by W. Raymond Mills
INTRODUCTION
When two nations exchange goods and services of equal monetary value, several good things happen. Both nations increase domestic production to create the exports. The imports that come into the nation will either increase the value of domestic production (when the imports are inputs into domestic production) or they will increase the goods and services available to be consumed by families and individuals. Both outcomes increase the wealth and welfare of each nation.
On the other hand, unbalanced trade requires cash to move from one country to the other. This can lead to problems if the cash needed to complete the transaction becomes scarce in the trade deficit country. It can also cause problems for the trade deficit country because domestic production of goods and services are the source of national wealth, as Adam Smith said. Sending money overseas to pay for exports (net) means that domestic production has not kept pace with domestic consumption – a situation that weakens the wealth creating capacity of the trade deficit country. Unbalanced trade is a beggar-thy-neighbor activity. Each nation should seek to avoid become a habitual trade deficit country.
This common sense perspective is rejected by the powers that be in the U.S. Instead they support the competitor view that all trade is good trade and that U.S. policy should aim to increase the total of world trade, regardless of the balanced-unbalanced issue. This doctrine, which I call the conventional wisdom, began with a book, The Wealth of Nations, published by Adam Smith in 1776. Smith argued that if governments would just keep their hands off trade, the private sector would use trade to generate wealth and net benefits for all participants. This theory has been validated in the one place where it has been tried – in the United States of America. Trade between the various states must be free. The intellectual validity of the above proposition is irrelevant (in my opinion) because it cannot be applied where Adam Smith wanted it applied, to trade between sovereign nations. Experience has shown that ambitious nations produce governments that refuse to ignore the possibility of using governmental power to increase their exports and restrict their imports. Realists should expect nothing else. Japan followed this path to recovery from the devastation of WW II and other nations have followed her example. Free trade has never been tried in global trade. Despite years of experience with trade influenced by other governments, the U.S. continues to base trade policy on a dream rather than reality.
Support for free trade theory developed out of U.S. experience. Throughout the 100 years of the 20th Century, U.S. factories have been relocating from the northern part of the U.S. to other places where labor costs were lower and unions absent. That pattern began inside the U.S. but continued outside the borders of the country. Free trade assured the CEO’s of U.S. corporations that goods produced outside the U.S. could be sold in the U.S. Second, the U.S. emerged from WW II with superpower status in both military power and manufacturing capacity. The Cold War with Russia spurred the U.S. to use both trade and military alliances with other nations to counter the Russian ambitions. The U.S. could tolerate open borders to imports so long as our manufacturing prowess remained unchallenged. Free trade is a helpful doctrine when the most powerful manufacturing power in the world is seeking markets for its exports. Great Britain embraced Free Trade in 1838 when it was at the height of its power. The U.S. embraced Free Trade after WW II when it was at the height of its power. Third, U.S. economists have supported the free trade ideal for years, ever since the Smoot-Harley law in 1930 showed that protectionism imposed by the leading world power dried up world trade because other nations also adopted protectionism. Paul Krugman published the third edition of his influential text book, International Economics, in 1993. In it he argued for support for the doctrine of Free Trade because any effort by the Congress to interfere in world trade will inevitably result in the kind of political logrolling that protects dying industries and restrains the progress created by competition. He assumes that protectionism is the only alternative to free trade. His perspective would be undermined by a governmental program that preserves competition among domestic industries by placing equal restrictions on all imports.
The U.S. trade deficit cannot be ignored, despite the views of most international trade experts. It has existed for 36 years, peaking in the years of 2005 and 2006 when 36% of U.S. imports were paid for with cash. Also, in that same year 46% of goods imports into the U.S. were paid for with cash. Our trade with the 3 nations of China, Japan and Germany combed in that year require 72% of the payments for goods imports to be cash not offset by the value of our exports to those 3 nations combined. These numbers represent a peak year. During the ten years of 2002 to 2011, the U.S. sent 5.8 TRILLION overseas to pay for our imports in excess of exports. Those dollars can buy a lot of new machines to increase the efficiency of production in competitor nations. It also can help placate a restive population by increasing the quality and quantity of goods and services available to them. It can increase the capital reserves in other nations; it can increase the International Investment Position of other nations. But the important reality for the U.S. is that those dollars are used to pay workers and suppliers in other nations, not the U.S. Those dollars are part of the reason the Chinese economy has been growing so fast in the last decade.
U.S. trade deficit problem improved considerably between 2005 and 2011. By 2011 payments for imports in excess of exports had dropped to 21% of imports for all imports, 33% for goods imports and 65% for goods imported from China, Japan and Germany combined. The primary reason for this change is the financial meltdown of 2009 which hammered world trade for one year. Also, the low value of the dollar helped exports.
Trade deficits exist because countries benefit from the corresponding trade surpluses. In 2011, trade between the U.S. and China, Japan and Germany resulted in the U.S. paying cash for 50% or more of their goods imports from each of those nations. By 2011, each of those nations had developed a competitive advantage over U.S. producers in some part of manufacturing industries to create their surplus. Statistics reported by the U.S. Census Bureau show that 90% of the U.S. goods trade deficit in the first half of the year 2012 in the U.S. was due to manufactured products only. The governments of each of these three nations have used their power to create the conditions favorable to their countries competitive advantage in manufactured products.
No trade deficit country has moved aggressively to use the power of their government to reduce the size of their trade deficit. No nation is more in need of this action than the U.S. The U.S. has been the world’s largest debtor nation for trade for decades. No law of nature or reason requires a trade deficit country to endure more than 36 years of a trade deficit. Each nation should defend its own interest – to take actions to preserve the nations’ ability to create wealth by domestic production.
The U.S. needs to develop a program (series of actions) that will reduce the size of our trade deficit with each of these three nations. In 2011, these three nations combined were responsible for 55% of our trade deficit in goods. That number can be reduced. If the merchandise trade deficit with the three nations can be reduced from 55% to 15% of the total U.S. goods trade deficit, the total cash paid for all imports from all nations (including services as well as goods) can be reduced to 6% of U.S. imports (if the other assumptions hold).
The numbers presented below show that a 290 billion reduction in the size of the goods imports from these three nations could result in a reduction of the total trade deficit in goods and services with all our trading partners of 407 billion (560 billion in 2011 versus 150 billion after implementation). Numbers for the year 2017 are, of course, a hypothetical possibility.
ASSUMPTIONS AND CALCULATIONS
Assumptions
1. The numeric increase in goods exports from the U.S. in the next 6 years will be one-half the size of the numeric increase in the years 2005-2011.
2. The ratio of goods exported from the U.S. to goods imported into the U.S. will grow by the same number of percentage points in the next 6 years as was experienced in the years 2005-2011.
3. The ratio of the goods and services exported from the U.S. to goods only exported from the U.S. will remain at 1.40.
4. The ratio of the goods and services imported into the U.S. to goods only imported into the U.S. will remain at 1.19.
5. The three nations as a group (China, Japan and Germany) will account for 15% of both imports and exports of goods into and out of the U.S. in the year 2017.
Calculations United States Trade To & From All Nations
Year Goods and Services Goods only (in Billions)
Exports Imports (Ratio)(Balance) Exports Imports (Ratio)(Balance)
2005 1,287 1,996 .64 -709 912 1,693 .54 -780
2011 2,103 2,663 .79 -560 1,497 2,236 .67 -738
2017 2,506 2,662 .94 -155 1,790 2,237 .80 -447
U.S. Exports to 3 Nations: U.S. Imports from 3 Nations Goods only (in Billions)
2005 Exports Imports (Ratio) Balance
· China, Japan & Germany Combined 131 466 .28 -335
As Share of Trade with All Nations 14% 28% 43%
2011
· China, Japan & Germany Combined 219 626 .35 -407
As Share of Trade with All Nations 15% 28% 55%
2017
· China, Japan & Germany Combined 268 336 .80 - 68
As Share of Trade with All Nations 15% 15% 15%
U.S. Goods Trade with Remainder Nations (Total – 3 Nations) (in Billions)
Exports Imports (Ratio) Balance
2005 781 1,227 .64 -446
2011 1,278 1,610 .79 -332
2017 1.522 1,902 .80 -380
Sources: U.S. Census Bureau, Foreign Trade Division, U.S. Trade in Goods and Services, 1960-2011, June 6, 2012; U.S. Census Bureau, Foreign Trade, Trade Highlights, Top Trading Partners
DISCUSSION
The above numbers represent an aspiration, a result I would like to see happen. It will not happen unless the U.S. changes current policy and practice re world trade. The actions needed are described below. The statistical result to be sought is present above.
The numbers in the above table assume that by the year 2017, the share of U.S. goods imports into the nation paid for by goods exports from the nation will be .80. That is a gain of .13 from the .67 share experienced in 2011. The second major assumption is that the share of imports into the nation proved by the combination of the three nations of China, Japan and Germany will be reduced to .15 by the year 2017. That number (.15) is the share of U.S. exports to the world purchased in the three nations in both 2005 and 2011 – and assumed for 2017. The .15 share for imports will be tough to achieve because the 2011 share is .28.
That kind of drop in imports from the three nations has never happened in the past and will not happen in the future absent a dramatic change in U.S. policy and practice.
The three nations are the focus of attention and action because trade with the rest of the world has already (by 2011) achieved the desirable ratio of 79% of goods imports paid for by exports (21% paid for by cash).
We need a program, a series of actions that can be implemented over time, to allow all parties involved to adjust slowly to the new reality.
This proposal assumes significant change. How can the U.S. government make that happen without a radical disruption of the world trading system?
First, implementation must proceed slowly. Secondly, the way must be prepared intellectually. Three propositions must be firmly establish.
1. Balanced trade is ideal trade because, in the long run, exports out must be near equal to imports in for all nations to insure that every nation gains a net benefit from trade (net benefit means the economy and the people are better off with trade than without trade).
2. Balanced trade will created unequal percentage increase in growth with the larger percentage increase stimulus to growth of GDP due to trade accruing to smaller nations.
3. It is the responsibility of each trade deficit nation to take actions to reduce their own trade deficit.
The actions proposed here should be delayed until the above three propositions are recognized as valid by bankers, economists and politicians all over the world.
Tariffs are the ideal weapon. They have been used for years by all nations to restrict imports. They have the advantage of being explicit. This makes the trading environment known rather than unknown. Western nations generally favor explicitness and honesty in all dealings, including trade. The U.S. should embrace this tradition.
Historically, tariffs have been answered with counter tariffs leading to a trade war which made both countries worse off. Historically, tariffs were imposed to satisfy a powerful political interest in the home country. Each imported product received a different tariff size reflecting the power of its advocate. Because of their origin, these tariffs had no intellectual justification. They were inefficient in that they usually defended dying industries. They harmed rather than benefited the general public of the home country, as Adam Smith argued so eloquently. Traditional protectionism, as described above, must be avoided.
The proposal is that every product manufactured in China, Japan and Germany will pay the same tariff rate. This insures that the products squeezed out of the import stream are those that are less competitive with alternative producers. Instead of favoring one domestic product over another, competition will be preserved throughout the global system. Those products that are available only from one of these three nations (and have no substitutes) will rise in price to offset the tariff. Limiting tariffs to those countries with a large trade surplus with the U.S. will retain the ability of other nations to enter the U.S. market. The handicaps applied to the three major nations will benefit producers in other countries as well as those in the U.S.
Prices will rise in the U.S. only after the three nations cease absorbing the increased costs by reducing profits and when all other nations and domestic producers cannot provide competitive substitutes for the handicapped goods. However, imports from the 3 nations will not decline until their products are priced out of the U.S. market. Domestic producers will fight for market share with the products of other nations. All nations that increase exports to the U.S. must also increase imports from the U.S. to avoid becoming the next nation added to the list of those nations handicapped by tariffs. This system is intended to expand over time to as many other nations as needed to reduce the size of the U.S. trade deficit.
The proposal is for tariffs to be temporally imposed on all goods manufactured in China, Japan and Germany until such time as the goods trade deficit with the three nations becomes less than 16% of the national trade deficit in goods (or when the value of the goods exports accepted from the U.S. becomes above 80% of the goods imports received from the three nations combined). Each of the three nations should be removed from the tariff system when they do their part in increasing the goods imports received from the U.S. relative to the goods exports they send to the U.S.
Implicit in this proposal is the idea that the U.S. should discard all other restrictions on imports. This scheme will succeed without this proposed gain in competiveness among domestic products but the gains will be greater with only this one tariff scheme.
The U. S. Congress should pass a law imposing a 10% tariff on all imports manufactured in China, Japan and Germany. This law will specify that the size of this tariff will increase by 5 percentage points at regular intervals (either 4 months or 6 months) until either the trade deficit with these 3 nations is reduced as described above or a cap in the tariff rate of 40% is reached.
The Congress will revise this system as needed, to remove or add nations to this scheme – or to change the tariff rates to meet new realities.
The Federal Reserve Board will be granted the authority to hold constant the size of the tariff at any time and for so long as inflation in the U.S. is a threat to the national economy.
This scheme is unlikely to produce a trade war because:
1. The proposed tariffs will end when U.S. trade nears a sensible goal.
2. The U.S. position is intellectually defensible.
3. Trade with other nations allows the U.S. to endure pressure from these three nations.
4. Exports to the three nations constitute only 15% of U.S. exports.
5. These three nations own trillions of dollars of U.S. Treasure notes. Selling a large quantity of these notes on the international market will depress the value of their remaining notes and will allow the U.S. to buy these notes at less than their face value. It would also decrease the value of the U.S. dollar, supporting sale of exports from the U.S. Using this money to acquire goods and services for sale in the U.S. will increase the market demand for goods and services produced or owned in the U.S. (a result Bernanke has been striving to achieve).
By way of summary; the three nations may mount some kind of resistance to the proposed actions, prices for goods may increase in the U.S… Set against these possible negative outcomes, production of manufactured goods may increase in the U.S., the trade deficit may be brought under control, the U.S. economy may be positioned to compete effectively in global trade, and trade surpluses may decrease throughout the world, positioning global trade to produce good results for all participating nations. The global trading system will be sustainable when it produces net benefits for all nations. Net benefits will be produced for all nations when every nation experiencing a long term trade deficit imitates the U.S. example.
THE END
December 19, 2012
ReformerRay
W. Raymond Mills
6000 Riverside Dr. Apt. B-175
Dublin, OH 43017
[email protected].
Trade with nations whose wages are well below our poverty level has been enabled by technology — global communications, containerized freight etc. This same onslaught of technology will continue on to eliminate many global jobs as illustrated by Foxconn’s announcement that they will be acquiring 3 million robots.
The book which most clearly describes this new phase we are entering is “Lights in the Tunnel” by Martin Ford.
Here are my recommendations:
Phase in of a 30% REVAT (Refundable Employee Value Added Tariff). Where possible, the proceeds would flow directly to those employees that added the value. Where not, it could be held in individual accounts or escrow on their behalf at an International Bank.
Within the US, we need to phase in an excess profits tax where corporate income which exceeds an industry - specific fraction of payroll would be taxed at 100%. The goal — corporations could only increase stock value by increasing payroll.
THE FISCAL CLIFF IS WHERE FREE TRADE HAS PUSHED US TO THE EDGE OF!
THANKS TO BUSH JR. NOT ENFORCING AGREEMENTS, & EXPANDING THIS HORRIBLE TRADE POLICY. WE LOST 50,000 FACTORIES, & MILLIONS OF JOBS ON HIS WATCH! A MAJOR DEDUCTION OF REVENUE! THEN, ADD IN TWO WARS, AN UNPAID FOR TAX BREAK FOR THE RICH, WITH AN UNPAID FOR DRUG BENEFIT. AND WHAT DID EVERYONE EXPECT TO HAPPEN?
WHILE WE GO OVER THE CLIFF…. WALL STREET, & THE BIG MONEY INTERESTS WHO PUSHED THIS TRADE POLICY HAVE BECOME FILTHY RICH! PERHAPS WE SHOULD TAX THE HELL OUT OF THEM TO REPLACE WHAT THEY STOLE?
Here are my three assumptions:
1. Obama has never heard of Warren Buffett or his “balanced trade” proposal.
2. Obama is desperately seeking a solution for our loss of jobs to China, India, Japan and elsewhere.
3. All we have to do is send a copy of Warren Buffett’s 2003 article on “balanced trade” to Obama and he will immediately take steps to put it into practice-thus bringing back millions of manufacturing jobs and restoring our economy to a healthy state.
There is a fourth assumption which I do not share: Obama is actually interested in seeing a return of U.S. manufacturing jobs.
Warning: Possible sarcasm in the above comments.
Warren Buffett stated the problem beautifully. But his proposed solution sidelines the Federal government. I believe actions of the governments of China, Japan and Germany to create a trade surplus must be countered by actions of the U.S. government to reduce their trade surplus with the U.S. Buffett’s solution provides support ONLY for existing exporters. I want to encourage new exporters by changing the market conditions faced by all U.S. manufacturing factories.
I agree with Bruce Bishop that Obama does not understand our problem. I am still wrestling with the question of whether it is willful “closing-eyes-to-reality” based on calculations of politics or if he really believes what the wall street crowd tells him.
Give me a few moments to make some general comments.
1. Balanced trade appears to be supported by most of the people commenting on the Trade Reform blog. That is real progress. We must have a simple, easy to understand alternative to Free Trade.
2. We have not agreed on the path from where we are to where we want to be. We have several suggestions available but not enough discussion of the comparative merits of each path.
3. My positive contribution to this discussion is contained in the article posted here titled “Moving toward Balanced Trade”.
4. I propose an intermediate goal of .94 percent of U.S. imports to be paid for by U.S. exports to be achieved in 6 years.
5. Tariffs limited to goods manufactured in 3 nations - China, Japan and Germany.
6. Other nations are excluded because U.S. trade of goods with the rest of the world is close enough to balanced trade.
Let’s have some comparisons between alternative action proposals.
(Subject headings need to be moved over to properly line up in the table in the article).
Warren Buffett laid the foundation for a program to rescue the U.S. from entrapment by free trade ideology by asserting.
1. Balanced trade must be sought rather than Free
Trade.
2. Unilateral action by the U.S. must replace
negotiation.
3. Reduction of imports is the solution.
All the contributors to this blog seem to agree with these 3 propositions, despite differences in details.
Additional propositions I would add to this list:
4. Handicaps rather than outright prohibitions.
5. Handicap imports only from those nations that have
a large trade surplus with the U.S.
6 Increase the level of the handicaps over time.
7. Tariffs are the best way to handicap imports.
8. To preserve competition between domestic producers, all products will have the same size tariff (per value of product).
Rejected alternatives:
1. Currency values is a blind alley because they cannot be controlled by the U.S. government.
2. Import certificates would be cumbersome, difficult to use.
3. Import restrictions or import handicaps applied to all nations are overkill - not needed to begin a program of import restrictions - creates enemies we do not need.
(My current E-Mail address is: [email protected])
For anyone who is not familar with the book “Trading Away Our Future,” by Raymond, Howard and Jesse Richman, I highly recommend it. It provides an alternative application of Warren Buffett’s “balanced trade” recommendation, and strongly supports “balanced trade.”
Here is the link to their website:
http://www.idealtaxes.com/
The Richmans, three generations of economists, have had several articles published on http://www.americanthinker.com, a popular conservative website with a huge following. I believe they are doing an excellent job of promoting “balanced trade.”
Thank you ReformerRay for this thoughtful essay. It is about time the idea of balanced trade were asserted as a guiding principle for trade policy. Only a genuine equilibrium in the balance of payments could be sustainable over time. Imbalance accumulating in either surplus or deficit will eventually reach a breaking point causing serious disruption, not to mention the already terrible deterioration of our country in the meantime, and getting ever worse as our trade deficits continue.
I agree with you that free trade is an ideal condition within an economy (i.e., between the several states of the nation) but unworkable on the international level. That is because within each nation there are many institutional arrangements necessary to human quality of life, and these arrangements require stability and create differences of cost between nations. The institutional arrangements are everything from viable enterprises to school systems and financial systems, from the regulation of labor and environment to public investment in education and infrastructure, from social insurance and retirement and health care systems to ready-response to emergencies and disasters, from military and police costs to the costs of governance generally. Pure market would be an environment too volatile and unstable to support these stabilizing systems, making society inhospitable to anyone but the rich, and even they would deteriorate as the infrastructure and social system necessary for wealth-creation also deteriorated around them. And so we must introduce government into the equation, to provide the stability and all the physical and institutional supports and all the mitigation of problems the market itself will never provide.
In a genuine free trade world, these political interventions necessary to the community will cause differences of price that would drive all investment and enterprise to the lowest-cost areas. These movements would be constant and rapid, causing more instability and shocks, which themselves add more costs and losses as people are displaced and perfectly functional systems dismantles by investors seeking higher margins. And so in the interests of self-preservation, governments must create strong trade policies and border control to prevent those shocks and volatility of uncontrolled surges of capital and goods and people in and out of country.
You mention how Britain adopted free trade in the middle of the 19th century when they were in a comparable dominance as America was after WW2. We should compare that to how the American government in the 19th century supported innovation, technology, manufacturing and education, all of which was consciously in contrast to Britain’s laissez-faire free trade. America thus achieved supremacy over Britain in virtually every sector of the economy by 1900.
Many thinkers have called that the “American System.” It was not free trade and not communism, but rather public-private cooperation. It is how we built the canals and ports and railroads, it involved the1st and 2nd Bank of the United States, it built the public university systems and land grant colleges, built a merchant marine to replace British shipping after WW1, and eventually went on to build airports and NASA, funded the public-private labs and R&D that yielded everything from radios to computers.
The American System was discarded when, over the ruins of WW2, as we were the only industrial power standing, our cold war alliances took political priority over keeping our economic edge. I agree with you that during the Cold War, especially its early years, America could overlook the hazards of liberalizing trade because our industries were so dominant and superior to the rest of the world. Political and geo-strategic imperatives took primacy, and much of the war-devastated world benefitted from the consequent rebuilding made possible by making the American market and American capital available to countries that allied with us politically.
As we all know, that world no longer exists. Many countries today are economically and politically strong, and they have export programs targeted at our consumer market because it is still the largest in the world. And so our domestic industries are now in a radically different situation than they were 50 years ago, unprotected and under siege from mercantilist economies around the world.
regarding your assertion that Smoot-Hawley caused the decline in world trade by provoking tariff wars, I do not think it was that simple. Remember that the Depression was well underway by the time the Smoot-Hawley Tariff Act passed in 1930, thanks to the 1929 stock market crash. Even libertarian hero Milton Friedman understood that the Depression’s causes were monetary, coming from a ballooning of money supply in the 1920s to turn the stock market into a bubble that popped in 1929. In the larger context of WW1 reparations crises, tariffs were certainly NOT the cause of depression. In the next several years, yes, trade dropped, as it always does in a depression.
Remember also tariffs went up in 1861, 1864, 1890 and 1922 without any resulting depressions, and the panic/recessions of 1873 and 1893 spread globally without tariff increases.
As for the place of Smoot-Hawley in our economic history, imports did fall by 2/3 in the next few years (of the Depression), but only about half of imported goods were dutiable under Smoot-Hawley, and those goods NOT dutied actually dropped more than those dutied. This according to Clyde Prestowitz, on page 83 of his book “The Betrayal of American Prosperity.” He goes on to say it was the reduction in the money supply by the Fed Reserve that squeezed credit to result in decreased purchases of imports by businesses and individuals.
Even more interestingly, Prestowitz then compares that situation with our present experience, saying “In just the past couple years of economic crisis, we have seen US imports fall dramatically with no significant increases in tariffs unprecedented increase in the money supply. So maybe in crisis, people just stop buying. This possibility is only strengthened by the fact that although the almost equally high Fordney-McCumber tariff of 1922 represented a greater percentage increase in the tariff rate than the Smoot-Hawley tariff, it was followed by the boom of the 1920s.”
Prestowitz has a lot more to say about how Smoot-Hawley has been maligned by free-traders trying to saddle it with responsibility for the Depression, which he says is deceptive or mistaken. I think he makes excellent points and therefore we should be more cautious about ascribing the collapse of trade in the 1930 simply to Smoot-Hawley or even to tariffs in general.
I agree with you Ray that the outflow of $5.8Trillion in trade deficits from 2002 to 2011 is a huge loss of wealth for our country, in quantitative terms but even mores in the qualitative results. As you imply, those dollars could have created a lot of manufacturing jobs in the USA, and ultimately could have bought a lot of new machines to increase the efficiency of production in the USA.
Now to discuss the plan of action you propose. I think everyone here at these CPA discussions agrees we need to replace trade deficits with balanced trade. The question of course is how to do it.
I must heartily disagree with you that any US action “should be delayed until the above three propositions are recognized as valid by bankers, economists and politicians all over the world.” Our country is bleeding jobs and industries and all the institutions supported by these institutions. Mass unemployment and deepening poverty are spreading throughout the land. It would be pure folly to wait until the whole world agrees on anything. They never will, nor does US action require they do. All that is required for effective US action is US political will.
In a similar vein, I reject your assertion that “Western nations generally favor explicitness and honesty in all dealings, including trade.” That is highly controversial, not to mention jingoistic by implying Asians have a different and inferior ethical nature. Such assumptions can only lead to antagonisms and distrust, all of it unnecessary and none of it helpful.
I also disagree that tariffs historically functioned to protect inefficient industries that would otherwise have died off. Tariffs from 1789 through 1970 built American industry into the richest and most productive industrial economy in the history of the planet. Of course it is possible they will at times protect industries so much they become uncompetitive, but that is a small hazard in comparison to the larger constructive role they played for us. We can and should take other measures besides pure trade policy to ensure our industries are at the cutting edge of innovation and productivity. Look at the history of public-private cooperation in the development of technologies and infrastructure in this country. Tariffs are no threat if larger pursuit of innovation and R&D investments are pursued.
Finally, the heart of your proposed plan of action strikes me as squeezing water: targeted tariffs on the imports from only those nations with trade surpluses towards us. That game would never end as capital moved from country to country seeking entry through all those other back doors. And the more general problem of adding costs to consumers would hurt Americans who are struggling right now, even while failing to guarantee any genuine reduction of our trade deficits.
As I have been arguing, a much better action plan would be to implement a Balanced Trade Policy that uses Import Certificates as import licenses, directly limiting the amount of imports to the amount of our exports. There is nothing cumbersome about such a system. look at the stock exchange or other exchanges for things like securities or even Renewable Energy Credits. In fact, by making importers buy the certificates from exporters, there would be a tariff effect in that cost, and that cost would go directly to exporters, strengthening their position. There are no back doors left unlocked. There are no added costs to consumers except in the added price of Import Certificates borne by the importers. There would be the guaranteed results of balancing our trade. And because consumer spending power would be unreduced except for the cost of the ICs themselves, all that import consumption now causing a drain of wealth would simply be re-directed towards goods manufactured in the USA, amounting to a stimulus to American industry equal to what had formerly been a trade deficit. That direct injection of money would create jobs and demand for capital goods here, and through the multiplier effect create many more jobs in supporting services and construction, even as it raised the wages in those multiplier sectors by bringing home the manufacturing operations that are the heart of wealth-creation in any economy.
It is difficult for me to understand why you and everyone else here in these CPA discussions is so reluctant to endorse the Balanced Trade through Import Certificates plan proposed by Warren Buffet. It avoids trade war with specific nations, it is legal under WTO terms, and it is a direct path to the goal we all agree on.
Wish there was an “edit” function here:
parg 4, add this CAPITALIZED phrase:
We should compare that to how the American government in the 19th century supported innovation, technology, manufacturing and education, ALL OF WHICH WAS PROTECTED AND PAID FOR THROUGH TARIFFS, and consciously in contrast to Britain’s laissez-faire free trade.
parg 11, add these CAPITALIZED words:
Even more interestingly, Prestowitz then compares that situation with our present experience, saying “In just the past couple years of economic crisis, we have seen US imports fall dramatically with no significant increases in tariffs AND AN unprecedented increase in the money supply.
I read Will Wilkin’s comment of Dec. 24 with much admiration and pleasure. I agree with all he says about Smoot-Harley not causing the depression. But Smoot-Harley did create a response from other nations that reduced world trade and (in my opinion) slowed recovery. However, that issue is secondary.
I must lock horns with him on the issue of import certificates versus targeted tariffs. This is a discussion worth playing out carefully and in detail. My questions are:
1. Which action will create the least counter-action by other nations?
2. Which action can be explained simply and easily understood by the U.S. public?
3. Which action will encourage additional U.S. firms to enter the export market?
4. Which action encourages slow tightening of import restrictions?
5. Which will add funds to U.S. agencies responsible for preventing smuggling?
6. Which action will allow the continuation of cross border trade of semi-finished goods with Canada and Mexico?
7. Which action sets an achievable goal that possibly can be reached in 6 years, which if achieved will lead to decreased tariffs?
8. Which action encourages continuation of trade with those nations who do not contribute to our trade deficit?
9. Which action will place governmental authorities in a position to prevent counterfeiting of certificates?
I envision a struggle for public opinion between those of us who believe in balanced trade and those who believe in free trade. That is why questions 1 and 2 appear first. Unfortunately for my side of the argument, anticipating actions of other nations and the U.S. public is difficult. Some may think that import certificates will create less uproar from other nations or will be easier to explain to john Q public. But let’s talk about it.
I would like to see the Richmond relatives enter the discussion as well as others who have opinions.
I recognize that others may prefer another way of beginning the discussion.
I am grateful for Will Wilkin for enunciating a perspective that is widely supported among the participants of this blog. I remain convinced of the superiority of targeted tariffs.
will
Will makes some important points which I did not address above but which must be faced ultimately. (Quote below)
Finally, the heart of your proposed plan of action strikes me as squeezing water: targeted tariffs on the imports from only those nations with trade surpluses towards us. That game would never end as capital moved from country to country seeking entry through all those other back doors. And the more general problem of adding costs to consumers would hurt Americans who are struggling right now, even while failing to guarantee any genuine reduction of our trade deficits.
I need to think some more.
The opportunity to discuss our trade deficit with others is a nice Christmas Present.
The U.S. is primarily responsible for our current predicament in that we supported unbalanced trade as a part of the effort to contain the territorial ambitions of Joseph Stalin and we passed on the opportunity to establish a more balanced system in 1985 (when the U.S. pubic was upset by the new and large trade deficit created in the four years leading up to 1985).
Any action on our part should focus on maintaining good trade relations with those nations who are minor contributors to our trade deficit. Let’s look at the data for a minute. The rest of the world shipped 1.6 trillion dollars worth of goods into the U.S. in 2011 but their trade deficit in goods with the U.S. was only 45% of our total goods trade deficit - because they purchased 1.29 trillion dollars worth of exports from us. Their purchases of exports paid for 79% of our imports from them. The numbers in my article show that if our total trade in goods was like our goods trade with the Rest of the World, our surplus in services would reduce our total trade deficit down to 6% of our imports.
The ruling elites in China, Japan and Germany should be admired for their skill and leadership in guiding their country to take advantage of their opportunities in the global trading system. I know they will continue to thrive, even if the U.S. succeeds in reducing their goods trade deficit with the U.S. down to 15% of the world total (currently at 55%). All three have many customers outside the U.S. Current problems in Europe will disappear before the year 2017.
I agree with Will that my proposal will raise prices in the U.S. But only 28% of goods imports come from these 3 nations and that 626 billion dollars is around 5% of the total U.S. economy. Those imports from the 3 nations that face stiff competition from producers all over the world will not be able to raise their prices and will be forced out of the U.S. market. That must happen for the U.S. trade deficit to decline.
The German population reluctantly accepted a tax system that paid exporters 20% of the cost of manufacturing goods sold overseas. That meant that a product made in Germany and sold in Germany costs more than the same product sold overseas. The U.S. consumer must accept the possibility that some products sold in the U.S. will cost more than the same product sold overseas, if we want to support manufacturing activities in the U.S.
I also agree with Will that my proposal, if implemented, will change the calculus of desirable factory location. The search will be own for locations that will enable foreign produced goods to continue to be shipped to the U.S. One factor to be considered is the possibility that other nations will be added to the list of tariff receiver, if they cannot accept U.S. exports. The possibility of foreign made goods continuing to be accepted in the U.S. must remain open, not only to maintain faith with current trading partners but also to insure that domestic producers will not be protected from competition. Some factories will locate in the U.S.
I look forward to further interchange of ideas.
ReformerRay
W. Raymond Mills
[email protected]
“The German population reluctantly accepted a tax system that paid exporters 20% of the cost of manufacturing goods sold overseas. That meant that a product made in Germany and sold in Germany costs more than the same product sold overseas.”
This used to be known as “dumping”. Now it is national policy for those countries wishing to game world trade.
Our US Trade Representatives have been miserable failures but we don’t hold them accountable. Instead, we allow the corporate propaganda pushing policies over principles to pass off these trade agreements as great successes. Again, corporate interests are trumping national interests and the USTR is their puppet.
Tom T
What other countries like Germany, China and Japan really did differently than the US was to not inflate and spend as much on wasteful malinvestments and wars. Countries like Germany, Japan and China have high savings that enables them to have a stable manufacturing sector. Any time you inflate faster than a trade a partner with lower savings, trade deficits arise.
The only time a country can undervalue their currency and subsidize their manufacturing sector is when the country has high savings. The reason being that when the currency is undervalued raw materials that have to be imported rise thus making those inputs cost higher in all sectors. With high savings the increase in input prices for the consumption stages of the economy doesn’t affect the demand that is stable too much. The high savings thus allows the exporters to be subsidized at the expense of consumers.
Now if a country has very low savings and then inflates their money supply faster relative to their trade partners; then input prices will rise thus making some exporters uncompetitive causing a reduction in exports and it would lead to the prices of imports in dollars to rise thus widening the trade deficit. One only has to look at the period from 2003-2008 in the US where the dollar depreciated against many currencies like the Euro and Yuan but the trade deficit only increased as the money supply increased, total savings declined, personal savings went negative, input prices like oil increased over 300%, etc.
The folllowing below is a comparison of gross savings as a percentage of GDP by country from Worldbank statistics. To view a comparison of all countries click on link at bottom of page.
What you will notice is that the US has had an average gross savings of 12% of GDP from 2008-2012. Countries with higher gross savings generally have a larger and more stable manufacturing sector. Additionally countries with higher gross savings may not only have a larger manufacturing sector as a percentage of GDP by higher real wages for manufacturing workers than countries with low savings.
Argentina 22%
Austria 26%
Australia 23%
Belgium 22%
Brazil 17%
China 53%
Denmark 23%
Egypt 17%
France 18%
Finland 20%
Germany 24%
Greece 5%
Hong Kong 29%
India 34%
Indonesia 32%
Italy 16%
Japan 22%
Malaysia 35%
Netherlands 26%
New Zealand 19%
Norway 38%
Philippines 25%
Singapore 47%
Switzerland 32%
Sweden 26%
Russia 30%
Saudia Arabia 47%
South Korea 32%
Turkey 14%
United States 12%
United Kingdom 13%
Vietnam 33%
To view a comparison between all countries see link below:
http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS
In the national accounts, Savings is calculated by subtracting Consumption (public and private) from Gross Domestic Product leaving Savings also equal to Investment + Trade Balance (a negative trade balance in the case of the U.S.) Savings is not known until the calculations are made to derive its level from the level of the other variables in the national accounts. The level of Savings is dependent upon the level of Investment and the Trade Balance and the level of Consumption relative to total GDP.
It is wrong to assume, as Mo and many other writers do, that the level of Savings causes anything else to happen in the national economy. Instead the level of savings depends upon Consumption patterns and the level of investment and the level (and sign) of the Trade Balance.
The level of the Trade Balance depends upon factors that are outside this equation such as the health of the manufacturing sector, currency values and governmental activities.
Savings is not a variable that influences the other variables in the formula thus your reasoning above is not sound.
Raymond savings does determine the other variables in the economy. It takes savings for there to be investment in capital in which the more capital per worker there is the higher real wages are. Risign real wages translates into economic growth which can only come about through capital accumulation.
To illustrate how its savings that determines the other variables in the economy picture yourself as Robinson Crusoe. Let’s say you accumulated 1000 berries; now instead of having to gather food, Robinson Crusoe can spend his time now building a stick to hit trees for berries instead of picking by hand, can build a home, can manufacture an automatic fish catcher and can work on building a raft to get off the island. Crusoe’s savings allows him to accumulate capital like the automatic fish catcher and etc that improves his standard of living.
When savings increase in a modern economy it’s a signal that consumers won’t to consume more in the future than today so it’s signal that investment should be made to make a larger quantity of goods in the future to sell at lower prices.
Some economists equate savings with cash hoarding but it’s not the same. Cash hoarding which reduces the amount spent on consumption and investment only occurs when the banking system becomes unstable due to massive overleveraging during a bubble. If it wasn’t for the credit expansion that keeps interest rates artifically low for long periods of time, there wouldn’t be massive overleverage and major instability within the banking system to cause an increase in cash hoarding in the first place.
So once again it takes savings on part of capitalists to first create the factors that go into making consumer goods. Consumption is important in the sense that it directs where those factors of production that capitalists created should be allocated in making consumer goods. But it’s important to note that to make the factors that go into producing consumer goods, there has to be savings of resources to begin with to allow capitalists to make the producer goods like the machines, etc.
The national accounts calculate savings in monetary terms not real terms so they may not accurately reflect how much real savings is avaliable with regards to real resources.
Mo -
What are you saying about the national accounts? They do not reflect reality? If they don’t reflect reality a lot of people working for the Bureau of Economic Analysis are wasting their time trying to improve their numbers to more closely reflect reality.
I am saying that the level of Savings is created by the behavior of the other variables in the national accounts. In China, the Communist government is arranging things so they have a high level of investment and a high positive trade balance SO THAT THE NATION HAS A RAPIDLY GROWING ECONOMY. The “Savings” in their economy produces a very high level of accumulation of dollars (credit) in their governmental coffers. Those credits are real. They exist because of years of a large trade surplus with the U.S.
I agree with you that these credits can be used to goose the economy (as the Chinese government did after the financial collapse of 2009). What I am saying is that the causal factors that create these saving should be the focus of attention. The call for the U.S. to increase its level of savings is a mistake because it diverts attention from the controlling factors - Trade Balance, Investment and Consumption.
A lot of what Mo says makes sense. I just think we should concentrate on the levers the Federal government can control. The liquidity in the system is one factor, as Mo says, but imports are equally important.
Capital is not being invested in the U.S. today by domestic industries that have the “savings” to do so. They only invest when they can expect a return on their investment. Look at the factors that control where in the world investment takes place. If we want investment in the U.S. we must slow down the flood of imports.
Merry Christmas everyone!
Tom T.
Me to - Merry Christmas. I realize people are busy but I am waiting impatiently for push-back from people who do not support uniform tariffs gradually increased on imports manufactured in China, Japan and Germany. How can I keep explaining more details without opposition?
Apparently my previous reply disappeared. Here is a repeat.
I am waiting impatiently for a push-back from those who do not agree that the U.S. should pass a law which requires gradually increasing tariffs on all imports manufactured in the countries of China, Japan and Germany. This proposal is submitted as a reasonable first step in a process of rescuing our trade deficit size from being controlled by the actions of other governments.
Mr. Mills,
Thank you for generating a most informed dialog on the subject. You will probably not get any push-back from this crowd since most of us all agree that a flexible countervailing duty on offending nations is the proper solution.
If you seek push-back, may I suggest you create asimilar dialog on the libertarian websites. Heritage and CATO jump to mind.
Mr. Shannon - I greatly appreciate the opportunity to put forth some suggestions to an audience that agrees with my beginning point. “flexible countervailing duty on offending nations” is a nice summary of my position. And I suspect many readers of this blog can sign on to that phrasing.
However, I would like to point out that the pledge that CPA wants us to sign is different. It concerns trade agreements. That is a blind-alley and a waste of time, in my opinion. It does not advocate unilateral action by the U.S. It assumes something good can come from negotiations.
I would like CPA to advocate that the U.S. adopt “flexible countervailing duties on offending nations” based on the assumption that our trading partners who are most responsible for our trade deficit will protect their own interest just as we are belatedly learning to protect our own.
I would like to communicate with Heritage and CATO but how do I get them to reproduce my article as CPA has so gracefully done? Most folks want to read only support for their own position.
I disagree that nations enjoying a positive balance of payments in their trade with us are “offending.” I agree that we need to take unilateral action rather than wait for or hope for rescue of the American economy by other nations changing their trade policy. The only country bearing any responsibility for our trade deficits is our own country. And since by your own estimate the 3 nations you suggest be targeted with tariffs together comprise only 55% of our trade deficit, that solution seems incomplete even if it fully worked (ie, balanced our trade with those 3 nations), and there is no guarantee it would even bring our trade with those 3 nations into balance.
By contrast, using an Import Certificate system modelled on the Buffet Plan would, by definition, bring our trade into balance by limiting imports to the amount of exports.
I agree CATO and heritage will offer “pushback,” but they are hardly fruitful ground for discussion. Those are very ideologically-driven organizations, committed to free trade axiomatically as part of their simplistic faith that unhindered markets will solve all problems. Maybe Raymond could wake up some still-thinking people reading there, but the core readership will no doubt sing the praises of extreme market ideology even after the last hubcap of America has thereby been offshored. The whole essential element of patriotism is completely lacking, there is no society, in their minds there are nothing but atomized individual homo economicus “rational actors,” who care for nothing but themselves. Such persons can already be found, bean-counting the multinational companies to offshore anything tradeable.
Good luck with them.
Hi Will. Your are correct when you say that my scheme provides no guarantee that the trade deficit will be eliminated while Import Certificates do provide that guarantee. I will go further. It is possible that my scheme will have zero effect upon the trade deficit.
If the 3 nations are determined to maintain a trade surplus with the U.S. they can pay the tariffs with what would otherwise be profits. When the run out of profits, the government can use some of the dollars they have accumulated over the past 2 decades to continue to sell goods at the same price in the U.S. If they do that, the only benefits to the U.S. will be additional revenue to the Federal government. My guess is that they will not chose this path because they are selling so much to the rest of the world. But it is likely to be some part of their response.
Even if the 3 nations reduce their shipments to the U.S., it is possible that shipments from other nations will fill the gap, resulting in no gain to the U.S. This is the price we pay to make sure that U.S. producers stay competitive with the other producers in the world.
No one knows how this scheme will work out.
I prefer this scheme because it preserves world trade. The 1.3 Trillion of dollars of exports we sell to the rest of the world is essential for the U.S. economy. The countries who are trading with us on a near balance basis are helping us as we are helping them.
Second, tariffs are easy to increase over time. The current trade deficit was created over a period of 36 years. Time will be needed to allow producers to move their factories to best exploit the new reality.
Third, the important thing is to change the mindset of the public and the political elite - for them to recognize that imports into the U.S. are under our control. The determination of the best way to reduce imports could easily vary over time. Congress will shape whatever scheme is adopted. If I could persuade them to start to reduce imports into the U.S., I have confidence that the product finally adopted will be different from what I think as ideal.
The Import Certificate idea will bring imports equal to exports but it is an unnecessary brutal way to do it. No appreciation of the majority of our trading partners who buy a lot of exports from us. No interest in allowing time for factories to be relocated. No concern for the uncertainty faced by would be exporters to the U.S. (they have no certainty as to whether ANY certificates will be for sale when they want to import and most important, they have no idea how much the certificate will cost them). Business men hate those type of uncertainties.
Agreed, Tom T.
Mo - The reason I am urging focus on the Trade Deficit rather than Savings is that the Savings focus allows the Washington establish to continue to ignore the trade deficit. If our problem is a world wide Savings Glut, as Ben Bernanke argued in a speech on April 14, 2005. By “locating the principal causes of the U.S. current account outside the country’s borders” (his words) he neatly and effectively gave cover for Washington to continue the “do nothing” policy response to our trade deficit.
The aspect of this speech which riles me so much is that he did not provide any good rationale for his position. He did explain that the current account deficit could be viewed from two perspectives - the interchange of goods and services or international financial flows. He choose to focus exclusively on the second perspective because that is the perspective other economists use.
That answer will be acceptable only to people who are willing to concede that economists as a group never get it wrong and that the consensus among economists must be accepted without question. I am a fan of one economists, John Kenneth Galbraith. He taught me that conventional wisdom is sometimes wrong because events change faster than convictions. I claim that appeal to authority is not a good enough reason for saying that the trade deficit is not the fault of decisions made in the U.S.
An increase in savings would actually reduce the trade deficit. Offshoring is only economically viable on a large scale if there is steady demand for products produced in very large quantities overseas.
Only unsound money could cause offshored made goods to cost cheaper than US made goods on a massive scale considering that offshoring incurrs many additional costs. Additional costs include expenditures to transfer capital overseas, paying to train foreign workers, paying to to create new foreign supply chains, paying to transport the product back to the US and paying legal and accounting costs for the global supply chain.
There was never a global savings glut. It actually was a global money printing glut where US dollars were created to buy real goods and services worldwide and to pay for wars. All these dollars that foreigners received were then used to buy up US companies, gov’t debt, real estate, capital, etc. If the gov’t didn’t promote inflationary policies that consumed resources, then the trade deficit would have been less. A trade deficit arises most times when a country has lower savings and inflates their money supply faster relative to trade partners.
The budget deficit though not identical to the trade deficit is fraternal. Gov’t expenditures for things like wars for example cause increase demand for oil and raw materials like rare earth metals. This has the effect of also increasing the trade deficit. Additionally, the unsound monetary system that is inflationary causes future costs to be higher than expected thus contributing to perpetual budget deficits. Cuts in the federal budget could reduce the trade deficit if enough foreign spending is cut.
To help fix the trade situation a sound monetary system is needed to allow participants in the economy to see what the real level of savings is. Also it wouldn’t hurt to have WTO policies that actually work for the US if that could ever be achieved.
When it comes to tariffs, yes tariffs could help to adjust the capital structure and reduce imports as well as keep businesses afloat that would be sound if it wasn’t for inflation. The only reason that tariffs may need to be implemented is because the world unsound monetary system heavily distorts the capital structures of trading nations. Exchange rates under a fiat monetary system can keep prices heavily distorted for long periods of time that prevent the proper restructuring of capital. Under a world unfettered gold standard or commodity backed monetary system, exchange rates would be kept within specie points (cost to import and export the commodity) that would link price levels and interest rates between countries which would allow for capital restructuring to occur in a more timely fashion.
But when it comes to tariffs they can also be very detrimental. Today a lot of high tech manufacturing depends on rare earth metals which the US doesn’t produce. Some estimate it may take 15 years to re-create supply chains for this sector in the US. So tariffs could cause these inputs to become very expensive thus making producers in the US uncompetitive.
Mo - I will agree that the flow of funds across national boundaries has some influence, sometimes, upon currency values and that currency values has some influence, sometimes, on the trade balance and the current account balance. That is the only concession I will make to those who argue that trade balance levels should be viewed primarily as a consequence of financial flows.
The trade balance is determined by the actions of millions of buyers and sellers all over the world who decide among options available to them. Their decisions (what to bring to which market where and what to buy) controls the trade balance. Look to the factors that influence these decisions and if you get it right you will know how to begin to design a program for the U.S. which will reduce the trade deficit.
There exists no empirical evidence or sound reasoning to support the belief that the level of savings controls the level of the trade balance in any given year (the statistics we are working with show levels of trade balance for a given year - and yes, those numbers are produced by the some procedures and statistician who created and use the formula for GDP on which I rely).
Mo, your thinking begins with a hypothetical possibility “Under a world unfettered gold standard or commodity backed monetary system,” — I say that is the wrong beginning point for thinking because it does not and cannot exist in the real world (just like free trade cannot exist between sovereign nations). This provides you with a perspective from which to criticize existing reality but it provides no guidance as to next steps forward.
The world price of rare earth minerals will become very expensive in the future, unless some substitutes can be created or found. Excluding rare earth minerals from the tariff system would have only a small effect on their price in the U.S. in the future.
Moving towards balanced trade will cause some price increases in the U.S., regardless of the means used. The size of the price increases can be minimized by accepting imports from the rest of the world.
Raymond technically all trade is balanced. Because the US artificially consumes more than it produces through credit expansion; the US winds up paying for the additional imports with the export of jobs, factories, transfer of technology, debt and the change in ownership of US companies.
Yes the trade balance is determined by the millions of people that consume products and invest their money. But what determines where they spend and where they invest is heavily influenced by prices. And what heavily influences prices is the supply of money that is controlled today by government central bank monopolies.
Countries with industrial policies can lure investment of capital from countries like the US with various subsidies, tax breaks and lines of credit. But in order for countries like China to provide these subsidies constantly they have to have high savings. If China did not have high savings and then subsidized their exporters then input prices would rise sharply thus making them less competitive.
A world gold standard is not a hypothetical possibility. It actually existed up till 1914 before World War 1 began. One thing to note that under the classical gold standard, gold only covered about 5% of the money supply but it did anchor to keep currencies stable and to adjust trade flows. Today there is no automatic adjustment with trading flows. People complain that countries that run trade surpluses should have a stronger currency but that only applies when currencies are convertible into a commodity.
What matters with trade is the terms of trade. From 1850-1900 the US ran Current Account deficits with tariffs and had a growing standard of living. During this time the US incurred debt to import capital which was used to produce new goods and services that could repay back the debt. This was also a time of sounder money when the dollar was convertible into gold.
Today credit expansion that artificially lowers interest rates encourages consumption at the expense of investment because if there wasn’t an increase in consumption then it would not be as profitable to offshore all production. For offshoring to be economical it depends on consumers purchasing a large quantity of goods made overseas which credit allows for.
Today there is no anchor to the monetary system, so special interests in Washington have great power to dictate where money flows, what trading policies get implemented, what industries get subsidized, what sectors get tax breaks, etc.
Hi Mo, To me the savings aspect is hardly relevant, considering the huge piles of cash corporations currently hold. The reasons they don’t invest it in the USA are 1) they don’t have to invest a dime here have access to the US market, due to “free trade” policies made in Washington DC, and 2) They don’t see the USA as a profitable location for investment, due to a whole constellation of factors that add up to a less competitive investment climate. Those factors include a deteriorating infrastructure, a relatively expensive labor force, relatively high corporate taxes (however creatively avoided by many multinationals), relatively complex or cumbersome or contradictory regulations (states with different regulations, federal agencies with contrasting definitions or requirements), and unfortunately, a declining overall industrial ecosystem (loss of suppliers and technologies and capabilities, due to offshoring and subsequent atrophy of skills and knowledge).
If we implement a balanced trade policy, for example using Import Certificates equal to our exports, then the current trade deficit outflow of wealth would be diverted back into American manufacturing, growing our GDP by approximately $600Billion to $800 Billion, thereby creating millions of jobs directly and millions more through multiplier effect. That huge stimulus to American industry would grow the tax base and thereby fund a revitalization of our infrastructure, our science and R&D, our education and training….all of which would make our country competitive once again.
Raymond, Bruce and Will,
I would just like to point out that a few years ago, my father, son and I invented “The Scaled Tariff”. Independently, Joseph Hitselberger came up with a similar idea which he called the “proportional tariff” (see “China Trade Fiasco” at http://www.facebook.com/groups/327886425672/).
We favor the scaled tariff over the ideas that we promoted in our 2008 book (Trading Away Our Future) and have already authored several commentaries about it.
We have also authored a journal article about it (http://www.esteyjournal.com/j_pdfs/richman12-2.pdf). In our journal article, we compare it with other proposals.
We were trying to create a simple system which would be WTO legal and balance trade without requiring a new bureaucracy.
The tariff rate is adjusted quarterly with each of our trading partners so as to take in half our trade deficit with that country as tariff revenue.
We have written it up into bill form and will be attempting to get it introduced during the current legislative session. If anybody would be willing to help, please e-mail me.
Howard Richman
[email protected]
Thanks Howard, for referencing your very constructive 2011 article discussing “Scaled Tariffs’. You and your relatives have advanced the discussion. Your proposal and my proposal can be considered part of a general class of proposals that assume tariffs on imports are required, that tariffs should vary by country rather than product and that tariffs should be focused on those countries creating the U.S. trade deficit.
The differences between the two proposals concern completeness and complexity. My proposal is incomplete in that it addresses current conditions only and does not attempt to provide a general solution that will apply in a variety of circumstances. Your broader perspective requires more detail and more complexity. My approach is a temporary fix that will be need to revised in a few years. I do not think that is a disadvantage. We cannot see very far into the future. The simplicity and explicitness of my approach should make it easier to sell to the general public.
I would be happy to support Scaled Tariff if a consensus develops on its behalf.
I agree with you that Scaled Tariffs are superior to Import Certificates. But I would leave the door open to the creation of better versions of either of our two proposals. What other versions of targeted tariffs would be better?
Thanks again for your contribution.
What do you think of my use of numbers for 2005 and 2011 to make real our current problems? And the hypothetical numbers to show the good outcomes that could possibly be created by targeted tariffs? You and I both envision a time when tariffs should be eliminated or scaled back. Good.
The Federal government should move aggressively to take unilateral action to reduce the size of our trade deficit. Both the Richman family and I have presented good options.
I see major deficiencies in other options on the table. The deficiencies are:1) Aiming only at increasing exports; 2. No realistic way to actually reduce imports; 3. Ignoring the role of China, Japan and Germany in creating our trade deficit.
1. EXPORTS ONLY.
(GUILTY OF REMATURE SUBMISSION. I HIT THEWRONG BUTTON)
1. EXPORTS ONLY. Exports are half of the problem but the Federal government can do very little to influence their level while imports are 100% controlled by rules established by the Federal government. The establishment focuses upon exports because they believe it is wrong to influence imports (based on free trade ideology which is implemented by the World Trade Organization). I see both as potential targets for action with imports being by far an easier target. Obama is wrong.
2. ACTIONS THAT WOULD REDUCE IMPORTS MISSING. Proposals that consist only of goals with action steps are deficient. Proposals that rely on negotiations are unrealistic. In my mind, the fair trade proposals supported by the CIO and the proposals advanced by the Coalition for a Prosperous America fall into this category.
3.IGNORING THE ROLE PLAYED BY CHINA, JAPAN AND GERMANY.
(Sorry - )
What role did China, Japan and Germany play in creating our trade deficit in 2011? They accounted for 55% of the U.S. trade deficit in goods. The exports they accepted from the U.S. paid for only 35% of the imports they sold to the U.S. By contrast, the remain of the world (all trading partners except these three) accounted for 45% of the U.S. trade deficit in goods. The exports these other nations bought from the U.S. paid for 79% of the imports received from these nations. Given the U.S. trade surplus in services, exports that pay for 79% of goods imported is close enough to equal trade to be satisfactory.
Most of the versions of Import Certificates and the proposals that apply restraint to imports from all nations ignore this reality. The first version of Ian Fletcher’s book proposes tariffs on all imports.
Correction - Second line under 2. says “goals with action steps are deficient” Should read “Goals WITHOUT action steps are deficient”. SORRY.
Hi Raymond, As you know, I have already offered my own “pushback,” and after considering your reply I still stand on my original position.
I saw a C-Span Book-TV presentation of the book below (which I have not read), by its author, a Greek economist.
The Global Minotaur
America, the True Origins of the Financial Crisis and the Future of the World Economy
by Yanis Varoufakis
The main theme of the book is that the monster of Greek mythology (the Minotaur) is a metaphor for the U.S. Trade deficit. It has a limitless appetite for foreign capital ( human flesh) to recycle the trade deficit. However the recycling mechanism (toxic Wall Street exotic instruments, etc.) has broken down (blown itself up). Has the crash of 2008 slain the Minotaur? Could we be so lucky? Well anyhow here is an ECONOMIST who actually believes trade imbalance IS a problem - and Greek no less. Pretty ironic.
Raymond what China is doing is allocating the high savings which in real terms are resources like raw materials to infrastructure and other types of industrial investments. It has to be remembered that the producer goods industries competes with the consumer goods industries for resources. China wouldn’t be able to allocate resources to invest and to subsidize their exporters without high savings. If China were to subsidze their exporters with low savings then input prices would evenutally rise sharply thus making them less competitive and would narrow their trade surpluses and migh even cause trade deficits. This could occur even with them having high tariffs.
The US on the other hand has directed the savings of real resources the last many years to finance the importation of foreign made goods, wars, financial speculation and a real estate bubble. Pretty much all the resources saved have been directed to activities that just consume resources which means they can’t be reused to further enhance the productivity of the country’s industrial base.
To further illustrate how it’s savings that determines the other variables, lets say the gov’t one day prints money to pay unemployed workers to build a high speed rail line. As the workers build the rail line and then eventually complete it, some people will say hey look gov’t spending funded investment. Yes the gov’t funded the rail line but there had to be real resources saved to enable workers to be able to take the printed money to buy clothing, food, shelter, etc. So really what the gov’t did was to re-allocate savings to projects they provided money for. If there wasn’t adequate savings then all the money allocated to investments either could not be completed or maintained.
When it comes to monetary figures that represent the real economy, they always have to be taken with a grain of salt. For example, lets say the gov’t printed money and allocated it to many people where most of it wasn’t spent. The monetary statistics would show that savings increased. However, just because there is more paper money saved, it doesn’t mean that there is any more real resources saved that can be used for investment. But even with that said, I do believe US Gross savings is very low as compared to many other industrialized countries considering that most of GDP is composed of consumer and gov’t spending which are sectors that mostly just consume resources instead of using resources to enhance the capital structure of the economy.
Mo - You are stringing together assumption that are not self-evident to me. Part of our problem is not using an agreed upon definition of what we are talking about.
The Savings I am talking about that do not control the other variables in the equation for GDP is the number that is created when Investment (public and private) are added to the Trade Balance (Exports minus Imports). It is also the number that is left over after Consumption (public and private) is subtracted from Gross Domestic Product. These numbers are calculated every year. They record what was experienced that year. They are not the pool of resources from which investments are paid. The pool from which investments are paid consist of undistributed profits accumulated by corporations, partnerships and sole proprietors over a series of years plus other sources such as loans, sale of shares, etc.
The Savings produced in year X cannot be used to fund investment in year X because the savings are not in hand until the end of year X plus the time lag between planning an investment and spending the money. Each year the savings in year X get added to the pool but there is no actual connection between the dollars left over after year X and the money spent in year X for buildings, equipment, software.
Currently, in the U.S., the pool of money available to be used for investments is greatly in excess of demand. So much so that corporations are buying back their own stock with excess money rather than investing in the U.S. Our trade deficit is part of the reason domestic firms are not investing in the U.S. The source and level of the pool of money is not a restraint, currently.
Presumably Mo and I are looking at the same world. But we see different things.
The primary question to be answered by all analysts is “so what”? What recommendations for action by any agent flow from your understanding of current reality? Action implications is one way to test propositions and ideas.
Will gross savings is still only like 12% in the US even with corporations having huge piles of cash. I keep mentioning savings because the lower the savings the more it costs to deal with the constellation of factors you described which is causing the US to become less competitive.
The reason that China is attractive to multinationals even though they have higher wages than countries in Africa is because of their high savings. The high savings allows resources to be used to fund infrastructure investments, to provide cheap coal for powering factories and allows the gov’t to pay for all the subsidies it gives to the export sector.
So other countries may have very low wages but if they have low savings it means they don’t have the resources avaliable to invest in sectors like infrastructure that is needed to make their economies competitive.
And I keep telling Mo that these savings he keeps talking about are an artifact or result of the interaction among the components of GDP and that he should look instead to those components because at least one of those components is Imports which is under the control of laws passed by the Congress and signed by the President.
For example, for the year 2011, Table 1.5 of the national accounts tell us that Investment plus the Trade Balance = 1,767 Billion dollars while Gross Savings is reported in Table 5.1 as 1,837 dollars. No essential difference between the two numbers(11.7% of GDP for one and 12% of GDP for the other). But the 1,767 appears in a context that explains how the U.S. economy produced that much savings in the year 2011.
The important components of GDP are Consumption, Investment and Trade Balance with trade balance the only component under the direct control of the Federal government.
ps. To get to $!,767 billion involves using information in Table 5.1, namely the investment by the public.
Hi Mo, I don’t think the “gross savings” level is relevant, at least not in the sense that you argue it is too low and that is the heart of our problems.
US corporations are reported to be sitting on a pile of cash holdings of about $5 Trillion:
http://www.theatlantic.com/business/archive/2012/07/the-5-trillion-stash-us-corporations-money-hoard-is-bigger-than-the-gdp-of-germany/260006/#
That is more than enough money to build many factories and much infrastructure and all the jobs that would result. The problems are rather:
1) That $5 Trillion “savings” is in the hands of corporations that don’t need to invest in the USA in order to sell their wares in the USA
2) That $5 Trillion is NOT in the hands of American consumers who would spend it to stimulate American manufacturing
3) Even if that $5 Trillion WERE in the hands of US consumers ready to spend it, the free trade policies and the declining competitiveness of our industrial ecosystem combine to assure that much of that spending would flow out of the country through purchase of imports.
That is why I assert a balanced trade policy, using Import Certificates to limit imports to an amount equal to exports, would be the best starting point of a solution because it would:
1) re-divert the ongoing $600-800 Billion annual outflow of wealth from trade deficits (import purchases) to direct stimulus of US manufacturing because that amount of current consumption would still occur but become demand for US industries instead of foreign industries.
2) incentivize corporations to invest in the USA because they’d have to produce it here to sell it here. Considering they have a reported $5Trillion in savings now, no rise in the national savings rate is required for building the new factories and capital goods and jobs that would put America back to work.
In other words, the problem isn’t lack of savings but rather lack of investment in the USA of the huge savings already existing, instead it is hoarded and without the balanced trade policy to keep existing spending in the country that would encourage investment of that corporate savings in our country.
Yes some large corporations do have large cash balances which they are holding abroad to defer paying taxes till a later date. But just because they have large cash balances of paper money doesn’t mean it represents real savings. Savings are the real resources that can go into producing captial that is the key to growing the economy and raising real wages. The gross savings number is very relavent because it reflects declining capital accumulation in the US due to inflation which greatly contributes to offshoring and declining living standards.
To illustrate why the large corporate cash balance figures can be misleading. Lets say the gov’t sent everyone checks for $50,000 with most of the money not being spent. Statistics would show an increase in savings but it’s just in monetary figures. Everyone having an extra $50,000 in cash does not mean that there has been an increase in the amount of resources avaliable to invest. Just look at the price of commodities today. They still hover at high levels like before the financial crisis when there was much less unemployment.
To note further about the corporate cash balances, there definitely needs to be some reform to the tax system to encourage more US investing.
When it comes to the trade deficit a big portion of it is related to the unsound inflationary monetary system that exists today. Whether the dollar is considered undervalued or overvalued, inflation causes domestic input prices to rise and it causes and increase in the demand for foreign imports. If interest rates reflected natural levels, there would be less foreign imports, higher savings which means higher investments and more domestic US spending, and a more stable manufacturing sector. For offshoring to be economical, there has to be stable demand for products produced in high quantities overseas. Gov’t policies that artificially stimulate consumption at the expense of investment greatly contribute to offshoring. Yes there are other factors at play that contribute to offshoring but inflation is the biggest one because the number one thing businesses look at one they produce goods is price.
The problem I see with the Buffet Plan for balanced trade is that it adds more government bureaucracy. All these policies like the Buffet plan, pushing China to revalue their currency and tariffs to reduce imports could be accomplished with monetary reform and the transition to a sound monetary system that is anchored to a commodity like gold.
It’s important to note that when the US was part of the classical gold standard, gold only covered about 5% of the money supply but it did anchor exchange rates, keep trade in relative balance, keep interest rates stable, prices stable, allow real wages to grow, keep savings stable which leads to stable investment and a stable manufacturing sector. Why impose more legislation that are mere band-aids when if implemented, a sound monetary system can address many issues at once like raising inequality, inflation, offshoring, etc.
Hi Mo, I see no comparison between your hypothetical scenario of govt printing $50,000 checks for all citizens, and the reported $5 Trillion corporate cash horde. Please explain.
If you are implying that huge corporate cash horde would not serve just fine to build millions of jobs at new and retooled factories, in rebuilding our crumbling infrastructure, and institutions of science and technology, you’ll have to explain that one too.
Finally, I don’t see much bureaucracy needed to issue Import Certificates. The Department of Commerce already exists, and balancing our country’s balance of payments had historically been one of its main functions until around 1970. Whatever bureaucracy it would require would be minuscule compared to the over 4 million jobs in the private sector that would be created directly by diverting our trade deficits into American manufacturing, not to mention the millions more jobs that would be created in services and supply lines serving that revived manufacturing. Those Import Certificates could efficiently find their way from exporter to importer through an exchange market like in stocks or securities or even renewable energy credits.
I disagree with your seeming ideological axiom that all govt bureaucracy is bad. Certainly many examples of bureaucratic stupidity or inefficiency can be found, but there are many other examples where a government bureaucracy can and does perform an important social function. In such cases the bureaucracy is a good thing contributing to the quality of life for our citizens. I submit that the Department of Commerce functioning to balance our country’s trade would be an enormously positive function.
I must respond to Will’s continuing advocacy of Investment Certificates. Here are eight reasons Targeted Tariffs (by country) are superior to Investment Certificates.
But first, here are 3 agreements between the two solutions. 1. The ideal of Balanced Trade is substituted for Free Trade. 2. Both advocate unilateral action by the U.S.
3. Both focus on reducing imports.
EIGHT ADVANTATES OF TARGETED TARIFFS
1. PARTIAL SOLUTION VERSUS COMPLETE SOLUTION. Given the radical change proposed and the sunk costs in free trade, begin slowly with only a partial solution rather than begin with an action which would move immediately in one step to achieve balanced trade among goods. A partial solution will enable the U.S. to reverse current practice and should help defuse opposition, both in the U.S. and abroad. The U.S. surplus in Services suggests that the U.S. should never seek to achieve balanced trade in goods alone.
2. TARGET 3 NATIONS RATHER THAN ALL. The U.S. needs to continue trade with those nations who are now trading with us in a conditions of close approximation to balanced trade. The data cited in my paper above shows that 3 nations accept exports from the U.S. that will cover or pay for 35% of the imports from those nations. The rest of the world shows a markedly different pattern, accepting exports from the U.S. that will cover or pay for 79% of our imports from those nations (data for the year 2011). We need the benefits of trade with those nations and we need their support in our determination to reduce our trade deficit with 3 nations.
3. CERTAINITY VERSUS UNCERTAINITY. Tariff rates will vary though time but will be increased as proscribed in a law passed by the Congress and signed by the President. Every potential importer into the U.S. will be able to predict tariff rates for at least 4 to 6 years in the future (assuming the law remain unchanged). Predictability is very important to businesses contemplating sales in a foreign nation. Import Certificates must be purchased by anyone exporting to the U.S. But at what price? What if all certificates for a given year are already sold? Can speculators buy the certificates? How soon before a good is to be offered in the U.S. will be a reasonable time to acquire a certificate?
4. EXISTING EXPORTERS VERSUS POTENTIAL EXPORTERS. The Certificates will be issued to U.S. businesses in the dollar amount of the goods they sell overseas. Businessmen who want to begin to sell overseas will be handicapped by not having these certificates. Tariffs, on the other hand, help both old and new exporters. It is important to establish a system which encourages All U.S. businesses to sell overseas.
5. TRADE IN SERVICES RECOGNIZED VERSUS IGNORED. The large and growing trade surpluses in Services enables the U.S. to accept goods trade that is less than balanced.
6. GOVERNMENT REVENUE VERSUS NO REVENUE. Tariffs provide some new revenue for the government. Imports Certificates do not. If legal imports are handicapped, smuggling will become attractive. Money will be needed to pay for more customs agents to both handle the new revenue and to deter smuggling.
7. GOVERNMENT AT THE CENTER VERSUS SIDELINED. Buffett’s original proposal was for the export businesses to sell their own certificates, thus zero role for government. Subsequent authors have proposed a central clearing house for sale of certificates operated by the government. Tariffs imply that the government is operating the system as a national policy. The Federal government must be a wholehearted participant in any successful attempt to counter the actions of the governments of China, Japan and Germany.
8. OPPOSITION VESUS COMPLIANCE WITH WORLD TRADE ORGANIZATION RULES. Unilateral tariffs require a repudiation of the rules established by WTO while Import Certificates are thought by some to be in compliance with WTO rules. Rejection of WTO oversight is appropriate given the established aim of the WTO (to expand trade throughout the world).
In summary, a program that is partial and limited to 3 nations will establish the point that the U.S. has rejected free trade for balanced trade. A partial and limited program will arouse less opposition, both in the U.S. and abroad. Let’s get the principle established.
b
I make stupid mistakes. It is “import” certificates, not “investment” certificates above.
Raymond savings affects all variables in GDP like consumption, investment and the trade balance. You can’t have any investment first without savings. If you are not saving then people are consuming. If over consumption is financed by inflation then it eventually leads to budget and trade deficits. The way savings in monetary terms is calculated is somewhat after the fact. When I mention savings its in reference to real resources saved and accumulated in the economy that can be invested. Once again you can’t invest to build infrastructure if the resources are not avaliable.
To illustrate how its first savings that needed lets look at the US economy. The US economy the last many years has been an economy made up of high consumption and low investment which means there is lows savings. For instance a lot of oil and rare earth metals have been consumed in the wars. Resources going into building critically needed infrastructure is an example of investment. Rare earth metals going into making bombs that just explode is an exmaple of resources going into consumption. Accumulated or saved resources can either be invested in projects that enhance the productivity of the economy’s capital structure or they can be consumed in projects that dont’ increase the economy’s capital structure.
Mo - Money spent on investment does benefit subsequent generations - IF the investment is successful, produces returns in excess of the cost. However, investments can fail. When they do. the investment provides no benefits.
Today, in the U.S., the pool of money available to be used for investments is greatly in excess of what businessmen are willing to invest because they fear an investment that does not produce sufficient return. When the pool of money is larger than needed, increasing the size of that pool does not increase investment.
The savings produced in any one year go to increase the size of that pool. But if it is already larger than needed, investments do not increase. Instead, businesses buy back their own stock. Which does not increase Gross Domestic Product.
You and I both want the private sector to invest in projects that produce a return so that it can support the domestic economy. I say reduce imports is the best way to provide the environment where investments will be profitable.
Question - If you somehow were given the power to reduce consumption in the U.S., would you do it if it increased savings?
In the Guest Opinion: Ken Davis blog posting Davis writes:
Our trade deficits from a massive flow of imports replacing sales by U.S. domestic firms to our own huge market are without doubt America’s worst “leaking boat”.
http://www.tradereform.org/2011/09/guest-opinion-ken-davis/
Very few are willing to invest in a “leaking boat”, fix the leak, i.e., the outflow of GDP, resulting from our net trade deficit, and investment will skyrocket.
Our trade deficits over the last 40 years have reduced the U.S. GDP. Attempts to address these trade deficits via currency devaluation reduced the purchasing power of that GDP. The link that following is to a chart which depicts the interaction of the reduced GDP and reduced purchasing power, on a per-capita basis:
http://www.stansberryresearch.com/pub/images/201112PSI_a.gif
A balanced trade model is as close to a “silver bullet” to address our trade deficit and maintain a stable currency as any other proposal put forth in the last four decades.