Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

How to Avoid Trade Wars While Balancing Trade
Raymond Richman, 6/5/2018

It is scandalous the way our media, including the Wall Street Journal, are reporting the world’s reaction to the Trump administration’s imposition of a tariff on steel and aluminum. Since 1975, America’s trading partners, with few exceptions, have enjoyed a surplus in their trade with the USA that has cost American manufacturing workers millions of jobs, caused a relative decline in manufacturing in the USA, and converted the USA from the world’s leading creditor nation to the world’s leading debtor nation. They have all been accusing the Trump administration of starting a trade war when in fact it could be argued that the trade agreements promoted by the USA were suicidal.

Trade Wars are predictable when a country chooses to impose tariffs on or more of a select group of products. It is easy for its trading partners to do likewise. A trade war is rare when a country devalues its currency which is equivalent to a cross-the-board tariff on imports.

The six other members of the G7, Germany, Japan, France, Canada, Italy, and the United Kingdom condemned the USA action. None of the media mentioned the fact that for decades these countries have been waging a trade war on the USA. In 2016, the countries with which the USA had the largest trade deficits, were China, $347.0 billion; the European Union, $146.3, (including Germany, $64.8 billion); Japan, $68.9 billion; Mexico, $63.1 billion; Ireland, $35.9 billion; and S. Korea, $27.7 billion. Only S Korea has agreed to reduce its deficit by increasing imports from the USA. The total trade deficit of the U.S. in 2016 was $734.3 billion. These countries account for 93.8 percent of the total. The reader should note that three of the six G7 countries are included.  How could the media accuse the USA of starting a trade war given the fact that it has suffered trade deficits for decades?

We are not suggesting that the USA devalue the dollar. It would hurt all of our trading partners including those with whom we have a trade surplus. We have a better suggestion. Doing something which is equivalent and superior in many ways to a devaluation, namely a cross-the-board variable tariff on a single-country’s exports to the U.S. The rate of tariff would depend on the size of the trade balance and would increase as the trade deficit widens and fall as the trade deficit narrows. A country experiencing a chronic trade surplus is actually encouraged to import more from the trade deficit country and less from other countries in order to reduce the variable rate.

Companies affected by the single-country-variable tariff would continue to export to the U.S. but would have to absorb the tariff. So long as exports continue to the U.S., U.S. tariff revenues would increase enabling U.S. consumers to be compensated for injuries to their living standards by reducing their taxes. Another effect would be increased employment and wages in the industries affected by the tariff.