Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Only Way the Trump Administration Will Be Successful in Fixing the Trade Deficit
An Open Letter to USTR Robert E. Lighthizer
The Only Way You and the Trump Administration Will Be Successful in Fixing the Trade Deficit is to LET TRADE FIX ITSELF! And Here is How.
Your Administration is in office in no small part because of its loud denunciation of international trade deals like NAFTA and the TPP and a pledge to fix the $0.5T annual trade deficit (really closer to $0.75T in actual goods). This is one area where the metrics are well established and failure to make at least a substantial dent in the trade balance will be easily visible to voters by 2020. And while economists may argue the relative importance of the trade deficit to our economy, it is hard to make the case that a net cash outflow of such magnitude does not hurt our economy, undermine domestic manufacturing, break essential supply chains and cost Americans millions of middle class jobs.
Unfortunately, the tools the you have in hand to balance trade are very limited. We are already seeing that jawboning doesn’t work as evidenced by a year-to-date trade deficit in 2017 that is almost 10% worse than 2016. And it is readily apparent to the clear-eyed observer that negotiations can make but a marginal dent in the trade deficit irrespective of the skill of the negotiator. In rough numbers, China exports 4 times as much to the US as it imports from us. Yes, four times! The same with Vietnam. Japan’s trade ratio with the US is over 2 and Germany’s is almost 2.5. (which belies the myth that we are bound to have a big trade deficit because we are a high wage country.), These countries understand that the trade balance does matter and in each case, the surplus with the US is an essential and strategically achieved component of their economy that they will not relinquish at a negotiating table.
We hear proposals that we can fix the trade deficit by “prohibiting” or countering currency manipulation by our trade competitors, but currency manipulation is hard to identify, quantify and prove; to an objective observer, our own quantitative easing looked a lot like currency manipulation. And besides, trade experts have highlighted over 100 different ways other countries tilt the playing field their way irrespective of the words in trade agreements or WTO rules. Others have proposed a substantial (say 25% or more) flat tariff. But such an indiscriminant strategy would incur the wrath of the WTO and penalize our fair-trading partners like Canada and Brazil more than it would the Chinas of the world.
Who knew trade was so hard, and what can we do? The only solution is one that’s not really new, but that never gained traction. That is to employ a “closed loop” mechanism in which the desired results are autonomously achieved – just like with the autopilot on an airplane (or now even on your car). Warren Buffet foresaw the dangers of an emerging trade imbalance in 2003 and published an Op-Ed in the WSJ advocating we adopt a system of “Import Certificates” (i.e., rights to import) that could only be earned by exporting a like value of goods or buying them from someone who had. Thus trade would inherently be balanced. Obviously this would need to be phased in over some period of years to not disrupt the world economy. And it has other drawbacks like requiring a new bureaucracy to manage the certificate marketplace and penalizing our best trading partners like a flat tariff. But the basic concept of using a “feedback” approach was sound....
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