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 Richmans' Trade and Taxes Blog

Trade Deficits Are Taxes on American Workers Levied by Foreign Countries
Raymond Richman, 6/18/2019

The media are all trumping that Pres. Trump’s tariffs are a tax on American consumers and favor free trade. They are telling less than half the story. The chronic trade deficits are also a tax on American workers. The chronic trade deficits tells us that foreign countries are shipping to us more goods at current exchange rates than we are shipping to them. They are accumulating the difference in US cash, bonds or notes or existing productive assets like real estate or private securities. They are not buying newly produced goods or services which require labor to produce. The workers who lose their jobs have to seek lower paying jobs in the US domestic market.

The American consumers are for the most part salary and wage workers. The trade deficits eliminated the jobs of millions of American manufacturing workers who found continued employment only in lower wage domestic jobs. Many multinationals have been producing products abroad and selling most of their output in the US producing huge deficits with China, Germany, Japan, Mexico, S. Korea, and others. Santa Monica, California once had hundreds of manufacturing jobs creating products for Apple Corp. Its principle product now is produced by Foxconn, a Chinese company, in China.

It is true that the laid off workers found jobs eventually but at much lower wages. This is the excuse for the widespread economic belief that trade deficits do not cause permanent unemployment. The difference between the wages before and after a trade deficit has all the characteristics of an income tax, leaving the worker-taxpayer with less after-tax income to consume or save. Chronic trade deficits may not cause unemployment in the long-run as many economists argue but millions of manufacturing workers lost well-paid jobs as a result of the trade deficits and ended up considerably poorer.

The media including the Wall Street Journal are in favor of free trade just as Adam Smith and David Ricardo were two centuries ago. But the media are certainly wrong today. In Adam Smith’s day, trading accounts were settled in gold, itself a commodity. So trade was in balance.  Then followed a period in which nearly all currencies were on a gold standard and trade deficits were settled by the transfer of gold. When the US government and the world went off the gold standard, trade deficits came to be settled by credit instruments. This created no pressure on prices in either country. US Trade deficits grew. During the decades since 1994 when GATT was approved by the world’s nations and the World Trade Organization was created, the USA suffered huge trade deficits and economic growth, wages and salaries in the USA stagnated and declined. It is this negative situation that Pres. Trump and his advisors are attempting to correct by seeking balanced trade with other countries.

Free trade is an appropriate policy only when the trading partners share the same currency and none engage in mercantilist policies like subsidies to exporters, artificially low foreign exchange rates, and barriers to imports  to gain and maintain a trade surplus.

The US Constitution forbids the States from applying mercantilist policies but still permits them to offer gifts and tax subsidies to prospective employers. As a result, states compete with one another in offering incentives to prospective employers. A recent instance is the competition of a large number of cities for the location of a regional headquarters of America’s richest corporation, Amazon. One can argue from this example that multinational corporations put international organizations ahead of country and are quite willing to sacrifice the welfare of American workers to benefit their shareholders. Looking back, the US push for a general   agreement on tariffs and trade was naive from an economic and political point of view.

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Comment by Tom Hamilton, 6/22/2019:

I don't belileve that cheaper imports have made up for lower incomes of the bottom 90% since we started exporting jobs.  The labor participation rate for males 25 - 54 years old was 98% in the 1950's and now it is around 88%.  We need to encourage capital investment in the US.  By illiminating corporate taxes and taxing capital gains and dividends at the earned income tax rate.  That will discourage buy backs and stock options and encourage investment.  Also, corporate raiders.  Pay for social programs with a VAT tax.

Comment by M, 7/21/2019:

Naive from and economic point of view?  The consequences were clear to anyone with half a wit (beforehand). As always, It all depends on whose ox is being gored.

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  • [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]