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Levy Economics Institute's analysis of Import Certificates to balance trade
Howard Richman, 1/6/2010
In a July 2008 working paper, three economists from the Levy Economics Institute of Bard College (Papadimitriou, Hannsgen, and Zezza) analyzed the costs and benefits of Warren Buffett’s Import Certificate (IC) plan, making quantitative estimates of the effects.
As far as benefits go, they pointed out that Buffett’s plan would cause an immediate macroeconomic boost to the economy, increase government tax collections (because of increased American income) and reduce the trade deficits to a sustainable level. On the costs side, they pointed out that the ICs could result in increased uncertainty and could produce trade retaliations.
Their discussion, throughout, was thoughtful and balanced. They made three important contributions to the Import Certificates discussion:
- 1. They pointed out that the ICs would be less expensive if not applied to fuel products, as during the first years of Senators Dorgan and Feingold’s Balanced Trade Restoration Act. The reason being that demand for fuel imports does not much respond to price.
- 2. They pointed out that if ICs were earned by service exports, not just goods exports, then there would likely be many faked exports in order to fraudulently obtain ICs.
- 3. They came up with a new version of the IC plan: Having the government auction the ICs and then use the funds generated to reduce payroll taxes.
Their cost argument about the unstable and uncertain future value of the ICs may have exaggerated the disruptiveness of this uncertainty. They did not seem to be aware that Buffett had suggested that expiration dates be placed upon the ICs in order to insure that the futures market for ICs would be liquid. Importers and exporters already deal with future uncertainty in foreign trade due to changing exchange rates and could deal with changing IC prices the same ways.
Their cost argument that other countries would retaliate to the ICs ignored our two major contributions to the Import Certificates debate in our 2008 book, Trading Away Our Future, which was published just a few months before their working paper:
- 1. We developed a targeted IC plan. Under our WTO-compliant alternative to Buffett's plan, the ICs would be auctioned by the U.S. government and be targeted to the mercantilist countries so that they would be country specific (i.e., an IC obtained by exporting to China would allow importing from China). If a mercantilist country were to respond by further restricting their imports from us, they would be further restricting our imports from them. Instead, they would be forced to take down their many tariff and non-tariff barriers to our imports so that they could export more to us. Buffett's plan could make use of country-specific ICs when needed by the U.S. Treasury to respond to retaliation. The trade deficit country wins any trade war if it has country-specific ICs in its arsenal.
- 2. We anticipated the world's response to Buffett's Plan. We foresaw that if the United States were to adopt Buffett's plan, most other trade deficit countries would soon follow suit, creating a new international system to replace the WTO that did not require any international supervision. Any trade surplus country that tried to restrict its imports would necessarily be restricting its own exports.
The Levy Economics Institute economists are in agreement with us that if the trade surplus countries do not respond by restricting their imports from the United States, then U.S. producers would reap a tremendous benefit. They wrote:
In the absence of retaliation, we estimate that exporting firms would cut their prices on foreign markets only moderately, as the demand they face is price inelastic. They would therefore reap a windfall in profits almost equal to the full value of the certificates they sold, minus any increase in the costs of the imported intermediate goods they use to produce exports. (p. 24)
They also noted that additional profits made from the new trade situation would be invested, resulting in increased employment and increased disposable income for American workers.
Thus, ICs increase profits for American producers and fixed investment in American production. Not only could this increased fixed investment jumpstart the American economy out of the current recession, but it would also create better tools and products for American workers, and thus increase long-term American growth and productivity.
The ICs would be temporary. Gradually the increased investment caused by the ICs would make American products more competitive, which would, in turn, eventually make the ICs less and less expensive. Eventually, the ICs would not be necessary to keep trade in balance. They could be discontinued, while kept available should mercantilism again raise its ugly head. The era of modern mercantilism would be over.
[Originally published on our old blog on March 29, 2009]