Sunday, January 04, 2009

Tariffs Are No Answer

Three economists, Drs Raymond Richman, Jessie Richman, and Howard Richman, write the
Trade and Taxes Blog HERE:

Balanced Trade will Create Jobs

While the bailouts have given financial enterprises some stability, they haven’t created a single job. During the last two decades we lost millions of good industrial jobs as a result of our huge trade deficits. By restoring our trade balance, we could create millions of good jobs. We can do this at very little cost. Indeed, the solution we recommend would earn hundreds of millions of dollars for the U.S. treasury. Moreover, the trade deficits are the result of mercantilist policies of foreign governments that are the antithesis of free trade. Under World Trade Organization rules, countries experiencing chronic trade deficits with another country are entitled to take remedial actions, such as tariffs and quotas. Free market forces to correct trade imbalances are practically non-existent.

Economic theory describes the mechanism for correcting trade deficits under a system of flexible exchange rates. In theory, the value of a country’s currency should rise when it is experiencing a chronic trade surplus and fall when it experiences a chronic trade deficit. China’s yuan, for example, is believed to be grossly undervalued relative to the U.S. dollar. If the yuan appreciated, Americans would have to pay higher prices for imports from China, while the Chinese would find the prices of American goods to have become cheaper. According to the theory, the U.S. would import fewer goods from China, and China more goods from the U.S. until trade is in balance. The system has not worked. Dr. Bernanke himself has said market forces were not succeeding in reducing the trade deficits because as the result of the huge flow of foreign savings to the U.S. the dollar remained overvalued. He suggested that foreigners should be encouraged to use their savings at home instead of sending them to the U.S. The trouble with his advice is that the trade surplus countries, particularly China but also Japan, Germany, OPEC, and many emerging economies adopt policies to perpetuate and grow their trade surpluses with us. They call their policies export-based development but we call it by its pre-Adam Smith name, mercantilism.

Incoming flows that are invested in new plant and equipment, like new automobile plants, have given employment to hundreds of thousands of American workers. But such investment was a small fraction of the flow of funds to the U.S. as a result of the trade deficits. The latter financed the irrational exuberance we experienced in the securities and housing markets without creating a single job. Indeed, the flow of funds to the U.S. weakened our own savings and investment.

Both the Japanese, until recently, and the Chinese limit imports from the U.S. by requiring prospective importers to obtain the permission of a government agency. In effect, they have been applying a form of import licenses in addition to exchange controls. Although the U.S. government has repeatedly sent missions to complain about such practices, jaw-boning has had little effect, none on Chinese policy. The purpose of international trade is to enable countries to exchange a bundle of goods they value less for a bundle of goods they value more. There is no reason to accept deliberate policies of foreign governments to deindustrialize the United States.

To bring trade into balance, we recommended in our book, Trading Away Our Future (2008) a system of Import Certificates similar to a proposal by Warren Buffett, which we believe violated the rules of international trade. In effect, our proposal would restrict imports by physically limiting the value of the total amount of goods that could be imported from any country with which we have chronic trade deficit. I now believe that to be a poor way of reducing the trade deficits. It would create a bureaucracy to auction off import rights and would inevitably become corrupted by our elected representatives in Washington. Instead, we recommend a cross-the-board tariff at a single rate, say 10 percent, applicable to China, Japan, Germany. OPEC, and other countries enjoying a chronic trade surplus with us. The result works just like flexible exchange rates are supposed to work.

It would act like a revaluation of the currencies of the countries with which we are experiencing chronic deficits. The price of imports from, say, China would rise, reducing our demand for imports from China. Countries could reduce the tariff by importing more from us. In the meantime, our tariff revenues would amount to billions of dollars.

We are left with no alternative except a tariff on all imports from these countries

The unfairness complained of by the good Drs assumes that the US is a free trade economy. It isn’t. They argue that “trade deficits are the result of mercantilist policies of foreign governments”. However, the politics of foreign trade suffer from protectionist instructs everywhere, including in the USA.

They call their policies export-based development but we call it by its pre-Adam Smith name, mercantilism”.

I thought this was promising until I got to this sentence. Adam Smith called these protectionist policies part of ‘mercantile political economy’ – he never used the word ‘mercantilism’ (he died in 1790); it is a late 19th-century German word, imported, if you like, into the writings of English speaking economists from then on. Moreover, the policies of mercantile-minded governments never went away from the 16th century onwards in some form or other, and they operate, still today, across the world. It’s called ‘beggar thy neighbour’.

This is illustrated in the article by the statement: “Free market forces to correct trade imbalances are practically non-existent”.

Yes, it’s a world wide phenomenon, against which the WTO is impotent. Governments everywhere cannot deliver free trade because of domestic politics, where these count, and won’t deliver free trade where domestic politics don’t. Governments of all kinds prefer the benefits of cross-border manipulation of exchange rates where they benefit their economies.

So, what do the three Dr Richman’s suggest as their remedy?

we recommend a cross-the-board tariff at a single rate, say 10 percent, applicable to China, Japan, Germany. OPEC, and other countries enjoying a chronic trade surplus with us. The result works just like flexible exchange rates are supposed to work.”

They also conclude that:

Balanced trade would create new investment opportunities.”

Oh dear! I assume most Lost Legacy readers will spot the weakness in their policy of imposing across the board US tariffs on all deficit trading countries.

Yes, the success of uch tariff impositions assumes there will be no retaliation by the countries concerned! And retaliation is almost inevitable.

Everybody can play the game of passing their existing, or future, trade problems onto their trading partners. After how many rounds of mutual ‘across-the-board-tariff impositions’, would it take for mercantile economies to slow down the world’s foreign trade? And how many jobs would that cost in America and elsewhere?

If, say, the US has a trade deficit in automobiles – because US consumers prefer the better value (for them) of buying imported models – it may be more sensible to require the US domestic car industry to start over and to dramatically improve its products (electric, hydrogen, and hybrid fuelled model, also tackling the oil deficit). Given an opportunity to enforce change on the US giants – no bail outs – the US government may be missing the golden opportunity to do just that.

However, all governments, including the supposed ‘free market’ US version, are subject to immense lobbying forces capable of influencing legislators where it hurts (loss of political power) and where it benefits (helping to keep them in power and, for some of them, in the living standards to which they have become accustomed).

It was ever thus.

In fact Adam Smith wrote all about it in Wealth Of Nations
in his critique of mercantile political economy (the ‘capture’ of legislators and those who influence them by the vested interests of some UK ‘merchants and manufacturers’) in his detailed analysis of Britain in the 18th century under governments run mainly by rich landowners, who followed the fallacies of the political economists of his day, because they didn't know any better.

Today, there is no excuse for such ignorance, unless you ignore the politcal dimension of political economy.

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Blogger Ardie said...

Brilliant! Keep in mind that John Maynard Keynes recommended a short term tariff (I think it was about 15 percent). The use of the protective and revenue tariff are tools that must be used in critical times such as these. Economists who scout the tariff are simply refusing to look at economic history.

5:50 pm  
Blogger Gary said...

Have John Maynard Keynes' recommendations ever worked? I can point to literally dozens of examples where they have failed - including the Keynesian deficit spending of George Bush during the post 9/11 period, and the "stagflation" of the late 1970's - and I don't know of any examples when it actually worked as Keynes predicted.

In order to be taken seriously, "theories" (I use that word lightly with Keynesian theory) must predict what will happen given a particular set of circumstances. Keynes fails every time - yet economists persist in recommending those same failed policies.

How Keynes is still taken seriously by anyone (except ivory tower, government funded economists who have never been held accountable for their failed predictions and policies) is beyond me.

3:30 am  
Blogger Cleisthenes said...

Balanced trade is the optimal solution when dealing with nations who game their currencies.
The way to do that is the : "proportional tariff" whereby the tariff is proportional to the trade deficit that the U.S. has with a given country. China's would be higher and Europe's less.
It would decrease trade with nations who do not play fair (China) and increase trade with those who do play fair.
It can gain worldwide support as most nations in the world face the same trade deficit/federal deficit problems. That is, they face high trade deficits and the resulting and accompanying federal government deficits. The international negotiations will roll much easier than it seems at first glance.

8:57 pm  
Blogger Cleisthenes said...

Keynes Says Tariff Is Only Viable Option
Mar 10, 1931
In a letter that was meant for the Financial News but never sent, Keynes says, "The advantages of a revenue tariff, as compared with alternative taxes, which have impressed themselves on me, are the following :
(1)It would have a very favourable effect on business confidence.
(2)In so far as it caused home-produced goods to be substituted for imported goods, it would relieve the foreign exchanges and increase profit and employment at home."

"Can you tell me another tax which will at the same time restore business confidence, relieve the pressure on the exchanges,
increase profits and employment, and provide the Chancellor of the Exchequer with a margin of resources? If you can, you should not keep it to yourself."

8:59 pm  
Blogger Jesse Richman said...

I agree with you that retaliation is potentially a very serious challenge. That is why I think the best approaches to move trade toward balance are the scaled tariff and single-country import certificates. Both of these policies aim directly at bringing trade toward balance. And the scaled tariff is specifically targeted at countries running trade surpluses with the U.S. and the world. Because the tariff rate and/or the cost of import certificates varies directly in proportion to the magnitude of the bilateral trade deficit, these policies provide strong incentives against retaliation. For more elaboration of these arguments, check out Balanced Trade by Richman, Richman, and Richman. Lexington Books, May 2014, our article on the scaled tariff and our blog (now at I doubt that I'll convince you, but perhaps we can deepen our understanding of each other's positions.

6:10 am  
Blogger Gavin Kennedy said...

Thank you Jessie for your comment though on my blog post in August 2009 that you have just made in January 2014.
I take your point but my reservations on the economics of retaliation by the USA are also informed now by the evidence of politically administered tariff and general trade policies points to extreme caution. Retaliation is a two-edged sword. Britain in the past would have sent a gunboat metaphorically; administrative actions of these kinds are not inexpensive – the drawing up of the legislative proposals would not costless, either financially or administratively. A divided democratic system (US) would be stormy; China does not face such costs and it has a lot of ‘friends’ around who benefit from the ‘cheap’ products it sends the US. These trends also lower US costs of living on a daily basis. Such imports also re-structure elements of the US economy and promote US switching to creation (IT) from cutting metal at high domestic costs (car industry experiences formerly round about means to pay employee pensions and medical costs while producing expensive cars. Pride costs. Chinese finance of US businesses is not a dead-loss economically. High administrative costs of a new Equal Trade Agencies, plus the associated lobbying and counter-lobbying between the domestic gainer and losers, and the political overspill, creeping ‘extra-equality-of-trade’ goals developed by the administrators (definitions of equal trade becoming ‘extra’ definitions of equality, and needs to counter China’s extra responses (they are very bright people too!) would produce unintended consequences that wither the perceived original drawing board ‘good ideas’. Let alone getting this scheme through the WTO’s scrutiny.
In short, I remain sceptical of ‘one shot’ solutions. The home of entrepreneurial initiative (US) can surely do better than that.

9:58 am  

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