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Fix the Trade Deficit or Risk another Financial Crisis

May 04, 2017

The Commerce Department reported the deficit on international trade goods and services in March was about $43.7 billion, indicating the United States is on track to another trade gap in excess of $500 billion for 2017.

[Peter Morici] May 4th, 2017 [economist and business professor at the University of Maryland, and a national columnist]

For decades, the trade deficit has been a source of torment. Critics blame it for jobs losses, and apologists say it permits Americans to consume more and cheaper products without much harm.

Both arguments have an element of truth but most importantly, the trade deficit must be financed. Foreign governments and private persons buy U.S. Treasuries, corporate stocks and bonds and real estate in tony locations like Manhattan and Miami Beach, and we have to pay interest, dividends and rent on those assets that grow larger each year.

Americans make similar investments abroad, but overall foreigners are buying more here. The U.S. Net International Investment Position (NIIP) is now minus 45 percent of GDP and if large trade deficits persist, the NIIP could reach negative 60 percent over the next decade—likely sooner. In recent years, no nation has reached that level of indebtedness without eventually going through a reversal of its trade deficit, often accompanied by a financial crisis or severe domestic deflation.

Economists are inclined to believe bilateral deficits—or even deficits in particular commodities like oil—don’t matter but if one country or commodity is huge in the numbers then the global problem can’t be addressed without addressing the particular country or commodity.

China accounts for more than 60 percent of the U.S. trade deficit and petroleum for more than a quarter of the rest.

Trump administration proposes to fix the China trade by applying pressure to open its markets—if Americans can sell more in China, then we can continue to enjoy cheap consumer goods at Wal-Mart. And by liberating the oil and gas sector from Obama era regulations and continuing to build out wind, solar and other renewable energy sources.

As for China, the president’s recent statement on trade policy indicates revved up use of trade remedy laws to keep out or at least penalize subsidized and dumped imports. For U.S. industries that benefit hooray, but Beijing advantages domestic producers in so many ways—from forced technology transfers from foreign investors to generous benefits for technology startups—that Mr. Trump’s strategy reminds me of the farmer chasing an infestation of grasshoppers with a butterfly net.

The Peterson Institute suggests in a forthcoming study a program of currency market intervention to offset foreign government intervention in currency markets and lower the value of the dollar across the board. These days, manipulation by foreign governments is not the problem—but rather the lack of confidence in the durability of existing regimes. Marine Le Pen challenging the future of the EU and China’s authoritarian regime are scaring investors and driving down the euro and yuan.

At the Mar-a-Lago Summit, Presidents Trump and Xi announced a 100-day review of policies to address the trade deficit but that is as unlikely to yield results as were similar bilateral talks initiated by Presidents Bush or Obama.

Warren Buffet, for many years, has suggested a system of import certificates and elsewhere, I have advocated a tax on the conversion of currency into yuan. The latter would essentially raise the price of imported goods and encourage reshoring.

Under the Buffet Plan, exporters would receive certificates to import goods in amounts equal to their foreign sales and in turn, those could be sold to importers, who would be required to present certificates to bring goods and services into the country.  Those certificates would go to the highest bidders and hence be used to import goods that had the highest value to consumers.

Rather than apply it to all our trading partners—and cause global outrage—I would just apply it to trade with China and endure its bellicosity as needed. Either Beijing finally starts realigning its economy to rely less on trade surpluses with the United States or this scheme would do it for them.

No matter which tact chosen, Americans would pay more for toasters, tee shirts and TVs. However, that burden would pale by comparison to losses in jobs and living standards imposed by a debt crisis on the scale of that endured by other nations who left their problems to fester until international investors quit buying their bonds and other assets. 

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

 

 

 

 


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  • Excellent note. America must get its trade deficit under control or we will face Buffett’s squanderville. Speaking of Buffett, while understanding his import certificate (IC) plan and sharing his enthusiasm for fixing the US trade deficit, I would be very skeptical of the IC plan for several reasons. For example: How would the American government validate “exporter” eligibility for ICs to avoid corruption? Would ICs go to the factories that produced the exports or to the traders who sell the exports? Would profits that are supposed to go to exporters from their sale of ICs to importers be siphoned off by the traders who would actually match buyers and sellers? How would the IC system, which by Buffett’s own admission is basically a quota system, be scaled to fit the size of the US deficit? And most importantly, the IC plan has no exit strategy — it would have to go on forever.
    Especially for the last reason, I favor a variant of Peter’s proposal to tax the conversion of currency into yuan. Instead of limiting this proposal just to currency conversions with China, tax all inflows of debt-generating, asset-shedding borrowing and selling to foreigners that America does in exchange for the money that allows us to live beyond our means. This would moderate the value of the US dollar, making America’s goods and services more competitive in domestic and in foreign markets. This is the way for America to shrink its overall trade deficit. This can easily be accomplished with a Market Access Charge (MAC) on all incoming foreign capital flows.
    John R. Hansen
    Americans Backing a Competitive Dollar – Now!
  • I believe WTO rules would prohibit “targeting” China by using the import certificate concept on just them. And a single certificate marketplace would hurt our balanced trading partners much more than China and the other mercantilists. The Buffett regime needs two easy refinements. First is that it be implemented on a bilateral basis. This could be done with our larger trading partners (with which we run deficits) individually and perhaps with “pool” certificates for all the others. Secondly it needs a reasonable phase-in period during which exports earned imports cerificates on a greater-than -one basis initially, transitioning to one-one over 3-4 years to minimize market disruption. A third desiable refinement would be to exempt designated raw strategic materials from the value of imports. One beauty of this regime is that it restores free market dynamics by eliminating favoritism for products and crops won with the best lobbying power.

    This approach can easily be explained as an inherently fair “we will buy from you as much as you buy from us” trade policy. Neither “better” negotiations nor higher static tariffs and more restrictive import barriers will win the trade “whack-a-mole” game against the myriad tools in the mercantilist toolbox.

    Only such a modified Buffett regime or (as published elsewhere, a dynamic bilateral tariff applied as an alternate closed-loop methodology ) will get us to balanced, highest-value free trade.