Our massive trade deficit is destroying significant segments of American industry and eliminating badly needed jobs. This is happening because we are slow to recognize an unpleasant reality: We do not live in a world of textbook free trade. We live in a world where our trading partner China has chosen mercantilism and is using the full powers of its government to advance its industries in ways that destroy ours.
If we continue to turn a blind eye to this reality we will become a poor nation.
However we can deal with our trade deficit; we can balance trade. We will describe two ways to do this and there may be more.
Balancing Trade
Tariffs must immediately come to mind as a way to balance trade so we will consider tariffs first. Then we will describe an approach we call BT/BC that is much less well known but may have major advantages.
Both approaches meet the two criteria we laid out at the end of Part 1: first, that the actions we choose should be under our control and not require the cooperation of our mercantilist partner, and second, that the actions we choose should be effective; they should actually balance trade.
Tariffs
Tariffs have a long and checkered history reaching back through centuries. In the United States no discussion of tariffs is complete without mentioning the Smoot-Hawley tariff of 1930. There are many who credit this tariff with making the great depression worse. Then there was President Nixon's 1971 tariff that was an across the board tariff imposed to compel Japan and other nations to appreciate their currencies. It is generally credited with doing that.
Tariffs meet our first criterion; they can be enacted, repealed or modified by the United States without the consent of our trading partner. Whether they are compatible with WTO Article XII, which permits extraordinary actions in the face of severe and continuing trade imbalances, is something that can be argued.
Tariffs have the great advantage of being flexible; they can be applied to different countries or to different classes of goods. They can be high or they can be low. If initially they don't seem to be producing the desired result, they can be made higher, so that in that sense they can be said to meet our second criterion, they can get the job done, they can balance trade.
However it is the effect of tariffs on the scale of trade that is their major drawback. Tariffs tend to diminish trade, and therefore its benefits. There is also the unpleasant possibility that tariffs could trigger a trade war in which countries react to their trading partner's tariffs with tariffs of their own. This is the effect that followed the U.S.'s imposition of the Smoot-Hawley tariff.
In an extreme case one can imagine trade being balanced by tariffs, but balanced at some level far below its pre-tariff-war level. It is this potential for tariffs to limit or even eliminate trade that make tariffs so extremely unpopular among economists.
The Role of Economists
Economists matter. They often directly formulate government economic policy and their thinking influences government actions indirectly as well. Economists do not want a world economy in which tariffs and counter-tariffs cut off the benefits of trade in which they strongly believe and which they have taught with pride to generations of students.
The usual thing proposed to balance trade is tariffs; since economists are against tariffs, they tend to be against these proposals and to use the dreaded label of protectionism against them.
But is it really true that economics has nothing to suggest toward countering mercantilism beyond opposing tariffs? Fortunately the answer to that question is no. There is in fact a well-known piece of economic thought that is worth considering in countering mercantilism.
The Concept of Cap and Trade
In advocating balanced trade in his remarkable 2003 Fortune article, Warren Buffett described the use of what he called import certificates. In various writings and in Congressional testimony University of Chicago Professor Robert Aliber has discussed a similar concept he called points.
Both proposals have much in common with a well-known economic concept called Cap and Trade that is used not in international trade but in the context of pollution control, to set a limit on pollution.
In Cap and Trade permits to pollute are either issued or auctioned to companies that emit pollutants. Companies must obtain enough permits to cover their emissions. If they can reduce their emissions they can sell their permits to others. Pollution can then not exceed the total of all the permit amounts issued; this is the cap.
When we apply this same concept to international trade; we will call it BT/BC. BT/BC can either stand for Balancing Trade By Certificates, or equally well for Balancing Trade with Buffet Certificates.
BT/BC
Here is an example:
Suppose that a company exports $1 million worth of goods or services produced in the U.S. By doing that the company earns a certificate stating that it has exported $1 million. These certificates are then traded on an open market. Anyone who wants to import into the U.S. is required to have certificates with total face value equal to the value of the proposed import.
This produces balanced trade very directly as the total value of imports is limited to the total value of certificates available and that is the total value of exports. Thus the export total plays the role of the cap in limiting imports.
Properties of the BT/BC Approach
BT/BC, like ordinary tariffs, is a very flexible approach and many variations are possible. Like tariffs it could be applied to specific nations or to specific classes of merchandise or in special situations or to all of these. The price of the certificates sold could go to the producers or in part to the government. Balancing trade could be introduced gradually by initially giving more than a dollar of imports for each dollar of exports, but decreasing that amount over time.
However, and this is important, unlike ordinary tariffs, the direct effect of BT/BC is not to lower or eliminate trade but to lower or eliminate the imbalance of trade.
To make this more concrete, let us imagine that the U.S. decides to balance trade with the set of countries with which we have had persistent large trade imbalances. We will call this group China+. Here are some observations:
Other Comments on BT/BC
With a BT/BC plan the China+ nations can avoid massive expenditures on certificates either by decreasing exports to us or increasing imports from us. The option of decreasing exports would allow us to regrow our industries, while the option of increased imports from us would provide export based jobs here with no decrease in imports. In this case the increase in our exports would tend to drive down the price of certificates so that the real world might well come close to the world of textbook trade where trade is naturally balanced.
BT/BC is very much in line with the spirit of both the IMF and the WTO. The IMF states in Article I of its charter that one of its purposes is the balanced growth of international trade, while the WTO states in its preamble the aim of securing reciprocal and mutually advantageous trade.
Conclusion
Part I described the need to balance trade to stop the destruction of American industry and to create jobs. Part II has described two methods, ordinary tariffs and BT/BC, that we can use to balance trade. While BT/BC seems to have many advantages, tariffs have more history.
Mercantilism is not going to go away. We must find a way to deal with its consequences despite the fact that powerful sectors of our society benefit from the present situation and therefore oppose change.
If we are willing to face up to the reality of mercantilism we will find ways to arrest out nation's downward slide.
But we should act before it is too late.
The 2003 Buffett balanced trade model is a sanction consistent with ARTICLE XII of GATT 1994’s quantitative remedies and in Buffett’s opinion virtually retaliatory proof. A balanced trade model by the U.S. will cause a paradigm shift in how China views its long-term interest. The Chinese Government has been manipulated the U.S. Dollar when it pegs its currency. If it was manipulating the U.S. water or radar systems, Americans would have united against such manipulation, in a flash. By maintaining the peg, via keeping the U.S. Dollar strong, China is MAKING U.S. EXPORTS LESS COMPETITIVE IN ALL MARKETS. Therefore, China’s manipulation of our currency is negatively affecting, not only our balance of trade with China, but all our trade balances.
In spite of guidance from a luminary like Warren Buffett, America has squandered almost seven years, because China’s creatively veiled protectionism allows the most powerful U.S. special interest groups to “plausibly deny” concern. If neither the WTO nor Buffett are conned by China and the deniers, neither should be the 2010 U.S. voters.
We suggest the best immediate use of your time & energy would be to focus on contacting your political representatives that our free society allows. Using http://www.congress.org/ makes it easy as all you need is your zip code and all their contact information is there.
Tell them your views on Communist China's negative influence on American society (this being an example) & our economy .... and demand they take action to stop it. Be prepared to E-mail them the link to this article by Dr. Gomory. Assure your representative that you & a large number of your local family and friends will be following their actions as well.
Again, don't waste your time ... your time is too valuable.”
By June, 2009, the total number of U.S. investment projects in China had exceeded 57,000 and the value of accumulated U.S. investment in China reached 61 billion dollars. These U.S. companies operating in China REPORT annual profits of at least 80 billion U.S. dollars. The actual profits are of course much higher, as they are hidden with transfer pricing moves. According to the American Chamber of Commerce in China's 2009 White Paper, about 74 percent of American businesses in China made profits and 91 percent chose to stay in China to expand their business. Many of these businesses are enjoying not only whatever industrial policies promulgated by Beijing, but they are also enjoying preferred status, advantaged over the locals.
On the other hand, cumulated Chinese direct investments in the U.S., due to the hostility shown by the American Congress, has been only US$3.1 Billion by June 2009. The $80 Billion in American profits from China is MANY TIMES that of the profits on China's exports to America ($300 Billion, with profits averaging 1-5%).
Protectionism will just jeopardize Americans' ability to make profits from China. It will also kill the fastest growing export market (China) for American exporters.
Say NO to protectionism.
Yet these clowns who obviously do not often buy from Walmart, now preach MORE of such atrocity, so that every one of the 300,000,000 American consumers will have the pleasure of paying through the nose for suit the fancy of these "economist" - who can't economize out of a paperbag if their lives depended on it.
Where is common sense to be found anymore? In these hard times folks need HIGHER PRICES like they need the PLAGUE.
According to the National Science Foundation and the National Society of Professional Engineers, less than 5% of the current undergraduate college students in the USA studying for a degree in science, medicine, mathematics or engineering are US citizens. In the Asia the vast majority of the college students are majoring in science or engineering.
We need to increase the percentage of USA citizen college students studying science and engineering from 5% to more than 70%, in order to emulate the economic industrial successes of the Asian countries. We must emulate the educational systems of China, India, Pakistan, and other Asian countries or the USA will die economically.
Real wealth is created and/or acquired ONLY when the members of a family (or a nation, city-state, island, tribe, etc.) plant, grow and/or harvest something of commercial value from the earth; extract something of commercial value from the earth; provide professional services (medical, legal, dental, engineering, architecture, accounting, land surveying, technology, etc.); collect payment for patent and copyright use; manufactures or constructs something of commercial value that is consumable or permanently useful for income or rent; and then trades, sells, leases or rents these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family.
The powers that be obviously disagree with you on the last point. The prevailing wisdom of the elite in America is that FINANCIAL ENGINEERING creates more wealth with much less effort and no headaches about labor movements, or availability of limited resources (and thus fluctuation in prices), etc. That's why the best of the college grads go into investment banking.
Your BT/BC proposal seems reasonable, and I see no flaws except for the cost of the enforcement bureaurocracy that will be required.
The US International Trade Deficit must be corrected by any means possible! This is the basic structural economic foundation problem that will destroy the US economic miracle
The USA is losing the Economic War! The USA must re-industrialize, or become a third world nation of mostly unemployed beggars after the US government destroys the purchasing power of the US dollar.
The USA has lost the World Technology Leadership! The USA must change the emphasis of our education systems back to technology and science if the USA wants to compete in the world with US technology.
The USA is Bankrupt! Instead of redeeming our freshly printed US dollars and other currency with gold, the US government is allowing these freshly printed US T-Bills, Bonds, or other Securities to be redeemed for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned wealth and assets located in the USA (that were created by previous US generations prior to de-industrialization) to foreigners in order to pay foreigners to manufacture our imported products that we consume, rather than have US citizens work to produce the things that we consume and also to pay for growing US government expenses that are in excess of our federal tax collections.
America today is still the world's 3rd largest exporter - larger than Japan, larger than everybody except Germany and China. If America is no longer a world leader in technology, it was by choice - just look at the miles long list of restrictions on exports. Just a rational step - of allowing American exporters to sell WHAT IS ALREADY AVAILABLE on the international markets (and thus do not implicate real security issues), would get America up that technology ladder again in no time, and bring the U.S.A. to No. 1 in exports again - all done with real good paying jobs.
The silly protectionists are, on the other hand, pushing against a wet noodle by trying to "bring back" $1/hr. jobs (that's what they are worth in the international marketplace today) and turn those into $18/hr. jobs. That is just pure wishful thinking. If America wants $18/hr. jobs, America has to sell $18/hr. products.
Many countries are losing confidence in the dollar as the benchmark for world trade and currency values. Other currencies, like the Chinese Yuan with a more stable value and redeemable for gold, are now being talked about as a replacement for the US Dollar as the benchmark for international currency values. The Chinese Yuan might be the last man (currency) standing after the big spending US government policies and the Non-producing US citizens destroy the value of the US Dollar.
Foreign entities will very soon own everything of value in the USA as they trade their US bonds and US dollars earned by manufacturing US consumer products for title to assets located in the USA.
Foreigners will then become the major (or maybe the only) source of employment for US citizens.
If US citizens are not willing to work for lowest wages than the foreigner workers employed in foreign countries are willing to work for, then the USA cannot compete globally based upon lower product costs.
If the USA cannot compete on lower product costs, then maybe the USA could be competitive internationally through other areas such as superior technology.
The USA did win WWII and create good jobs for a few of the decades following WWII when technology as the primary goal of the US college education systems.
Asia is now the primary source of the most advanced engineering and scientific talent because their public technical education process starts early and continues to produce a stream of highly qualified young people that is quite large compared to what is produced by the US undergraduate programs.
American students will generally not endure the hard work and intense focus that is required for science and engineering degrees, especially since there is such limited financial rewards and respect for that effort after graduation.
Only if our US products are technically superior can we export those products in return for their foreign payment (gold and US dollars) to the USA.
Unless we can somehow produce these products cheaper than the foreigners, foreigners will not buy any more expensive products produced with US labor.