The workers of Lordstown voted for President Trump in record numbers because he is, as he says, "the tariff man". There are no guarantees in life, and less so when it comes to replacing known supply, often qualified to make the intermediate you need in your end product, and some generic product that may not be supplied on time, at the quality standards you need, or even for a good price. Call it what you like, open markets and free exchange is a far more effective trade policy than trying to pick winners and losers like President Trump has done. With tariffs, its the wack-a-mole on steroids as companies find new foreign suppliers, if need be, pay the higher tariffs on the assumption they will go away (as Trump promised in his deals with China), but rarely do they sign up for the four or five year, multi-billion dollar investment, in adding new domestic supply with the political system on a four year schedule of policy adaptations. To limit trade imbalances, you need across the board, non-discriminatory, tariffs on all imports that will allow private companies to make the hard decisions on cost and efficiency that trade policy demands.
Towards a New Approach to Global Trade Policy: Fair and Balanced Trade to Make Globalization Work
Dr. David L Blond, President, QuERI-International (301-704-8942, firstname.lastname@example.org).
I have been studying American and global trade policies now for the past fifty years. I have written often and without much effect calling out the dangers to the erosion of the manufacturing base well before it became popular with politicians and economists beginning at my time at UNCTAD in Geneva in the 1970’s, later as the Pentagon’s Senior (and only) economist in the Office of the Secretary during the Carter and Reagan years, and for the next nearly forty years in the private sector. I worried about the imbalances even as I made my living forecasting and analyzing the global economy writing a series of essays in The Manufacturers magazine in 2001-2004 suggesting how to slowly and deliberately reverse the steady increase in the US trade deficit that began after the Reagan tax cuts and the back-to-back recessions of the 1980’s. The following ideas were first proposed in these essays appearing monthly, but they are as sound today and could easily fit into your own plans as they were then. The QuERI Integrated Global Model is one of the largest and most complete models of the global economy covering industrial and service output, employment, prices, and international trade.
Multilateral Solution to the Trade Imbalances
First general principle: Trade must be fair and also balanced if it is to be useful and equitable.
Second general principle: Any tariff applied must be non-discriminatory and not tied to any single country or product flow. The world is far too complicated and interrelated to allow governments or even smart people to decide winners and losers.
Third general principle: The damage of from imbalances impact both the countries in surplus and the countries in deficit equally, thus the remedy must be applied to both sides of the equation.
Forth general principle: Any changes in trade policy must be made collectively, not unilaterally, thus the United States should propose and lobby strenuously for a revision in the WTO compact that requires the following from all countries party to the WTO agreements:
1. At the end of the year, the degree to which a country is out of balance with its trade account needs to be fairly assessed allowing for some exclusions for emergency imports or other irregular imports. Countries with trade imbalances for more than two years in a row or three out of the last five years will be required if these imbalances as a share of their GDP are greater than an agreed maximum to apply to all:
a. Imports for countries with a chronic deficit then governments are obliged to add an ad valorem tariff of 10% on all imports with the exception of primary products (manufactures alone).
b. Exports for countries with a chronic surplus excluding primary products will be obliged to add an ad valorem excise tax of 10% on all outgoing manufactures.
2. When countries regain some balance, then international trade and globalization, both necessary for the long-term health of countries and world economic prosperity, then tariffs will be less necessary, but form an automatic stabilizer.
Fifth General Principle: Don’t decide winners and losers, but allow natural processes determine who will change behavior with respect to imports. Thus applying the tariff across the board, on all imported products with a few exceptions, recognizes that companies understand their supply chains better and the costs they incur. A 10% increase in expenses on 30 or 50% of the inputs may place them at a disadvantage against competitors who have a far smaller bill for imported inputs, thus unlike a tariff on final products, companies will adjust sourcing to remain competitive and profitable. Applying the tariff on all imports eliminates the ability of companies to switch suppliers from one country to another with the only recourse to choose between foreign suppliers and domestic suppliers.
Notes: The successive rounds of global tariff negotiations have significantly lowered barriers to entry until President Trump’s imposition of tariffs on a unilateral basis disturbed the global eco-system, but as the failure of the Doha Round, the last major unresolved global tariff negotiation showed, it is unlikely that there is much benefit from further efforts. Agricultural products are often the center of these talks and also pose the greatest danger to stability. Insistence on opening up the production of food to foreign competition has proven dangerous and destructive. Internalized growth in agriculture has proven to be a powerful force for growth in other sectors tied to agriculture. Self-sufficiency in food supply is insurance against the vagaries of international markets and prices. American efforts to “open markets” have been unhealthy given that long term global food security is critical to insuring adequate stocks in times of famine.
Balancing Private Sector Obligations to National Economic Wellbeing
Objective: Incentivize companies large and small to see their responsibilities to countries where they operate to create conditions for economic growth and expansion both in surplus and deficit countries. Subsidizing companies through tax credits whose net contribution to economic welfare is positive and penalizing companies whose net contribution to growth is negative.
First Principle: Company revenues in a single country and company expenditures should be in relative balance in order to maximize the benefits to consumers, workers, and communities.
Second Principle: National economies must serve the entire community of interests, not just company optimization of profits, demand for goods and services reflects the national economic outlook, so selling into a rich market while rewarding, must be balanced against benefits offered to that market through purchases of materials and labor, sufficient supplies, or benefits to consumers through low prices.
Third Principle: Let companies determine the mix of domestic and foreign inputs while adding in costs and benefits associated with differential corporate taxes on profits are factored in.
· Measuring net contribution by calculating the share of total revenues from domestic sales relative to total sales worldwide against total purchases (materials, wages, and services) from domestic sources against total purchases worldwide.
· Calculate marginal corporate tax rates based on relative share of domestic sales to domestic purchases with tax rates as a multiple of these ratios:
o Ratios less than .8 (domestic sales/domestic purchases) are taxed at ½ standard corporate tax rate on profits, thus rewarding companies selling more overseas relative to domestic supply.
o Ratios between .8 and 1.2 are taxed at the standard corporate tax rate on profits.
o Ratios more than 1.2, where domestic sales are greater than domestic costs are taxed at 1.5 times standard rate.
· Implicitly this approach would penalize wholesale channels that buy exclusively from overseas sources of supply. It is likely these sellers would have to raise their margins and potentially diversify. Higher prices for imports would reduce profits of companies relying on foreign sources exclusively.
· Applying the corrective only to profits, not costs alone, as tariffs do, will allow the private sector to determine sources of supply, not government regulators. It will also slowly resolve the problems of retailers in finding domestic alternatives. International trade will remain important, but trade imbalances will be forced through market forces back into closer balance by decisions made at the company, not government level.
· Additional taxes collected as a result of trade imbalances will flow to governments allowing them to fund programs to enhance domestic supply and competitiveness.
It is my hope that this short and clear description of the optimal approach to solving the problem of rebalancing the global economy will get to policy makers and leaders, including Vice President Biden. We live in an interconnected world and President Trump's efforts have made it harder to find a good and honest solution to the dual problem of monopoly power of a few countries, as reflected in economies of scale in key regions as well as technology infrastructure, with the benefits of uplifting billions from poverty to a new future. These ideas were first suggested by me around 20 years ago in The Manufacturer Magazine articles, but they are truer today than they were then. Please pass this on. hashtag#Biden hashtag#Trump hashtag#internationaltrade hashtag#congress hashtag#trade hashtag#policy