Friday, February 10, 2017

Paul Ryan’s Border Adjustment Tax vs. Donald Trump’s Targeted Tariffs

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.