Why Pursue a Balanced Trade Goal?

October 14, 2014


The economy-gutting results of US trade policy are caused by Congress' prime directive to the President.  Reduce trade barriers.

Why is that the wrong goal? Because, while plausible, it's primary result has been to enable foreign trade cheating, 40 years of deficits, de-industrialization and job losses.

CPA has placed a high priority on Balanced Trade as the new primary national trade goal.  That's why we have this petition going (which you should sign).

I've been asked how this Balanced Trade goal would work, why do it, and how would it change current negotiations. 

The question is whether the overarching trade policy goal, i.e. the core metric for determining success, should be “reducing trade distortions” or “balancing trade flows”.  Congress sets the primary goal by way of statute.  Because Congress has trade authority under the constitution, and delegates that authority to the President with conditions.

The balanced trade goal is different than prescribing the means to achieve a rigid balance.  Here is the rationale:

  1. Enforcement, which CPA supports as a priority, is very necessary but insufficient.  It takes too long, it is patchwork, and many mercantilist tactics are outside the scope of any trade agreements.
  2. Free trade was supposed to be an antidote to mercantilism, but current policy enables mercantilism in practice;
  3. The current primary trade policy goal of reciprocal micro-barrier reduction (sector by sector) seems plausible and positive, but the result has been mercantilist (1) non-compliance; or (2) erecting other barriers to substitute for the one they reduced; or more often (3) using strategies outside the scope of any trade agreement to gain a trade advantage, like currency manipulation, state-owned enterprise subsidies, or border adjustable taxes (used as tariffs and export subsidies).
  4. True free trade (as envisioned by David Ricardo) should result in fleeting surpluses and deficits, not persistent ones.  A balance of trade over time is also the original GATT concept.
  5. A balanced trade goal would direct the USTR/Executive Branch to prioritize actions that would reduce the trade deficit and bring us towards surplus (which is necessary, for a time, to counter the years of deficit).  The actions needed to do so would change over time.
  6. Analog:  The Federal Reserve is statutorily bound to pursue two goals (a) minimize inflation; and (b) maximize employment.  The method of achieving the goals is not prescribed.  The agency has discretion as to how to pursue the goals.  But the metric for performance evaluation by Congress and the public is clear.  See the 1977 amendments to the Federal Reserve Act.
  7. A balanced trade “goal” would avoid the debate as to “how we do it.”  Should we only do advanced tech?  Maybe, but we don’t have national agreement on that, and there are some lower tech industries where we have an advantage.  Should we focus on currency?  Probably.  Should we focus on energy net exports?  Maybe, but we may want to keep our energy in the US to add value and sell higher end goods.  Certainly, we should build our supply chains but again, no national agreement on that yet.  The “how we do it” would become the next stage debate after the goal is set.  And the “how” would change over time.
  8. Shifting from “reducing trade barriers” as a primary goal to “balancing trade” would likely change trade negotiations from pursuing special interests to pursuing the national interest, in this way.  Assume there are 15 trade distortions at issue in a negotiation.  Eleven are micro, or industry specific (heavy equipment, electronics industry, etc.).  Four are macro (currency, tax subsidies on exports, massive industrial subsidies). Trade negotiators are under pressure to resolve the 11 industry specific issues, because of industry lobbying, and succeed.  Yet the macro-barriers remain, which are the national interest, and overwhelm any benefit that micro-barrier resolution could have made.  Trade negotiators can claim success on resolving 11 of the 15 barriers, a majority of them, even though we are worse off from a net trade and “net mercantilism” standpoint.  The national interest is in the macro issues, while the special interest is in the micro issues.

As Peter Morici (economist at Univ. of Maryland) has said, we could double US growth by getting rid of the trade deficit.  The "more exports", "more two way trade" and "reducing barriers" goals have produced 40 years of trade deficits, de-industrialization, foreign mercantilism appeasement, and job losses.  We now need to shift to balanced trade as the core metric for determining whether the USTR has succeeded in the national interest.

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