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Gomory calls for Import Certificates to balance trade
Howard Richman, 10/14/2010

We are not the only ones proposing ways to balance trade, Ralph Gomory, one of our country's premier economists and business leaders, has also been proposing practical ways to do so.

There are two ways to balance trade, Import Certificates (ICs) and the scaled tariff. We called for ICs in our book Trading Away Our Future, but in our recent writing we have been calling for the scaled tariff. Both methods have their own advantages. ICs balance trade more surely, while the scaled tariff requires no new bureaucracy.

On September 14, Ralph Gomory (Jobs, Trade and Mercantilism -- Part II -- Dealing with Reality) reiterated his call for Import Certificates to balance trade, which he calls BT/BC (which stands for Balancing Trade by Certificates or Balancing Trade with Buffett Certificates. Specifically, he wrote:

BT/BC, like ordinary tariffs, is a very flexible approach and many variations are possible. Like tariffs it 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. Balancing trade could be introduced gradually by initially giving more than a dollar of imports for each dollar of exports, but decreasing that amount over time.

However, and this is important, 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.

To make this more concrete, let us imagine that the U.S. decides to balance trade with the set of countries with which we have had persistent large trade imbalances. We will call this group China+. Here are some observations:

  1. When BT/BC is fully applied trade is balanced.
  2. The market price of the BT/BC certificates is an incentive to U.S. producers to export. This translates into jobs in this country.
  3. The market price of the BT/BC certificates makes the China+ group's goods more expensive in the U.S.
  4. 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.
  5. 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 ours.

There are two versions of the Import Certificate plan. The one proposed by Warren Buffet issues marketable Import Certificates to exporters. The other, proposed by us in Trading Away Our Fuure, has the U.S. government auction the certificates to importers. As I have explained previously (Auctioning Import Certificates is consistent with WTO Rules), the auctioning version is consistent with WTO rules, while the Buffett version is not.  But that doesn't make auctioning the better plan. As we noted in Trading Away Our Future:

The Buffett plan has within it the seeds of a different, but perhaps better international system, one based upon the fact that balanced trade, like barter, always benefits the parties involved. Under the new system, any country experiencing a trade deficit could decide to impose a system of import certificates in order to bring that trade back into balance. The new system would put an end to mercantilism. Any country that tried to subsidize one particular export-competing industry would be hurting its import-competing industries. There would no longer be a need for the World Trade Organization, nor for the GATT treaties, nor for any other of the forms and bureaucracies of the current regulatory-based trade system....

No longer would it be possible for one country to deindustrialize and economically destroy its trading partners without its trading partners’ consent. With balanced trade the rule, not the exception, no longer would the world economy be characterized by massive movements in the prices of currencies that would cause intense recessions and depressions. The mercantilist era of economic warfare would end. The era of economic instability caused by currency collapses would end. An era of international economic stability would begin. (p. 98)

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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]