The 2016 election was a referendum on the imbalanced global
trading system. It lost. President Donald Trump’s victory and Bernie Sanders’
insurgency both drew urgency and energy from the millions of livelihoods our
trade deficits have cost.
The vast U.S. trade deficit siphons away hundreds of billions of
dollars each year, has cost the U.S. millions of well-paid manufacturing jobs,
and has slowed U.S. economic growth to a crawl. President Trump won the
election by promising to address the massive loss of American manufacturing
jobs.
As Trump has rightly noted, the chronic U.S. trade deficits
reflect, principally, a problem with particular countries which perennially
structure their rules, policies, and/or currencies to keep American goods out.
According to the Bureau
of Economic Analysis, the U.S. trade deficit in goods and services was
especially large with four particular countries: China ($312 billion), Germany
($71 billion), Mexico ($61 billion), and Japan ($56 billion). Our total deficit
with these four countries during the most recent four economic quarters equaled
$500 billion, a total larger than the U.S. global trade deficit ($491 billion).
If our trade were balanced with just these four countries, it
would be balanced with the world. As a basic matter of justice, fairness,
and rationality, any effort to balance U.S. global trade must focus on these
countries.
Paul Ryan’s Border Adjustment Tax
Although it may be well intentioned, the Border
Adjustment Tax (BAT) proposed by the Republican House leadership, led
by Rep. Paul Ryan, would fail to balance trade. The BAT has two components: (1)
a 20% tariff at the U.S. border for all products produced overseas, and (2) a
20% rebate to corporations for products sold abroad.
Like a devaluation of the dollar, it would shift the terms of
trade with all trading partners, but the trade cheaters would hardly be
affected at all. China, for example, could simply reduce the exchange rate
between its currency and the dollar by the same 20% so that American goods
would be 20% more expensive in China and Chinese goods would be 20% less
expensive in the United States.
On the other hand, countries with which we currently have trade
surpluses would have a much harder time. South and Central America, for
example, buy $73 billion more from the U.S. than the U.S. sells them.
Similarly, the United Kingdom buys $17 billion more from us than we buy from
them. Punishing those countries would be cruel and counterproductive. These are
the countries that buy more and more from us when we increase our purchases
of their products. The BAT would reduce our purchases from them.
Targeted Tariffs
If the goal is to balance trade, Congress (or Trump acting
unilaterally) should enact tariffs just upon imports from those countries with
which the U.S. runs huge trade deficits. In fact, this is exactly what
President Trump promised to do during his election campaign, in order to bring
about trade-balancing negotiations.
Under existing anti-dumping legislation, the president has the
authority to promulgate such tariffs in order to enforce the International
Monetary Fund's Article of Agreement (Article IV) which requires that countries
“avoid manipulating exchange rates or the international monetary system in
order to prevent effective balance of payments adjustment or to gain an unfair
competitive advantage over other members.”
Alternatively, Trump or Congress could promulgate targeted tariffs
under WTO rules by adopting our proposal, the Scaled
Tariff, a single-country-variable-tariff. Unlike Ryan’s BAT, the Scaled
Tariff takes advantage of an option available to trade deficit countries under
Article XII of GATT 1994, which is part of the WTO agreement. President Nixon
invoked this article in August 1971 when he imposed across the board 10%
tariffs on all U.S. imports.
From World War II to 1971, the United States had run positive
trade balances, except for a $0.7 billion deficit in 1953. In 1971, Nixon was
responding to what was becoming a much larger trade deficit than the 1953
deficit. In fact, the deficit was so large, that it threatened to deplete the
U.S. Treasury’s gold supply. So, at the same time that Nixon imposed the
across-the-board tariff, Nixon took the U.S. off the gold standard.
Nixon’s tariffs worked. His Treasury Secretary John Connally
engaged innegotiations with
fellow treasury secretaries that changed the U.S. trade balance from a negative
$3.4 billion in 1972 to a positive $4.1 billion in 1973.
Unfortunately, in 1973, Nixon foolishly ended the fixed exchange
rate system which had kept world trade relatively balanced since World War II.
Annual U.S. trade deficits, starting in 1976, dwarfed the $3.4 billion deficit
that bothered Nixon. The annual U.S. trade deficits are so large today that
they would require something stronger than across-the-board tariffs to balance
them.
The Scaled Tariff would only be applied to countries that have a
significant trade surplus with the United States. The tariff rate with each
country would be proportional to the degree to which our trade is out of
balance. The initial Scaled Tariff rates, based upon the most recent four
economic quarters, would be: China 33%, Germany 23%, Japan 17%, and Mexico 10%.
If these countries were to respond by buying more US goods and
services, the tariff rate upon their goods would diminish or disappear. If they
responded with counter-tariffs, the scaled tariff would automatically respond
in kind, and American trade would increase with the countries that buy more
from us when we buy more from them. In either case, U.S. economic growth and
U.S. manufacturing would return.
The Crucial Difference
The critical difference between Ryan’s BAT and Trump’s targeted
tariffs is that targeted tariffs balance trade. They only affect the countries
that have secured a favorable balance of trade with us in order to gain a
competitive advantage at the expense of our workers and manufacturers.
The Scaled Tariff is designed to raise half of our trade deficit
in government revenue. Thus the Scaled Tariff upon the four countries with
which we have the largest trade deficits would raise about $250 billion in its
first year. The revenue increase would not be temporary; balanced trade would
increase economic growth, so income tax and excise taxes could be expected to
grow.
By proposing the BAT, Paul Ryan and the other House leaders are
clearly making progress in their economic understanding. They have finally
realized that free trade hasn’t been working for the United States. But
President Trump is way ahead of them when it comes to solutions. He is
proposing targeted tariffs that would bring about balanced trade.
Economists since Adam Smith have advocated free trade. But
economic theory tells us that free trade will not be balanced except under very
restrictive conditions: 1) all the trading partners use the same currency, 2)
labor and capital are freely mobile between them, and 3) there are no barriers
to imports or subsidies to exports. The reader will note that these conditions
are imposed by the U.S. Constitution on the States. They do not exist
internationally. To believe free trade is an appropriate policy currently is to
believe in fairies.
Now is the time to legislate or execute the policies needed to
rebalance global trade. When trade is balanced, all countries grow together and
the trade between them grows as the countries grow. But when trade is
imbalanced, the trade-deficit countries experience slowed growth, which ruins
the export markets for the trade-surplus countries, thereby slowing growth
world-wide. Reducing the U.S. trade deficit is an essential priority to
President Trump, to his voters, and to our country.
--
The Richmans co-authored the 2014 book Balanced
Trade published by Lexington Books, and the 2008 book Trading Away
Our Future published by Ideal Taxes Association.
http://www.americanthinker.com/articles/2017/02/paul_ryans_border_adjustment_tax_vs_donald_trumps_targeted_tariffs.html
