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Time to End the “Free Trade” Ideology and Substitute “Balanced Trade” Economics Instead
Raymond Richman, 11/23/2015

In his essay “The Consequences of Neglecting Manufacturing”(4/20/15), Robert E. Scott of the Economics Policy Institute, compares trade in goods exports, goods imports, and the ratio of imports to exports for the United States and its top three international competitors, China, Germany, and Japan in the year. The smallness of the ratio of imports to exports, the more likely the country is restricting imports and subsidizing exports, a practice called mercantilism. He writes, “Overall, the United States had a trade deficit of $67.4 billion in [the] top 30 exporting industries. The top 30 exporting industries in those other countries had sizeable trade surpluses that ranged from $223.2 billion in Japan to $285.3 billion in Germany to $647.7 billion in China.” The trade deficits the U.S. has been experiencing for the past two decades has caused the displacement of millions of U.S. workers in manufacturing and has contributed to the weakness of the U.S. economy and caused the U.S. becoming the world’s leading debtor nation.

Here are the facts as Scott details them.

Without exception, the top 30 export industries in China, Japan, and Germany were all manufacturing industries. Six of the top 30 U.S. export industries were primary commodity exporters including grains, seeds, and nuts. This commodities sector was responsible for a trade surplus of $69.7 billion. The United States also had a trade surplus in aircraft and parts (two sectors) of $76.2 billion. However, these surpluses were more than offset by trade deficits in two other sectors, motor vehicles and parts, with a trade deficit of $117.2 billion, and electronics, with a trade deficit of $110.2 billion, both important U.S. manufacturing industries.

While we think of the importance of the motor vehicle industry in the U.S., the impression held universally in the U.S. among the general public and economists is that the motor vehicle industry is one of the most dynamic parts of the U.S. economy and an important contributor to the level of the Gross Domestic Product and our high standard of living.. To the contrary, the foregoing data suggests is that it is making a negative contribution to the U.S. economy and lowering the wages of everyone except those employed in the automotive industry or owning shares in automotive corporations, domestic and foreign. That is probably true of the domestic automotive industry but the foreign firms, Mercedes, Nissan, Toyota, Honda, Hyundi and others are a drag on the U.S. economy as is the purchase abroad by U.S. companies of autoparts and vehicles produced abroad.

There is an easy solution to the dilemma posed by these facts. They would not matter if our trade were in balance. The trade deficits are what cause the negative effects on employment and manufacturing and our so-called free trade agreements negotiated during the past five decades gave an incentive to American Corporations to move their production aboad, secure in the knowledge that the products and parts produced abroad would not be subject to tariffs when imported into the U.S. Our solution is our invention of the single-country-variable tariff, which we termed the Scaled Tariff, which is imposed on any country with which we have experienced chronic annual trade deficts. It does not matter whether the cause of the trade deficit is a country’s barriers to trade, its mercantilist practices, or an artificial exchange rate. The goal is simply to balance trade. The Scaled Tariff is described in our book Balanced Trade (Lexington Books, 2014).  

Scott concludes “that the U.S. trade deficit in its top 30 export industries is a consequence of its toleration of massive currency manipulation over many years by China, Japan, and about 20 other countries, the failure to eliminate widespread tariff and nontariff barriers to U.S. exports, and the failure to develop effective strategies for rebuilding U.S. manufacturing.”

The inoiuthaction of successive government administrations in the U.S. is scandalous. The cause is an ideology dating back too Adam Smith that is not supported by any economic theory. The only time that free trade is an appropriate policy is when all the trading partners permit free movement of labor and capital, have a common currency, and impose no barriers to imports or grant subsidies to exports.

The U.S. needs no trade treaties to increase its exports. All it needs is the Scaled Tariff, the single country variable tariff, that it is authorized to impose under international law, which, we believe, authorizes countries to defend themselves when they experience chronic trade deficits whatever the reason for the deficits. This means taking action against Chna, Japan, Germany,   South Korea, and Mexico.