Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The Currency Reform Bill Won't Work: What Should Replace It and Why
In a July 4 commentary, Ian Fletcher, author of Free Trade Doesn't Work: What Should Replace it and Why, argues that the bipartisan Currency Exchange Rate Oversight Reform Bill would only be a small first step toward solving our trade problems. He begins:
Later in the commentary, Fletcher points out that the bill is seriously flawed because (1) it acts slowly and (2) it relies upon industries filing lawsuits with the Commerce Department:
Would the ... currency-reform bill get us out of this trap, if it passed? As noted, it's definitely a positive move, but it's still just a start. Its key limitation is that its approach is gradualist and, above all, reactive, because it depends on victimized industries filing lawsuits under the trade laws. So it will ultimately need to be supplemented with a much more comprehensive strategy.
Fletcher doesn't mention two other very serious flaws:
We have proposed an alternative that does not share these flaws: a tariff, with a rate tied to our trade deficit with China. Not only would it comply with a special WTO rule which lets trade deficit countries restrict imports in order to avoid balance of payments problems, but it would also address all of the specific problems of the currency-reform bill:
Here's how the numbers of our proposal would work in practice. Let's assume that Congress specifies that the tariff should collect 50% of our trade-deficit with China. In 2009, we imported $305 billion from China, but the Chinese government only let its people import $86 billion from us, creating a trade deficit of $219 billion. If the tariff were designed to take in 50% of our trade deficit, that would be 50% of $219 billion, which is $109.5 billion. An initial tariff rate of 36% on $305 billion of imports from China would be designed to take in that $109.5 billion in tariff revenue.
In order to be sensitive to movements of trade toward balance, the tariff rate could be automatically adjusted each quarter, based upon our exports and imports of the previous four quarters. Once trade moves into relative balance, the tariff would disappear.
[Note: Ian Fletcher misidentifies the bill as being Senator Stabenow's bill, perhaps because of this misleading article. It is actually a bipartisan bill introduced by Senator Charles Schumer.]
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