Been thinking about international trade a lot lately given the topics in the news.
1) I don't believe tariffs on aluminum and steel are a particularly good idea as they single out steel manufacturers as winners and steel users as losers rather unfairly. Such well-intentioned interventionism typically ends poorly as it reduces or eliminates competition and lets industries become lax, bloated, and inefficient. The US Jones Act was intended to protect American ship manufacturers, but the result is US merchant shipping is three times as expensive for construction. So instead of a vibrant US shipbuilding industry, we have a bunch of 1970s era shipping plying up and down our coasts when those ships should have been scrapped 20+ years ago. This ended up with deadly consequences in 2015 when the SS El Faro (a 1971 ship) sank in a hurricane off Florida killing 23 Americans.
2) At the same time, I could be convinced that our trade deficit needs to be seriously addressed. Forgive the Macroeconomics 101 terminology, but many of you will remember the equation:
GDP = Consumption + Investment + Government Spending + (Exports - Imports)
There is an alternate savings side definition which states:
GDP = Savings + Consumption + Taxes
Re-writing the terms we end up with:
(Savings - Investment) = (Government Spending - Taxes) + (Exports - Imports) which means
Private Savings + Trade Deficit - Investment = Government Deficit
The conclusion from this simple equation then is if you want the government deficit to fall, either private savings must fall or the trade deficit must fall. Or said alternatively, government deficit spending ends up somewhere, either in private citizens hands or in foreign exchange as the country buys more than it exports.
Therefore, if you want to reduce the government deficit but have the private sector continue to save, the trade deficit must fall.
I'm still a free trade advocate at heart but in a world where the US is the reserve currency which will cause it to be perpetually in demand and (possibly) overvalued, I am at least sympathetic to arguments that we need to do something else to address our balance of trade.
3) Last night I came across Warren Buffet's proposal from about 2003 about how to solve the trade deficit, and have been thinking about it this morning. I'm not sure I'm fully at a place yet where I'd recommend it, but I definitely believe its a better proposal than an ad hoc application of tariffs on specific industries. His original suggestion can be found here: http://fortune.com/2016/04/29/warren-buffett-foreign-trade/
The basic premise is that it treats US exports as basically a cap and trade market. Importing goods requires tradable import certificates, and exporting goods generates these certificates. Additionally the government could auction off quantities of certificates over time, thereby basically forcing the trade deficit to maintain at a target level. E.g. the current US trade deficit is $577 billion. For 2018 we could auction off $550 billion of permits directly. Thereby the sum of the auctioned off permits, generated permits, and consumed permits would net to a trade deficit of $550 billion. We could therefore have a clear mechanism to say by 2030 issue only $200 billion of permits, cutting the trade deficit dramatically.
Permits would then be tradable in a fully liquid futures market between importers and exporters with the price determined by the market.
Why I like this approach is:
1) I don't believe tariffs on aluminum and steel are a particularly good idea as they single out steel manufacturers as winners and steel users as losers rather unfairly. Such well-intentioned interventionism typically ends poorly as it reduces or eliminates competition and lets industries become lax, bloated, and inefficient. The US Jones Act was intended to protect American ship manufacturers, but the result is US merchant shipping is three times as expensive for construction. So instead of a vibrant US shipbuilding industry, we have a bunch of 1970s era shipping plying up and down our coasts when those ships should have been scrapped 20+ years ago. This ended up with deadly consequences in 2015 when the SS El Faro (a 1971 ship) sank in a hurricane off Florida killing 23 Americans.
2) At the same time, I could be convinced that our trade deficit needs to be seriously addressed. Forgive the Macroeconomics 101 terminology, but many of you will remember the equation:
GDP = Consumption + Investment + Government Spending + (Exports - Imports)
There is an alternate savings side definition which states:
GDP = Savings + Consumption + Taxes
Re-writing the terms we end up with:
(Savings - Investment) = (Government Spending - Taxes) + (Exports - Imports) which means
Private Savings + Trade Deficit - Investment = Government Deficit
The conclusion from this simple equation then is if you want the government deficit to fall, either private savings must fall or the trade deficit must fall. Or said alternatively, government deficit spending ends up somewhere, either in private citizens hands or in foreign exchange as the country buys more than it exports.
Therefore, if you want to reduce the government deficit but have the private sector continue to save, the trade deficit must fall.
I'm still a free trade advocate at heart but in a world where the US is the reserve currency which will cause it to be perpetually in demand and (possibly) overvalued, I am at least sympathetic to arguments that we need to do something else to address our balance of trade.
3) Last night I came across Warren Buffet's proposal from about 2003 about how to solve the trade deficit, and have been thinking about it this morning. I'm not sure I'm fully at a place yet where I'd recommend it, but I definitely believe its a better proposal than an ad hoc application of tariffs on specific industries. His original suggestion can be found here: http://fortune.com/2016/04/29/warren-buffett-foreign-trade/
The basic premise is that it treats US exports as basically a cap and trade market. Importing goods requires tradable import certificates, and exporting goods generates these certificates. Additionally the government could auction off quantities of certificates over time, thereby basically forcing the trade deficit to maintain at a target level. E.g. the current US trade deficit is $577 billion. For 2018 we could auction off $550 billion of permits directly. Thereby the sum of the auctioned off permits, generated permits, and consumed permits would net to a trade deficit of $550 billion. We could therefore have a clear mechanism to say by 2030 issue only $200 billion of permits, cutting the trade deficit dramatically.
Permits would then be tradable in a fully liquid futures market between importers and exporters with the price determined by the market.
Why I like this approach is:
- It allows the market to dictate who wins and loses from tariffs. It is possible that steel and aluminum are the industries best placed to capture foreign market share, it is also possible that they are not. Permit trading would allow the market to decide what the best use of the trade deficit is. Be it oil, steel, t-shirts, chemicals, iphones, electronics, toaster ovens, whatever.
- Suppose the international price of steel is $100 a ton, the permit cost is $10, and a US producer is competitive at $105 a ton. In this case, US steel is quite 'at the margin' internationally, and a user of steel is better off buying American steel rather than the $110 it costs for international steel + permit. If however the US producer is competitive at only $115 a ton, then economically steel is the best use of an import credit and brought into the country.
- It means industries are not protected outright but must still remain competitive globally. If they are not, then the domestic producers are priced out and imports begin to come into the country.
- It allows us to tell the world "its not you, its me." Rather than engaging in a tit for tat trade war targeting specific industries and retaliatory measures, this allows us to say we are credibly trying to address our national spending issues by limiting the net flow of trade into the country. We can do so in a very clear and structured manner with a long time horizon. As Mr Buffett points out, countries with trade surpluses will not be able to retaliate with the same structure as the value of import permits in their economies will fall to zero.
- The mission statement for what/how much we are trying to accomplish and how we will accomplish it is crystal clear.
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