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What Would Buffett Do? — A Plan to Balance Trade, Create Jobs and Restore American Manufacturing

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The following is an article by Bill Parks, CPA member and supporter, and Founder and President, of NRS, Inc.

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Summary

The U.S. trade deficit, like an infected appendix, won’t get better on its own – it will get worse. It’s destroying the American heartland, and without an effective intervention, it will threaten the entire US economy. Band-Aid proposals such as a value-added tax (VAT) won’t solve the problem, nor will the nostrum of laissez faire. We need a remedy that treats the illness, and not just the symptoms. Fortunately, an effective treatment has already been prescribed – by none other than Warren Buffett. Administered correctly, it can be the cure our nation needs.

 

In a 2003 Fortune Magazine article, Buffett and co-author Carol Loomis proposed “issuing Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports,” and requiring importers to acquire ICs in amounts corresponding to the dollar value of their imports, ultimately resulting in balanced trade.  Senators Russ Feingold and Byron Dorgan later proposed “The Balanced Trade Restoration Act of 2006” which would have implemented a version of Buffett’s plan. Unfortunately, the bill was never brought to a vote.

 

We need to look again at ICs. I’m proposing a revised version of the Buffett plan that will balance trade, create American jobs and help put the shine back on the rust belt.

 

Central components:

  • Issue ICs to US exporters in amounts equivalent to the dollar value of their exports.
  • Require importers to acquire ICs in amounts equivalent to the dollar value of their imports.
  • Allow exporters to sell their ICs to importers in an auction similar to that used to auction US treasury securities.
  • Designate an independent, bi-partisan federal agency such as the United States International Trade Commission (USITC) to oversee IC issuance and to regulate certificate exchange values to optimize trade balance and market stability, with a goal to achieve balanced trade in ten years.
  • Tax IC sales and use the revenues to help pay down the deficit.
  • Limit Import Certificates to manufactured goods and outsourced jobs, and exempt agricultural products and raw materials. This would bolster manufacturing and improve the job market while avoiding the volatility associated with oil and other commodity prices.

A Call to Action

Even the most robust enforcement of new and existing fair trade legislation wouldn’t substantially reduce our trade deficit. In fact, even if all our trading partners allowed unions and floated their currencies, it wouldn’t make any significant difference in our trade deficit. Let’s finally put to rest all the talk of the Smoot-Hawley tariff of 1930, as well as complaints that  China’s managed  currency causes our trade imbalance.(1) Our naive free trade stance caused the U.S. to lower tariffs, but failed to demand tariff parity with our trading partners. At most, we asked our partners to impose “voluntary” quotas that allowed them to keep funds from the implied tariffs, contributing to our present unsustainable position.

“A laissez-faire system works to the benefit of the country in the most competitive position,” wrote Paul Kennedy in “The Rise and Fall of the Great Powers.”(2) Conversely, laissez-faire works to the detriment of a country that is less competitive. Only those blinded by the most chauvinistic beliefs could still think the United States holds long-term competitive advantages against many Asian economies. Over the more than thirty years that my company has been importing and exporting products, the decline in the relative competitiveness of the United States has become increasingly clear. The result, of course, has been the collapse of American manufacturing, the loss of millions of jobs, and economic malaise in the industrial heartland.

Without action, our trade deficit won’t disappear until the living standards of the United States, China and other Asian countries such as Thailand or Viet Nam are in equilibrium. Is that our goal? That equilibrium is not going to be met by bringing their economic standards up to ours, but more likely by melding the economies and getting a weighted-average standard of living. Living standards are rising all across Asia, but the median income in the United States has scarcely budged in more than thirty years. In fact, the lower 80% of U.S. wage earners are worse off than they were forty years ago. Keynesians would admit that without running up the deficit and household debt over the past 30 years, our standard of living would have decreased. The added interest burden of this and future debt, as well as a continued trade deficit, assure a lower future standard of living for the majority of Americans.

A Case for Import Certificates

Over seven years ago, Warren Buffett and Carol Loomis devised an ingenious way to end our ballooning trade deficit.(3) Their article in Fortune Magazine shows both the reason and the direction for his plan:

“The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to an increase in overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.(4)

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties – either exporters abroad or importers here – wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.”

In response, Senators Byron Dorgan and Russ Feingold introduced the “The Balanced Trade Restoration Act of 2006”(5) which included practical schedules and mechanisms to implement the Buffett proposal in stages.(6) It called for imports and exports to reach parity, dollar for dollar, over a ten-year period.

All imports except oil and gas were initially covered in the Senate bill, and the ratio of imports to exports was reduced from present levels to 1-to-1 over five years. Over the next five years, oil and gas were included in imports and gradually brought into parity with other imports. Thus, after ten years, there would be a balance between imports and exports. The bill cites article XII of the General Agreement on Tariff and Trade (GATT 1994) that permits any member country to restrict the quantity or value of imports in order to safeguard its financial position and the balance of payments of the member country. Unfortunately, this bill never even came to a vote in the Senate. Today, the dire U.S. economic and trade situation cries out for the Buffett plan.

A Revised Proposal

I suggest limiting Import Certificates to manufactured goods and outsourced jobs, (7) and exempting agricultural products and raw materials.  This would boost U.S. manufacturing while avoiding the volatility associated with oil and other commodity prices.(8) The incentive effect of ICs will cause a huge jump in demand for domestically manufactured products and a corresponding jump in employment, and as manufacturers grow their production capability and new factories are built, the added employment will produce a multiplier effect on the economy. This multiplier effect will be accompanied by an accelerator effect as factories gear up to meet production demands, purchasing everything from machine tools to computers. This one-time boost could pull the economy out of the doldrums in record time.

Over time, ICs will serve as an economic tool that affects our economy just as surely as monetary or fiscal policy. Flexibility in cranking down the IC ratio will allow us to moderate domestic and international economic disruptions. We should no more use a fixed formula to implement certificates than we should use one to control monetary or fiscal policy. Dimitri Papadimitriou expresses concerns that IC prices could be extremely volatile and disruptive to commerce, (9) but ensuring regulatory flexibility will turn this potential liability into an asset.

ICs are a far more effective tool for improving U.S. trade competitiveness than a Value Added Tax would be. An overwhelming number of countries use the VAT as a major revenue source because it is allowed to be rebated rather than counted as the export subsidy that it really is. It also penalizes imports from non-VAT countries. It is easy to jump to the conclusion that the U.S. should impose a VAT in order to compete abroad. However, a closer examination of the issue reveals that ICs would create the desired effect progressively, creating more and better jobs for the working class, whereas a VAT is a regressive policy whose cost is passed to the everyday consumer while the importer’s profits remain high.

Exporters have much to gain from ICs, and for good reason, but allowing the exporter to keep all of the revenue from IC sales would be an overreaction. A better solution would be to reserve some of that revenue for the government, or to tax IC revenues at a special rate (50 %?) to achieve the same result. This would avoid a complete revision of our tax system while still countering the subsidy given to exporters in countries with high VAT rates. It would also help provide much-needed funds for deficit reduction, which may help counter the usual bias against raising tax revenues. Also, to help ensure economic stability, congress could provide a timeline for balancing manufacturing trade, leaving the ratio of imports to exports to be determined one or more years in advance depending on forecast economic conditions.(10)

If the Congress passes and the President signs the enabling legislation to implement ICs, the United States International Trade Commission (USITC) might be the logical body to administer the proposed Import Certificate (IC) program.(11) The USITC has the experience and appropriate staff to administer the IC program and resolve disputes over which products would be subject to the program and which should be excluded. It would also annually, or more often, determine the ratio or dollar amount of imports to be allowed for each import certificate awarded per dollar of covered exports to meet Congress’s intent.

The USITC could certify exports monthly and issue the ICs with a12-month validity. The ICs could be auctioned off in a process based loosely on the process used to auction U.S Treasury securities. Dealers might be the main purchasers with provisions for direct purchasing by importers. By adjusting the IC ratio monthly, the USITC or another agency could minimize price volatility. Congress might ensure that the USITC has specific goals such as achieving balanced manufacturing trade in 2020.

Notes:

1. It would likely have little effect on consumer goods, but might aid capital goods industries including automotive and industrial supplies and materials. Our company, NRS, purchases consumer goods from firms that have factories in not only China, but Korea, Vietnam, Taiwan, Thailand and Cambodia as well as several European countries. Production is often moved from one country to another in search of lower costs. Recently we have seen factory jobs moving from China to Viet Nam and from Thailand to Cambodia. Some of these jobs previously moved from Japan to Korea or Taiwan.
2. Paul Kennedy, The Rise and Fall of the Great Powers. P. 360
3. America’s Growing Trade Deficit Is Selling the Nation Out From Under Us. Here’s a Way to Fix the Problem-And We Need to Do It Now. FORTUNE October 26, 2003 By Warren E. Buffett and Carol Loomis
4. Indeed, though the dollar has declined about 20% against the euro since this article appeared, the annual trade deficit has increased from $410 billion in the year prior to Buffett’s article to over $700 billion before the recession.
5. Not to be confused with S.3083 – TRADE Act of 2008 that would require a review and renegotiation of all or most existing trade pacts.
6. S. 3899: To achieve balance in the foreign trade of the United States through a market-based system of tradable certificates as well as other purposes.
7. Outsourcing destroys American jobs just as surely as does moving American manufacturing jobs overseas. Therefore, outsourced jobs should also necessitate import certificates. More research will be necessary to establish the appropriate value for outsourced labor by multi-nationals that outsource to their own subsidiaries. Rules must be in place to assure fair transfer pricing within multinational firms.

8. International trade imbalances in commodities and raw materials cause extremely disruptive business conditions.. Combining commodities with manufactured goods would cause wildly fluctuating IC prices. Business must have predictable IC prices in order to operate efficiently. Commodities imbalances need targeted approaches such as encouraging green energy and imposing carbon taxes or the less desirable choice—Cap and Trade legislation.
9. Dimitri B. Papadimitriou, Greg Hannsgen, and Gennaro Zezza, “The Buffett Plan for Reducing the Trade Deficit.” Working Paper No. 538. The Levy Economics Institute of Bard College, July, 2008.
10. Ian Fletcher proposes as an alternative The Natural Strategic Tariff. This raises revenue and doesn’t discriminate as would the usual protective tariff. By being levied at the same rate on all imports it avoids the harm of having tariffs levied according to political power. He believes also that it will work to foster “good” industries. He roughly defines them as high tech areas that are at an early point of production where the protective tariff will increase production and these increases will rapidly lead to scale economies. The disadvantage is that there is no guarantee that it will achieve a trade balance and US manufacturers are still at a disadvantage to manufacturers from countries that levy Value Added Taxes.
11. Made up of six members, each member is nominated by the President and confirmed by the Senate. They serve staggered terms with no more than three commissioners from the same party.

One Response to “What Would Buffett Do? — A Plan to Balance Trade, Create Jobs and Restore American Manufacturing”

  1. robert says:

    Buffet’s solution requires we exit the WTO. The political reality is quite different. Like all solutions the problem lies in inertia in DC to do ANYTHING of substance to save this country from third world financial status.

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