Donald Trump – egged on by Peter Navarro – didn’t exactly grasp the way that trade works. But this is worse, far worse. Here we’ve a demand for a rewriting of the world trade system with a starting point of not understanding the subject at all. What’s worse the author used to be a US trade negotiator – surely he would have learnt at least something while doing that?
But, this was very far from what we have today when capital markets are open, financial flows far outweigh trade flows, currencies float in financial markets, much trade is in goods and services characterized by economies of scale and scope, many countries pursue export led growth strategies while using subsidies and tax incentives to attract capital and technology investment, and some countries (Germany, Japan, China, South Korea) accumulate chronic trade surpluses while others (especially the U.S.) act as consumers of last resort by importing more than they export, thereby accumulating chronic trade deficits. These are financed by borrowing from the thrifty, export surplus countries.
No, trade deficits are not financed by borrowing. They’re financed by running a capital account surplus. This is not some recondite detail this is definitional stuff. The US does run trade deficits and as a result it has a capital account surplus. Because the two together make up the balance of payments and the thing about the balance of payments is that it always balances.
Borrowing can be part of that capital account surplus, sure. An American company borrowing from foreigners does that, Uncle Sam too. But so too is selling a house in LA to a foreigner part of that current account surplus, so is selling some Facebook stock to them. This does matter for the complaint then becomes:
Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off–or simply service–the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat–they have nothing left to trade–but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.
The problem with this Warren Buffett idea is that it requires considerable trade deficits. That of the US is around $500 billion a year. Thus the US in aggregate needs to sell – or borrow against, either – $500 billion a years worth of assets in order to gain that capital account surplus that matches the current account deficit.
Household wealth in the US is some $130 trillion. Therefore we can do this for 260 years. Except even that’s wrong. For US household wealth creation is of the order of $10 trillion a year. You know, -ish, -ish. So the US should sell – or more accurately, US residents should – 5% of new wealth creation each year to foreigners. And keep 95% of new wealth creation for themselves. That and that alone will finance the trade deficit.
So, running a trade deficit of about the current amount leads to foreigners owning a lower, lesser, portion over time of the total US wealth. We do not, that is, have a problem here at all.
However, ignoring all of that we’re told that the following are the solutions:
A first step for President Biden would be to impose a Market Adjustment Charge (MAC) on all non-direct investment (not in new means of production) into the United States. This would do two things. The funds from the charge would go into an Infrastructure Renewal Fund to finance upgrading of U.S. infrastructure. The charge would also tend to weaken the dollar, thereby contributing to an end of the chronic trade deficits.
Every foreigner who buys a Treasury must pay an extra tax. Anyone see even a slight problem with that?
Step two would be for the International Monetary Fund (IMF) to adopt Keynes’ Bretton Woods proposal that all countries should have balanced trade in the medium to long term. To prevent chronic surpluses and deficits, he called for the IMF (or WTO) to impose tariffs on the exports of chronic surplus countries to force them to balance (a tax equal to the total surplus would also suffice).
It’s not actually countries that trade with each other. It’s individuals and companies that happen to be located in particular countries. So, imagine, Mercedes makes a car that Americans want. But German based folks are selling lots to US residents already. So, there should be a tax upon Mercedes cars, right? An extra one? We tax American folks who want a Mercedes more than those who want a Renault because of what other Krauts or Frogs are doing? Or even, just because brie is out of favour in the US this year? Whut?
A sixth step would be for Biden to underpin this free world tech leadership program with a reorganization and concentration of U.S. government resources like that of the Kennedy administration in response to Sputnik. The Biden administration should study how China has organized its industrial policy and technology programs as well as how the U.S organized to win WWII. It should create similar structures and programs.
We should make the American economy fascist?
Finally, Biden should invoke the Defense Production Act to direct increased U.S.-based production of critical goods such as medicines, semiconductors, and solar panels, while also submitting legislation to curb corporate political spending and to gain the right of review of corporate overseas investment plans which remain entirely opaque.
Government decides where private companies may invest? Have we already used the world fascist?
Clearly, excessive free world dependence on China at odds with fundamental free world values. By adopting the above noted suggestions, Biden would dramatically cut U.S. and free world….
…adherence to fundamental free world values.
The fundamental mistake here – other than not grasping the subject at all – is that assumption that it is countries which trade with each other therefore the country is the unit of trade management. Which is, again, rather a fascist view to take of things…..