have been running chronic trade surpluses which cause chronic trade deficits among their trading partners. They are following the mercantilist prescription of running trade surpluses in order to grow their economies more rapidly.

Almost all economists have decried mercantilism. For example, Adam Smith, the founder of modern economics with his 1776 magnum opus (An Inquiry into the Nature and Causes of the Wealth of Nations) called it a policy of “beggaring all their neighbors,” because mercantilists intend to grow at their trading partners’ expense.

The problem is that mercantilism works if trading partners tolerate it, as John Maynard Keynes, the founder of modern macro-economics pointed out in the chapter about mercantilism in his 1936 magnum opus (The General Theory of Employment, Interest and Money):

[A] favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

The governments of China and several other Asian countries have successfully grown their economies at U.S. expense by buying U.S. assets (stocks, bonds, or gold) while at the same time keeping out U.S. products through tariff and non-tariff trade barriers. They are following the classic recipe for mercantilism as laid out by University of Chicago economist Jacob Viner in 1948 and Chinese economist Heng-fu Zou in 1997. They are not the first countries to practice mercantilism successfully:

  1. England and France used mercantilism in the 1500s to replace Spain as the world’s primary economic and political powers.
  2. From 1865-1873, the U.S., Canada and Australia used mercantilism to grow rapidly at Europe’s expense.
  3. From 1924-1929, the U.S. and France used mercantilism to grow rapidly at British and German expense.

Mercantilism gives faster economic growth and increased political power to the trade surplus countries, but gives trade deficits, slower economic growth, and reduced political power to their trade-deficit victims. The correlation between trade balances and changes in political power are striking, as we demonstrated statistically in a recent conference paper.

Unfortunately, the majority of the American economic profession has completely ignored the growing research about the destructive nature of chronic trade deficits and about ways to combat them. For example, in their popular international economics textbooks, now in their tenth and eleventh editions, Paul Krugman (with his co-authors) and Dominick Salvatore never consider the causes of chronic trade deficits, and never offer remedies to those trade deficits.

The Business Economists

Fortunately, there are a growing number of respected economists who have been addressing the problem. Most are business economists, and thus in close touch with business managers and the problems that they are facing.

One is Prof. Ralph Gomory, Research Professor at the Stern School of Business of New York University and former Director of Research at IBM. He is the co-author with Prof. William Baumol, distinguished former Professor of Economics at Princeton University, of a seminal work published in 2000. They modeled international trade in a world in which countries can acquire a “comparative advantage” by specializing in any industry in which they can obtain economies of scale. He now supports a system of import certificates to balance trade.

Another is Prof. Peter Morici at the Robert H. Smith School of Business of the University of Maryland. Earlier, he served as director of the Office of Economics at the U.S. International Trade Commission. He now supports a dollar-yuan conversion tax that would be applied to Chinese imports into the United States at a rate that would be adjusted to the rate of Chinese currency market interventions.

Yet another is Donald Trump’s chief economic advisor, Prof. Peter Navarro at the Paul Merage School of Business of the University of California-Irvine, who is on record with his view that the chronic trade deficits have cost a huge loss of American manufacturing jobs.

In Navarro’s 2011 book (Death by China), co-authored with Chinese-dissident Greg Autry, he noted that China is singly responsible for about half of the total U.S. trade deficit and a half percent reduction in the U.S. growth rate. His estimate is in line with our own estimate, based upon the above graph, that current U.S. trade deficits are cutting the annual U.S. growth rate by about 1%. Specifically, he wrote:

As for the actual impact our Chinese import dependence has had on America’s growth and unemployment rates, this, too, is mind-boggling. Over the past decade, our trade deficit with China has typically shaved off close to a half a point of GDP growth a year. While that might not seem like a large sum, it translates into a cumulative impact of millions of jobs that the American economy failed to create. (p. 69)
In his 2015 book (Crouching Tiger), he opposed Chinese currency manipulation and advocated countervailing duties against Chinese products. Like these economists, we have proposed a way to balance trade. In our 2014 book, we recommended that trade-deficit countries apply a single-country-variable tariff system, called the Scaled Tariff, upon the products of those trade-surplus countries with which they have significant trade deficits. The rate of the across-the-board tariff with each trade-surplus country would rise or fall depending upon whether our trade deficit with that country were increasing or decreasing. Navarro is aware that it will not be easy to take on Chinese mercantilism. In his 2008 book he wrote that the Chinese government has threatened to dump its more than one trillion dollars of U.S. government bonds gained by “recycling U.S. dollars gained from its export trade back to the United States.” He notes:
Through the currency manipulation process, China has accumulated over one trillion dollars worth of U.S. government bonds. Now anytime that U.S. politicians threaten to penalize China for its unfair trading practices, China routinely retaliates with threats of its “financial nuclear option.” Specifically, China threatens to destabilize the U.S. economy by dumping U.S. government bonds and dollars on world markets. (p. 8)

But Trump may have this threat covered. As part of his tax reform plan, he proposes a reduced tax rate on the approximately $2.5 trillion in profits parked overseas by U.S. corporations so that they can avoid paying the difference between foreign corporate tax rates and the higher U.S. tax rate. If an inflow of parked dollars is timed to coincide with sales by trade-surplus governments of U.S. assets, the two effects, moving in opposite directions, could cancel each other out.

The U.S. trade deficits have become an important political issue. The choice this election is between free trade and balanced trade. Trump, a businessman, and his chief economic advisor, a respected business economist, have put together a plan to balance trade.

If they succeed, they will significantly increase the U.S. annual economic growth rate, restore the blue-collar middle class, and begin the process of restoring U.S. economic and political power. If Hillary Clinton wins, the American economic decline, shown in red in the above graph, will likely continue.


Raymond Richman is Professor Emeritus in Public and International Affairs at the University of Pittsburgh. His economics dissertation advisor was Milton Friedman at the University of Chicago. The Richmans co-authored the 2014 book Balanced Trade published by Lexington Books, and the 2008 book Trading Away Our Future published by Ideal Taxes Association.

To read another version of this commentary, go to:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016

    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term
    Environmental Regulation
    Last 100 Years
    Real Estate Taxation


    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]