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Richmans' Trade and Taxes Blog
Letter to Prof. Martin Feldstein of Harvard U
The following is a copy of a letter I sent to Prof. Martin Feldstein of Harvard that I thought many of you would be interested in.
I’ve been an admirer of Prof Martin Feldstein for many years but his op-ed in the Wall Street Journal, “Tariffs Should Target Chinese Lawlessness, Not the Trade Deficit” (12//28/2018) has got it exactly backwards. Tariffs should not be used as punishment for lawless economic behavior. Although economists believe in the benefits of trade, they know, as John Maynard Keynes did, that “beggar-thy-neighbor” trade policies that result in job-losing trade deficits for the U.K. had to be fought with counter-measures. In the absence of a common currency, the preferred policy is a single-country-variable-tariff (our invention) whose rate increases as the trade deficit widens and falls as trade is brought into balance.
Of course, trade need not be balanced with every nation but should be balanced with the world of nations. Since the General Agreement on Tariffs and Trade was signed in 1994, the USA has had huge deficits with Japan, Germany and the European Union, and China, which amounted to $562 billion in 2016 of a total of $734 billion. This resulted in booming economies in those countries and relatively stagnant growth in the USA accompanied by the loss of millions of high-paying jobs in USA manufacturing. Free trade is possible but not with predators.
We allowed cumulative trade deficits with Germany and the European countries post WWII to prevent them from voting Communist. But Germany and French intellectuals did not want to be dominated by the USA either. Unfortunately for them, the world political situation changed with the onset of the Cold War, and NATO was formed as a defensive-offensive bloc dominated by the good old USA. Economically, the USA continued to allow its former enemies the privilege of enjoying trade surpluses with the USA. By the late 1970s, the USA had changed from being the world’s leading creditor nation to the world’s leading debtor nation!
Copying, imitating, and improving on your most successful competitor’s products is at its heart of market competition. So much of what China has been doing is to play catching-up, which joining the league of most-favored trading nation facilitated.
The USA alleges that China has been stealing USA trade secrets. Maybe so. But the way lawlessness should be dealt with is by civil or criminal action, not tariffs. What appears to be bad about China’s alleged lawlessness is its failure to respect patent monopolies. Injured parties can seek recourse through the courts. Our leaders appear to believe that international courts are antagonistic to the USA in international proceedings. The principal damage lies in the creation of trade deficits. But trade deficits are easily corrected by the single-country-variable-tariff. As we proposed its employment, it would apply to all products imported from the trade surplus country and would rise as trade deficits grow and would fall as trade is brought into balance. There is nothing a trade surplus country has to gain from a trade war but has a lot to gain from balanced trade.
Raymond L. Richman, Pittsburgh, PA.
The author is Prof. Emeritus at the Graduate School of Public and International Affairs, the University of Pittsburgh. He holds a Ph.D. in economics from the University of Chicago.
Comment by Reader, 1/15/2019:
Good letter! I hope Feldstein reads it!
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