Categorized | Trade

Jobs, Trade And Mercantilism — Dealing With Reality, Part Two

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Here’s another article from Manufacturing & Technology News. This one was written by Ralph Gomory, Research Professor at NYU, President Emeritus of the Alfred P. Sloan Foundation and former IBM Senior Vice President of Science & Technology. Professor Gomory is also on the Advisory Board of the Coalition for a Prosperous America.

America’s massive trade deficit is destroying significant segments of American industry and eliminating badly needed jobs. This is happening because the United States is slow to recognize an unpleasant reality: It does not exist in a world of textbook free trade. China, America’s largest trading partner has chosen mercantilism and is using the full powers of its government to advance its industries in ways that destroy their American rivals.

The United States has turned a blind eye to this reality. If it continues to do so it will become a poor nation.

However, the United States can deal with its trade deficit. It can balance trade. There are two ways to do this, and there may be more. Tariffs are one. The second is less well known but has major advantages: balanced trade with balanced certificates. Both approaches meet two important criteria: that the actions the U.S. chooses should be under U.S. control and do not require the cooperation of a mercantilist partner; and that the actions should be effective — they should actually balance trade.

Tariffs have a long and checkered history reaching back through centuries. In the United States, no discussion of tariffs is complete without mentioning the Smoot-Hawley tariff of 1930. There are many who credit this tariff with making the Great Depression even greater. Then there was President Nixon’s 1971 across-the-board tariff imposed to compel Japan and other nations to appreciate their currencies. It is generally credited with doing so.

Tariffs meet the first criterion: They can be enacted, repealed or modified by the United States without the consent of its trading partners. Whether they are compatible with WTO Article XII, which permits extraordinary actions in the face of severe and continuing trade imbalances, is something that can be argued.

Tariffs have the advantage of being flexible. They can be applied to different countries or to different classes of goods. They can be set high or low. If they don’t initially seem to be producing the desired result, they can be set higher. As a result, they can meet the second criterion: They can get the job done. They can balance trade.

However, the effect of tariffs on the scale of trade is a major drawback. Tariffs tend to diminish trade, and therefore its benefits. There is also the unpleasant possibility that tariffs could trigger a trade war in which countries react to their trading partner’s tariffs with tariffs of their own. This is the effect that followed the U.S.’s imposition of the Smoot-Hawley tariff.

In an extreme case, one can imagine trade being balanced by tariffs, but balanced at some level far below the pre-tariff-war level. It is this potential for tariffs to limit or even eliminate trade that make tariffs so extremely unpopular among economists. And economists matter. They often directly formulate government economic policy. Economists do not want a world economy in which tariffs and counter-tariffs cut off the benefits of trade. They strongly believe and have taught it with pride to generations of students.

Tariffs are the “obvious” means to balance trade. But while economists stand against them — and label those who promote them as protectionists — it is equally true that economists have no other ideas on what to do to counter mercantilism. There is, however, a well-known economic concept worth considering to counter mercantilism.

In a remarkable article that appeared in Fortune magazine in 2003, Warren Buffett described the use of what he called import certificates that could be used to balance trade. University of Chicago Professor Robert Aliber has discussed a similar concept he calls “points.” These proposals have much in common with a well-known economic concept called cap and trade used to set limits on pollution.

With cap and trade, permits to pollute are either issued or auctioned to companies that emit pollutants. Companies must obtain enough permits to cover their emissions. If they can reduce their emissions they can sell their permits to others. Pollution cannot exceed the total of all the permit amounts issued. That is the cap.

When this same concept is applied to international trade it is called balancing trade with balanced certificates (BT/BC), an acronym that can also be used for “balancing trade with Buffet certificates.”

Here is an example. A company that exports $1-million worth of goods or services produced in the U.S. earns a certificate for that amount. These certificates are then traded on an open market. Any company that wants to import into the United States is then required to have certificates with total face value equal to the value of the proposed import.

This produces balanced trade very directly as the total value of imports is limited to the total value of certificates available, which is the total value of exports. The export total is the cap in limiting imports.

Many variations are possible. Like tariffs, the certificate system could be applied to specific nations or to specific classes of merchandise or in special situations or to all of these. The price of the certificates sold could go to the producers or in part to the government. The program could be introduced gradually by initially giving more than a dollar of imports for each dollar of exports, but decreasing that amount over time.

Unlike ordinary tariffs, the direct effect of BT/BC is not to lower or eliminate trade but to lower or eliminate the imbalance of trade. This is important. Imagine that the United States decides to balance trade with the set of countries with which it has persistently large trade imbalances. Such a group could be called China+. Here are some observations:

– When BT/BC is fully applied trade is balanced.

– The market price of the BT/BC certificates is an incentive to U.S. producers to export. This translates into jobs in this country.

– The market price of the BT/BC certificates makes the China+ group’s goods more expensive in the U.S.

– There is an incentive for the China+ nations to import U.S. goods, because that in turn will increase their own ability to export to the U.S.

– Should the China+ group respond with certificates of their own (a certificate war) they are simply moving the world toward balanced trade. Should they decide to respond with tariffs, they will be acting to reduce their own exports as well as those of the United States.

With a BT/BC plan, the China+ nations can avoid massive expenditures on certificates either by decreasing exports to the United States or increasing imports from the United States. The option of decreasing exports would allow the United States to re-grow its industries, while the option of increased imports from the U.S. would provide export-based jobs in the United States with no decrease in imports. In this case, the increase in U.S. exports would tend to drive down the price of certificates so that the real world might well come close to the world of textbook trade where trade is naturally balanced.

BT/BC is very much in line with the spirit of both the IMF and the WTO. The IMF states in Article I of its charter that one of its purposes is the balanced growth of international trade, while the WTO states in its preamble the aim of securing reciprocal and mutually advantageous trade.

Mercantilism is not going to go away. The United States must find a way to deal with its consequences despite the fact that powerful sectors of American society benefit from the present situation and therefore oppose change. If the United States is willing to face up to the reality of mercantilism it will find ways to arrest its downward slide.

The country must act before it is too late.

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