How to resolve trade imbalances

It would not be difficult to erase substantial trade imbalances using a simple rule. If any trading partner has more than a certain percentage trade imbalance, say 15% more exports to the US than imports, impose an additional 5% tariff on all goods from that country each year (so 5%, 10%, 15%, etc) until the imbalance falls below that number.

 

The gradual, but unlimited, increase in tariffs would create enormous pressure on offending countries to increase imports from the US. The gradual nature of the increases would not create a self destructive economic shock. When the import/export ratio falls, the tariffs could be reduced gradually as well.

Comments

A. Jones Added Jan 11, 2018 - 8:36pm
I wonder how the author of this thread feels about a foreign exporter of an important good to the U.S., which undersells any domestic U.S. producer of that good by means of offering it completely free, at no cost to any American who wants it.
 
Does the author feel such a free good to American consumers should be blocked by high tariffs in order to stimulate domestic production of that good?
Thomas Napers Added Jan 12, 2018 - 6:45am
A trade imbalance is not something in need of resolution.  For some prodcuts, it makes more sense to produce them ourselves and for others it makes more sense to buy them from someplace else. Your suggestion would harm Americans as it would only be another tax on the many other taxes we already pay.    
Dave Volek Added Jan 12, 2018 - 11:47am
I won't claim to be an economist, but from what I have read, a trade imbalance is not necessarily a bad thing for either nation on the side of that imbalance. It seems things are equalized in other ways.
 
Right now, there is a trade imbalance between Canada and the US (with Canada being "favored"). This is the premise that US is getting a raw deal from NAFTA, which means it should be cancelled.
 
Maybe Canada should just cut off its oil exports to even things up.
 
 
A. Jones Added Jan 12, 2018 - 5:25pm
A trade imbalance is not something in need of resolution.  For some prodcuts, it makes more sense to produce them ourselves and for others it makes more sense to buy them from someplace else.
 
I agree. But that's not the commonly understood meaning of a trade imbalance (or, rather, a "trade deficit").
 
The problem is not an economic problem at all, but rather, an accounting issue relating to the way certain classes of goods are categorized. 
 
International trade accountants keep a ledger book with two columns per page: one column heading says "Current Accounts" the other column heading says "Capital Accounts."
 
"Current Accounts" = trading a consumer good for a consumer good (e.g., an American buys a box of Chinese-made disposable diapers at Walmart's for $10.00. Someone in China now has $10.00 — which cannot be spent domestically in China — and re-spends it in the U.S. buying a large bag of Tootsie Rolls. Thus, two consumer goods are exchanged — Chinese-made diapers for American-made candy — and the $10.00 is thus "canceled" in the accounting books, and the trade is said to have been "balanced").
 
"Capital Accounts" = trading a foreign-made consumer good for an American capital good (e.g., Same as above except that the person in China with the $10.00 from the American's purchase decides to buy a capital good such as a share of stock in the Tootsie Roll company instead of buying a consumer good like Tootsie Rolls. Economically, there's nothing wrong with that: it's good for the American company and the American stockholders if more people from around the world buy equity in the company. But in the International Trade ledgers, the way it appears is that $10.00 went out of the country for a foreign-made consumer good and $0.00 were returned for an American-made consumer good. So the ledgers make it appear as if there's a $10.00 "deficit." In fact, the $10.00 were returned to the U.S. but to a different sector — the production, or capital, sector — rather than the consumption sector. If you simply add the outgoing $10.00 (a negative number) for consumption to the incoming $10.00 (a positive number) for capital, you get zero, indicating that the trade was balanced.).
Dino Manalis Added Jan 12, 2018 - 7:27pm
Too many tariffs would start a trade war and devastate people and economies.  We should, like the U.S., reduce corporate taxes; expand worker retraining; and research and develop new goods and services the world's consumers would be eager to buy, slashing trade deficits.
Nick SJ Added Jan 12, 2018 - 11:44pm
Responses to Comments
Theoretically trade imbalances should actually favor the country which is importing more, since it is receiving real goods, whereas the exporting country is receiving a ledger entry in a bank account which has to be spent on goods and services to be of real value.  However, countries which use mercantile trade practices to support their manufacturers can produce unfair results. 
 
For example, should a country such as South Korea be able to export cars to the US without significant duties or other restrictions, while making it nearly impossible for US manufacturers to export cars to Korea?  Such trade practices can allow Korean manufacturers to grow in both markets while weakening US manufacturers. 
 
There are a number of countries which follow trade practices to support their own manufacturers while harming other countries' competitors.  It is this kind of export led trade imbalance which could be effectively countered with an escalating tariff that I described above.
 
NickSJ
A. Jones Added Jan 13, 2018 - 12:05am
For example, should a country such as South Korea be able to export cars to the US without significant duties or other restrictions, while making it nearly impossible for US manufacturers to export cars to Korea?
 
Yes. Even if the foreign manufacturer imposes tariffs on its imported U.S. goods, or engages in other kinds of trade restrictions, U.S. consumers do materially better if the U.S. practices complete free trade on its own imports. Additionally, consumers in the foreign country that is exporting goods to the U.S. (e.g., autos from S. Korea) are materially worse off. 
 
And not only do U.S. consumers do better materially under a policy of completely free, unhampered trade, but so do producers (though, of course, not necessarily the U.S. producers of autos): because consumers can purchase the less expensive S. Korean car, they have purchasing power left over to spend on other goods, some of which will be made by U.S. producers — those producers would not have sold their products to U.S. consumers had the latter been forced to pay an artificially higher price for a S. Korean auto. Additionally, some U.S. producers of goods that require less expensive autos for them to conduct their business — delivery services, for example, or transportation services (taxi, car service, etc.) can now expand their businesses in the U.S., thanks to their freedom to purchase the less expensive S. Korean product unhampered by government-mandated tariffs.
 
The only people who profit from tariffs are certain specific export industries, but they do so at the expense of other domestic industries. It's an example of pure, political "rent-seeking", i.e., using government coercion to extract an unearned "rent" from everyone else.
 
And actually, I'm not convinced that there's good empirical evidence that a tariff actually benefits the domestic export industry that it's intended to benefit. For example, a high tariff on imported S. Korean autos might simply discourage buyers from buying a car altogether. They might decide to put their limited purchasing power toward fixing their current car, or they might decide only to use public transportation, or they might decide to car-pool. Just because imports are higher than consumers would wish doesn't mean that they automatically decide to buy the U.S. product. They might not purchase anything at all, or they might direct their purchasing power toward something else entirely, a "2nd choice".
A. Jones Added Jan 13, 2018 - 12:06am
There are a number of countries which follow trade practices to support their own manufacturers while harming other countries' competitors. 
 
Name one.
A. Jones Added Jan 13, 2018 - 12:09am
Also, I'm hoping you'll respond to my first comment:
 
Would you impose a steep tariff, or some other kind of trade restraint, on a foreign entity that dumps a much desired good into the U.S., completely free of charge, i.e., at no cost to U.S. consumers?
Flying Junior Added Jan 13, 2018 - 5:17am
This is an interesting thread.  Most of the commentariat agree that an imbalance is not necessarily a bad thing.
 
It's better to be the country that buys high value-added resources from other nations than to be that country which supplies the cheap labor and gives of said resources.  We have more money.  We buy your best stuff.
 
I love a good trade balance.  I think it's healthy.  But I actually miss the golden days of twenty years ago when China was selling high-quality goods for mere pennies on the dollar.  It was very helpful to a young couple just getting started.  I could get a bristle hairbrush good enough to use on my dog for 99 cents.
 
Just where do you suppose did this idea that a trade imbalance with a certain nation is unfair to the U.S. come from?
 
I mean, it sounds pretty nuts, right?  To complain that China isn't buying enough U.S. goods?
 
Believe me, if we stick we the current megalo-maniac, China could easily surpass us.  But there does not exist any other way that this could happen.  Dump the Trump.  I want my country back.
A. Jones Added Jan 13, 2018 - 6:48am
China was selling high-quality goods for mere pennies on the dollar.
 
I must have missed that. When did China ever mass produce and sell high quality goods? Most things I've purchased with a "Made in China" label on them are crap. Inexpensive crap, but crap nonetheless.
 
China had also been playing an old game called "Beggar Thy Neighbor", in which it not only subsidized some of its own export industries but bought U.S. dollars and stored them, keeping them off the market in order to make the remaining U.S. dollars in circulation more valuable relative to the Chinese yuan. This made it appear as if Chinese imports to the U.S. were super-inexpensive. You can only buy all those U.S. dollars by inflating the number of yuan, so now China has a nice high inflation rate and suffering the usual distortionary effects of high inflation.
 
Cheap labor in the near future will no longer be from China. It will be from places like Indonesia, Bangladesh, and Vietnam. I'm already seeing these place names on a number of product labels.
Nick SJ Added Jan 13, 2018 - 10:40am
A. Jones   I think we basically agree on the merits of free trade.  Would you also agree that free trade in both directions between countries is better than one way free trade?  The point of my original suggestion is not to impose tariffs, but to force countries which follow mercantilist trade policies to open their markets to us. 
 
While classical economic theory is correct that consumers benefit from free trade, it doesn't address the issue that a one way free trade approach can cause industry in the free trade country to become mere branch offices of companies in non-free trade countries as its own companies are driven out of business.  Perhaps that is an acceptable side effect from your point of view, but many would disagree.
 
As for your question about a foreign company offering a product entirely free, this reminds me of the Frederic Bastiat technique of taking a principle to the extreme limit to illustrate a point.  In this case, can you point to any company actually doing this?
 
I wonder why you ask for examples of countries which practice export oriented trade practices.  As you obviously know, most of the major Asian countries use this approach.
 
Once again, I agree with free trade theory as it applies to consumers, but as a former business owner, I also sympathize with businesses which have to compete with foreign competitors which are allowed to sell in our market, while we are not allowed to sell in their market.
Katharine Otto Added Jan 13, 2018 - 12:38pm
It appears to me that "trade imbalance" is a government-created term that has little relation to the individual.  All tariffs and restrictions hurt the individual buyer.  Also, the US seems to have a bad habit of exporting the good stuff (like natural resources) and buying cheap junk made by virtual slave-labor in third world countries.  
 
While other people think the "global economy" is a good thing, I think it is ridiculous for Georgia (for instance) to be shipping frozen chicken parts to China.  The Chinese can raise their own chickens, and let Tyson and Purdue eat their losses.  Georgia is stuck with the pollution, as well as the pollution generated by other export industries.
 
When talking about "trade imbalances," the government apparently forgets that industrial exports, for instance, increase pollution and other environmental damage at home.  While local citizens may benefit somewhat from the jobs provided, they also have to live with the waste, as well as with the increased taxes that go to support the industrial infrastructure.
Flying Junior Added Jan 13, 2018 - 3:57pm
Again, interesting discussion.  Thanks to all.
 
The Chinese elite are now enjoying American beef.
 
One thing that I don't get is why we are so anxious to sell off our precious natural gas reserves.
A. Jones Added Jan 13, 2018 - 11:48pm
Would you also agree that free trade in both directions between countries is better than one way free trade?
 
Of course. But I would also agree that free trade even in one direction is better than tariffs in both directions. 
 
The point of my original suggestion is not to impose tariffs, but to force countries which follow mercantilist trade policies to open their markets to us. 
 
Which you do by imposing tariffs. The best way of dealing with countries that practice mercantilism is to let them practice mercantilism. It's only hurting their consumers, not ours.
 
While classical economic theory is correct that consumers benefit from free trade, it doesn't address the issue that a one way free trade approach can cause industry in the free trade country to become mere branch offices of companies in non-free trade countries as its own companies are driven out of business.
 
Utterly incorrect. You've forgotten that many domestic industries in the U.S. need inexpensive economic inputs from foreign countries for their own domestic manufacturing (steel, rubber, glass, electronic components, etc.). By forcing them to incur higher costs of production by imposing tariffs on foreign inputs you are simply putting them out of business . . . as happened when Bush43 imposed tariffs on foreign-made tires.
 
You can't lump all domestic businesses together and refer to them generically as "producers" because each one has its own required economic inputs that differ from the others. If domestic producers of US-X are put out of business by China-X, there are still other domestic businesses such as US-Y that can lower their own costs by using an input such as China-X in its own production — and lower costs of production are good for that domestic business. You can't lump US producers together and assume that just because US-X can't compete with China-X that therefore all domestic businesses are hurt. Wrong!
 
Perhaps that is an acceptable side effect from your point of view, but many would disagree.
 
Your scenario is imaginary fear-mongering.
 
As for your question about a foreign company offering a product entirely free, this reminds me of the Frederic Bastiat technique of taking a principle to the extreme limit to illustrate a point.
 
That's correct.
 
In this case, can you point to any company actually doing this?
 
No, but if a foreign entity did do this, would you object for any reason? Or would you say, "Underselling US producers by offering something for free to US consumers is fine. But offering that same good to consumers for 50% less than US producers can offer it is 'unfair trade' and needs to be balanced by means of a tariff."
 
It's a hypothetical question. I'm looking for a hypothetical "yes" or "no".
 
Once again, I agree with free trade theory as it applies to consumers, but as a former business owner, I also sympathize with businesses which have to compete with foreign competitors which are allowed to sell in our market, while we are not allowed to sell in their market.
 
Don't you sympathize with businesses whose product is no longer desired by a fickle consuming public? Shouldn't those businesses be protected from the consumers' changing tastes? If not, why not.
Nick SJ Added Jan 14, 2018 - 12:04pm
While you do an admirable defense of free trade, your arguments are trending toward ad hominem attacks and straw man arguments, which is unfortunate, since I basically agree with your free trade stance.
 
"The point of my original suggestion is not to impose tariffs, but to force countries which follow mercantilist trade policies to open their markets to us. 
 
Which you do by imposing tariffs."
 
Here you simply ignore the possibility that threatening to impose tariffs will cause a desired change in the other country's behavior.  Since that is the essential point of my argument, ignoring that outcome is a poor, if understandable, debating response.
 
"While classical economic theory is correct that consumers benefit from free trade, it doesn't address the issue that a one way free trade approach can cause industry in the free trade country to become mere branch offices of companies in non-free trade countries as its own companies are driven out of business.
 
Utterly incorrect. You've forgotten that many domestic industries in the U.S. need inexpensive economic inputs from foreign countries for their own domestic manufacturing (steel, rubber, glass, electronic components, etc.). By forcing them to incur higher costs of production by imposing tariffs on foreign inputs you are simply putting them out of business . . . as happened when Bush43 imposed tariffs on foreign-made tires."
 
Once again, you're simply ignoring the point of my suggested policy, which is NOT to cause higher import prices, but to force other countries to relax their import restrictions.  Perhaps you'd like to argue that other countries faced with the prospect of higher tariffs until they open their markets will simply sit there and let that happen.  I don't think that's a very realistic possibility, but you could argue that.  Unfortunately, you have apparently chosen to pretend that that possibility doesn't exist.
 
"Perhaps that is an acceptable side effect from your point of view, but many would disagree.
 
Your scenario is imaginary fear-mongering."
 
It's unfortunate that you've chosen to try to support your arguments with invective rather than counter-argument.  Factually there are many industries which have been partially or largely driven offshore by competitors which are protected from import competition by us. 
 
 
As one example, the domestic auto industry has been severely impacted by foreign competition from countries which virtually ban US auto imports.  Two out of the three large auto manufacturers went bankrupt, one was sold to a foreign company, and many thousands of workers lost their jobs.  That is not "imaginary fear mongering", and that is only one example. 
 
Once again, please don't respond that domestic consumers benefit from more choices.  That is not the issue.  I'm perfectly happy to allow foreign competitors to sell as many autos here as they want, but it is fair to ask that their countries allow our producers the same right.  Forcing them to do so by making it clear that we will not tolerate the status quo is not the same thing as planning to raise prices of imported products as a form of protectionism. 
 
 
If you want to argue against that point, then you need to supply logic or evidence suggesting that my suggested formula would not alter behavior by the affected countries.  In my humble opinion, there would be enormous pressure on those countries to increase imports from the US, which would require them to open their markets.  I would appreciate a reply using facts and logic which actually address that central point, rather than using demeaning language which avoids replying to that point.