Sunday, October 6, 2013

Tariffs as a mechanism to balance trade

We've seen that the US is running a large trade imbalance and that this has been ongoing for decades and will likely continue for many years if not decades in the future.  That this represents a significant balance of unsettled trade.  That the expected mechanisms of the market have not rectified this imbalance  even though decades have past, and that distortions in our economy have occurred after only a few years of such trade imbalances.  Some of these distortions have been detrimental to the US, such as the loss of many manufacturing businesses and their associated jobs, and the build up of the trade debt itself which one day needs to be repaid by settling the debt.  That this trade debt can only be settled by producing goods and services here in the US that will be sent overseas to the holders of this trade debt.  In other words, the lack of settlement of trade over the last few decades has shown that that market mechanism are too slow to resolve the imbalance before adverse effects show up in the economy.  This suggests that some mechanism is needed to resolve the imbalance over this shorter timescale of one to few years.  We just can't wait for markets to do their thing.  We have to act in the mean time.

Let me introduce you to the tariff.  This has been the traditional mechanism for regulating trade that has been used since the inception of the US.  But today this word seems to provoke howls of anguish and scoffs from many as being backward and an indication that the author is merely naive and doesn't understand all the advantages to all sides of free trade and markets.  To which I say, I'm not even talking about free trade or markets, that is a discussion for the future.  The situation today is that we don't even have trade.   What we have is multi-currency purchase and sales that are unbalanced.  That a trade is only complete when it is settled, and we have seen that trade is not being settled, and hasn't been for decades.  Only after we have actual trade, i.e. settlement, can we have a discussion about the merits of regulated vs. free trade.  Instead, I'm suggesting tariffs as a mechanism to force the settlement of trade so as to thus prevent the economic dislocations in the short term of a year to years that we are now experiencing.

Today, the US runs a massive trade deficit in the hundreds of billions of USD per year.  In 2011 the trade deficit totaled USD 785B [1], with China contributing the largest portion of this at USD 315B in 2012 [2].  Efforts to get China to reduce its trade surplus with the US by letting its currency, the Renminbi (CNY), float so as to let market mechanism presumably drive up the value of the Renminbi relative to the USD, have come to naught.[3]

How would a tariff help?  Well, the immediate reason for the deficit is that consumers in the US purchase a good made overseas, from say China, because it is cheaper than the good made in USA.  NB. that this doesn't mean the good is cheaper in terms of value, that is of relative values of goods and services.  Only that the price in terms of money is less for the imported good.  So, to reduce the amount of imported goods that consumers buy, the thing to do is raise their prices so that domestically produced goods are cheaper or at least the same price.  The easiest, and most traditional, way to do this is by imposing a tariff on the imported goods.  That is, a fee on each import paid by the importer to the government for the privilege of importing the good.  Typically, the cost of that fee is directly added to the price of the imported good, so the price to the consumer goes up about the same amount.  Thus, a significant tariff on imports would lower imports and reduce the trade deficit.  The tariff can be progressively increased as needed to achieve a balance of trade.   Balanced trade means that settlement is occurring.

Before anyone shouts "protectionism", let me say that has nothing to do with this particular tariff.  The sole purpose is to balance trade.    Only then can we discuss trade policy itself, and the merits of protection vs. Laissez-faire policies.

But other nations will retaliate some may say, and we will have a trade war.  We won't have a trade war or retaliation if the US emphasizes that the purpose of the tariff is merely to balance trade.  And that the tariff will be reduced as trade is balanced on its own.  That if other conditions like exchange rates are allowed to change to create balanced trade then the tariff will not be needed at all.

In other words, every nation has the right to balanced trade.  And the right to enforce mechanisms that will ensure balanced trade over periods short enough to prevent any economic distortions that a lack of balance may cause.

In practice, the tariff for the US would need to drive trade to a surplus of large size for many years as a massive trade debt exists that needs to be paid off through settlement.  This would constitute a shift from the USD 700billon+/yr deficits today to something comparable of trade surpluses, say USD 500billion/yr.  That's a shift of over USD 1trillion in trade!  This would bring back all those lost manufacturing jobs and spawn a renaissance of growth in America.

The US has suffered from trade deficits for too long.  Now is the time to implement mechanisms, like tariffs, that will rebalance trade so our economy can return to a normal state of operation.

NB. due to the government shutdown I'm using sources from others sites that have aggregated this data.

1 comment:

  1. This was a good suggestion that you put up here...dude…..hope that it benefits all the ones who land up here. 

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