Is there a better way to reduce the U.S. trade deficit than raising duties on imports? A lot of economists say yes. Some of their ideas are old, some new, and some a little strange. All have been given new life by the Trump administration’s tariff offensive, which has sparked fears of a global trade war.
[Peter Coy | March 29, 2018 | Bloomberg]
Economists who specialize in trade, coming from both the right and the left, mostly agree with President Trump that big and persistent U.S. trade deficits are a problem, particularly for American workers whose jobs have been displaced by imports. But trade experts say he’s wrong to imply deficits are necessarily a sign that a trade partner is cheating. Mexico, for instance, has a surplus with the U.S., but it runs a deficit with the world as a whole in its current account, the broadest measure of trade in goods and services.
Alternatives to jacking up tariffs range from buying foreign currencies in huge volumes to push down the value of the dollar and make American products more competitive, to Warren Buffett’s long-standing proposal to require importers to buy certificates to bring goods into the country.
The newest idea, and one of the most intriguing, is called the market access charge. It’s a tax that would be applied to all foreign purchases of U.S. assets (possibly excluding currency trading to avoid a fight with Wall Street). The level would be set at perhaps half a percent—high enough to discourage inflows of speculative capital but low enough not to discourage foreign investments in long-term assets such as factories. The hope is that dollars diverted from hot-money investments would be spent on American goods and services. The Federal Reserve would administer the access charge, raising or lowering it as needed, and would keep it in place until the current account was in balance.
The idea was conceived by John Hansen, a retired World Bank adviser. The Coalition for a Prosperous America, an organization that represents import-threatened companies and unions, endorsed the market access charge last year. Hansen says the coalition’s representatives talked it up in 130 meetings with congressional staffers in mid-March and got strong interest. The charge could succeed in shrinking trade deficits, says Joseph Gagnon, a senior fellow at the centrist Peterson Institute for International Economics. One advantage, he says, is that “it’s completely legal under international law.” Robert Scottof the labor-supported Economic Policy Institute has also come out in favor. Big banks, however, would likely oppose it, and the public might dislike it for making imports more costly and raising interest rates.
Other concepts directly target the strength of the dollar, which harms domestic producers by making U.S. goods and services more expensive. Gagnon and Peterson Institute co-founder Fred Bergsten propose that when the U.S. is running a big trade deficit, the Department of the Treasury should intervene decisively in currency markets to reduce the dollar’s value. Gagnon says the strategy should eventually make money for the government, because the foreign currencies acquired in the process would be worth more in dollars when the dollar sinks to its trade-balancing level.
Buffett’s import certificate idea has caught the fancy of many economists since he first pitched it in an essay in Fortune magazine in 2003. It’s essentially the same concept as that which underpins carbon-emission trading. Companies would receive import certificates based on the value of their exports that they could then sell to other companies. The system would discourage imports by making them more costly.
Buffett’s plan also resembles countertrade, which the Soviet Union used for decades to eke out scarce hard currency, observes David Colander, a Middlebury College economist. In a barterlike arrangement, every import into the Soviet Union had to be balanced with an export. The system was clunky and bureaucratic, but it did ensure that the Soviets never ran short on dollars and other major currencies.
A variant of Buffett’s plan, designed by Vladimir Masch, a Soviet planner who emigrated in 1972 and went on to work at Bell Laboratories, is called compensated free trade. Rather than putting the onus on companies, compensated free trade would require the governments of surplus nations to make payments to the U.S. for exceeding targeted surpluses. The U.S. could set the payment levels unilaterally.
The threat of a trade war is making once outré ideas seem relatively reasonable. Masch says he used to be told compensated free trade would never fly politically, but that was before Trump. “You can never say never in politics,” he says. Levy Economics Institute President Dimitri Papadimitriou agrees that such ideas have greater relevance in these times: “I would suspect that a Buffett-type plan would have a much better hearing now. It would certainly be much more preferable and less dangerous than the one just signed by executive order.”
The trouble with many of these ideas is that government intervention is bound to have unintended consequences—a sharp increase in smuggling, for instance. And having to balance imports and exports at all times would deprive the U.S. government of options, says Brad Setser, a senior fellow at the Council on Foreign Relations. The dollars that foreigners use to buy American goods and services wouldn’t be available to finance, say, a big American infrastructure program or other investment.
Fortunately, Setser says, there are proven ways to shrink trade deficits that are less extreme. He advocates changing tax laws to discourage offshoring and going after foreign trading practices that really are cheating, such as theft of intellectual property.
The quickest way to achieve more balanced trade, though, would be to shrink the U.S. budget deficit, say Setser and Dartmouth College economist Douglas Irwin, among others. Budget deficits force the U.S. to borrow more from abroad because domestic savings are insufficient to cover government spending and other needs. Trade deficits are the flip side of excess borrowing from abroad.
The $1.5 trillion tax cut that Trump signed at the end of 2017 will only make the U.S. trade deficit worse, experts say. It overstimulates an economy that’s already running hot, with a jobless rate of just 4.1 percent, which is bound to suck in even more imports from abroad.
In fact, many economists say, now is not the best time to attempt a reduction in the U.S. trade deficit. An American widget factory that’s already running flat-out wouldn’t have the capacity to meet domestic demand if Washington curtailed imports of widgets. It’s still important for U.S. negotiators to fight genuinely unfair foreign trade practices because they harm individual sectors, but a sharp drop in the overall trade gap now would probably stoke inflation. So while there are plenty of ideas for better orchestrating trade flows, the best thing for Trump to do right now might be … nothing.