Summary
Our present severe recession, though officially over, lends urgency to tackling U.S. trade issues. Without the announcement effect of a trade bill, manufacturers will continue to shutter factories and move production overseas. President Obama’s goal of doubling exports in five years is laudable. However, using as examples exporting frozen chickens to Russia and pork products to China misses the necessity to reinvigorate manufacturing. And it is unrealistic to expect that revaluing currency will correct a trade imbalance. Across the political spectrum many proposing a value added tax (VAT) despite its major shift in our financial structure and its well known regressivity. That only shows their desperation, not that imposing a VAT makes economic sense. The introduction and passing of the trade bill discussed below, with an effective date perhaps four years in the future, would give companies time to modify their behavior and prepare for future changes. The implementation delay could also dispel fears that the United States is simply overreacting to the recession. The legislation’s announcement would create a powerful incentive for firms to reconsider plans that call for closing American plants and could start the process of reindustrializing America.
Call for Action
The U.S. trade deficit—like an infected appendix—not only won’t get better on its own, it will get worse. It’s an ongoing problem that is destroying the American heartland and without an effective intervention will only make us poorer. What should be done? The nostrum of free trade is an inferior remedy to protectionism at its worst.(1) Mainstream economists and politicians that prescribe even more open trade for a sick economy have been lambasted from both the left and the right.(2) It is time to admit that free trade as it’s normally considered is not just a myth, but a dangerous delusion. Thomas Friedman, who should know better, even says that “…The free-trade system made us rich.(3)
Even the most robust enforcement of new and existing fair trade legislation wouldn’t substantially reduce our trade deficit. In fact, even if all our trading partners allowed unions and floated their currencies, it wouldn’t make any significant difference in our trade deficit. Let’s finally put to rest all the talk of the Smoot-Hawley tariff of 1930 and also to what extent China’s managed currency causes our trade imbalance.(5) Our naive free trade stance caused the U.S. to lower tariffs, but failed to demand tariff parity with our trading partners. At most, we asked our partners to impose “voluntary” quotas that allowed them to keep funds from the implied tariffs, contributing to our present unsustainable position.
“A laissez-faire system works to the benefit of the country in the most competitive position.”(6) What should be obvious is that laissez-faire works to the detriment of a country that is less competitive. Only those blinded by the most chauvinistic beliefs could still think the United States holds long-term competitive advantages against many Asian economies. Over the more than thirty years that my company has been importing and exporting products, the decline in the relative competitiveness of the United States has become increasingly clear. Even the most amateur economist can observe the devastating effect that the collapse of American manufacturing has had on millions of Americans.
Without action, our trade deficit won’t disappear until the living standards of the United States, China and other Asian countries such as Thailand or Viet Nam are in equilibrium. Is that our goal? That equilibrium is not going to be met by bringing their economic standards up to ours, but more likely by melding the economies and getting a weighted average standard of living. Living standards are rising all across Asia, but the median income in the United States has scarcely budged in more than thirty years. In fact, the lower 80% of U.S. wage earners are worse off than they were forty years ago. Keynesians would admit that without running up the deficit and household debt over the past 30 years, our standard of living would have decreased. The added interest burden of this and future debt as well as a continued trade deficit assure a future lower standard of living for the majority of Americans.
What Would Buffett Do? (WWBD)
Over seven years ago, Warren Buffett and Carol Loomis devised an ingenious way to end our ballooning trade deficit.(7) Their article in Fortune Magazine shows both the reason and the direction for his plan:
“The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to an increase in overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.(8)
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties—either exporters abroad or importers here—wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.”
Congressional Action
In response, Senators Byron Dorgan and Russ Feingold introduced the “The Balanced Trade Restoration Act of 2006”(9) which included practical schedules and mechanisms to implement the Buffett proposal in stages.(10) It called for imports and exports to reach parity, dollar for dollar, over a ten-year period.
All imports except oil and gas were initially covered in the Senate bill and the ratio of imports to exports was reduced from present levels to 1-to-1 over five years. Over the next five years, oil and gas were included in imports and gradually brought into parity with other imports. Thus, after ten years, there would be a balance between imports and exports. The bill cites article XII of the General Agreement on Tariff and Trade (GATT 1994) that permits any member country to restrict the quantity or value of imports in order to safeguard its financial position and the balance of payments of the member country. Unfortunately, this bill never even came to a vote in the Senate. Today, the dire U.S. economic and trade situation cries out for the Buffett plan.
A Revised Proposal
Limiting Import Certificates to manufactured goods and outsourced jobs(11) and exempting agricultural products and raw materials targets the manufacturing problem without the volatility associated with oil and other commodity prices.(12) Import certificates give us a tool that affects our economy just as surely as monetary or fiscal policy. The ICs would likely cause a huge jump in demand for domestically manufactured products with the attendant jump in employment, and as manufacturers grow their production capability and new factories are built the added employment will produce a multiplier effect on the economy. Along with the multiplier effect on the economy will come the accelerator as factories gear up by purchasing everything from machine tools to computers to support the higher level of production. This one time boost could pull the economy out of the doldrums in record time. Flexibility in cranking down the IC ratio is required to avoid domestic and international economic disruptions. We should no more use a fixed formula to implement certificates than we would use one to control monetary or fiscal policy. Dimitri Papadimitriou expresses concerns that IC prices could be extremely volatile and disruptive to commerce.(13)
There are renewed calls for implementing a Value Added Tax (VAT) in the U.S. to help American manufacturers compete internationally. An overwhelming number of countries use the value added tax as a major revenue source and because it is allowed to be rebated and not counted as the export subsidy it is. It also penalizes imports from non VAT countries. The IC would achieve the VAT’s goals by providing an incentive to exporters and also disadvantaging importers. Allowing the exporter to keep all the revenue from selling the IC would be an overreaction. A better solution would be one that reserves some of the revenue for the government or taxes IC revenues at a special rate (50 %?) and achieves the same result. This avoids a complete revision of our tax system to counter the subsidy given to exporters in countries with high VAT rates. The unprecedented level of government deficit and debt may counter the usual bias against raising tax revenues. Implementing ICs help exporters while providing substantial funds for deficit reduction. It might be appropriate for Congress to provide a timeline for balancing manufacturing trade, leaving the ratio of imports to exports to be determined one or more years in advance depending on forecast economic conditions.(14)
If the Congress passes and the President signs the enabling legislation to implement ICs, the United States International Trade Commission (USITC) might be the logical body to administer the proposed Import Certificate (IC) program.(15) The USITC has the experience and appropriate staff to administer the IC program and resolve disputes over which products would be subject to the program and which should be excluded. It would also annually or more often determine the ratio or dollar amount of imports to be allowed for each import certificate awarded per dollar of covered exports to meet Congresses’ intent. The USITC could certify exports monthly and issue the ICs with a 12 month validity. The ICs could be auctioned off in a process based loosely on the process used to auction U.S Treasury securities. Dealers might be the main purchasers with provision for direct purchasing by importers. By adjusting the IC ratio monthly, the USITC or another agency could minimize price volatility. Congress might insure that the USITC has specific goals such as achieving balanced manufacturing trade in 2020.
Notes:
1. Protectionism has an undeservedly bad name. Protecting domestic industries when the country is running a trade surplus does risk retaliation, but when a country is running massive trade deficits protecting domestic production may well be appropriate.
2. Non-economists predominate, for example: Senator Byron Dorgan—Take This Job and Ship it, Senator Sherrod Brown—Myths of Free Trade, Lou Dobbs—War on the Middle Class, Patrick Buchanan—The Death of Manufacturing, Eamonn Fingleton—Unsustainable, William Greider—One World, Ready or Not. And economists, Ha-Joon Chang—Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Ralph E. Gomory and William J. Baumol—Global Trade and Conflicting National Interests, and Ravi Batra—The Myth of Free Trade, Ian Fletcher—Free Trade Doesn’t Work What Should Replace it and Why.
3. New York Times, October 27 2010.
4. James Fallows, How America Can Rise Again The Atlantic January/February 2010
5. It would likely have little effect on consumer goods, but might aid capital goods industries including automotive and industrial supplies and materials. Our company, NRS, purchases consumer goods from firms that have factories in not only China, but Korea, Vietnam, Taiwan, Thailand and Cambodia as well as several European countries. Production is often moved from one country to another in search of lower costs. Recently we have seen factory jobs moving from China to Viet Nam and from Thailand to Cambodia. Some of these jobs previously moved from Japan to Korea or Taiwan.
6. Paul Kennedy, The Rise and Fall of the Great Powers. P. 360
7. America's Growing Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to Fix the Problem-And We Need to Do It Now. FORTUNE October 26, 2003 By Warren E. Buffett and Carol Loomis
8. Indeed, though the dollar has declined about 20% against the euro since this article appeared, the annual trade deficit has increased from $410 billion in the year prior to Buffett’s article to over $700 billion before the recession.
9. Not to be confused with S.3083 - TRADE Act of 2008 that would require a review and renegotiation of all or most existing trade pacts.
10. S. 3899: To achieve balance in the foreign trade of the United States through a market-based system of tradable certificates as well as other purposes.
11. Outsourcing destroys American jobs just as surely as does moving American manufacturing jobs overseas. Therefore, outsourced jobs should also necessitate import certificates. More research will be necessary to establish the appropriate value for outsourced labor by multi-nationals that outsource to their own subsidiaries. Rules must be in place to assure fair transfer pricing within multinational firms.
12. International trade imbalances in commodities and raw materials cause extremely disruptive business conditions.. Combining commodities with manufactured goods would cause wildly fluctuating IC prices. Business must have predictable IC prices in order to operate efficiently. Commodities imbalances need targeted approaches such as encouraging green energy and imposing carbon taxes or the less desirable choice—Cap and Trade legislation.
13. Dimitri B. Papadimitriou, Greg Hannsgen, and Gennaro Zezza, “The Buffett Plan for Reducing the Trade Deficit.” Working Paper No. 538. The Levy Economics Institute of Bard College, July, 2008.
14. Ian Fletcher proposes as an alternative The Natural Strategic Tariff. This raises revenue and doesn’t discriminate as would the usual protective tariff. By being levied at the same rate on all imports it avoids the harm of having tariffs levied according to political power. He believes also that it will work to foster “good” industries. He roughly defines them as high tech areas that are at an early point of production where the protective tariff will increase production and these increases will rapidly lead to scale economies. The disadvantage is that there is no guarantee that it will achieve a trade balance and US manufacturers are still at a disadvantage to manufacturers from countries that levy Value Added Taxes.
15. Made up of six members, each member is nominated by the President and confirmed by the Senate. They serve staggered terms with no more than three commissioners from the same party.
Bill Parks is Founder and President, NRS, Inc. Started with $2,000, NRS has grown to over $25,000,000 in sales and is the world’s largest paddlesports accessory provider.
