August 28, 2015

Is a Market Access Charge Better than Higher Taxes on Imports?

Readers have asked why the Market Access Charge (MAC), the centerpiece of this blog site, would work better than the options being considered by Congress, most of which involve currency manipulation taxes (CMTs) -- taxes that would be added to the import duties already paid by the American consumers of various imported goods. 

The MAC approach would be simpler and far more effective for many reasons, reasons that will be discussed in future postings, but let's start by looking at the simple issue of complexity. Maintaining a currency manipulation tax system would be complicated and costly, to say nothing of subjective, debatable, difficult to defend in WTO hearings, and damaging to free trade.


The Currency Manipulation Tax (CMT) Approach

Perhaps the most telling evidence of the basic complexity of a currency manipulation tax system is following language from the Trade Facilitation and Trade Enforcement Act of 2015 (H.R.644), language that lists some of the variables that must be obtained, calculated or estimated when computing the size of tariff surcharges designed to penalize currency manipulation by countries like China.  

Trade Enforcement (Customs) Bill Language on Currency Manipulation (Congress, 2015.05.14):
H.R.644 Trade Facilitation and Trade Enforcement Act of 2015
SEC. 703. BENEFIT CALCULATION METHODOLOGY WITH RESPECT TO CURRENCY UNDERVALUATION.
Section 771 of the Tariff Act of 1930 (19 U.S.C. 1677) is amended by adding at the end the following:

“(37) CURRENCY UNDERVALUATION BENEFIT.—

“(A) CURRENCY UNDERVALUATION BENEFIT.  —For purposes of a countervailing duty investigation under subtitle A, or a review under subtitle C with respect to a countervailing duty order, the following shall apply:

“(i) IN GENERAL.—If the administering authority determines to investigate whether currency undervaluation provides a countervailable subsidy, the administering authority shall determine whether there is a benefit to the recipient of that subsidy and measure such benefit by comparing the simple average of the real exchange rates derived from application of the macroeconomic-balance approach and the equilibrium-real-exchange-rate approach to the official daily exchange rate identified by the administering authority.
“(ii) RELIANCE ON DATA.—In making the determination under clause (i), the administering authority shall rely upon data that are publicly available, reliable, and compiled and maintained by the International Monetary Fund or the World Bank, or other international organizations or national governments if data from the International Monetary Fund or World Bank are not available.
“(B) DEFINITIONS.— In this paragraph:

“(i) MACROECONOMIC-BALANCE APPROACH.—The term ‘macroeconomic-balance approach’ means a methodology under which the level of undervaluation of the real effective exchange rate of the currency of the exporting country is defined as the change in the real effective exchange rate needed to achieve equilibrium in the balance of payments of the exporting country as such methodology is described in the guidelines of the International Monetary Fund’s Consultative Group on Exchange Rate Issues, if available.

“(ii) EQUILIBRIUM-REAL-EXCHANGE-RATE APPROACH.—The term ‘equilibrium-real-exchange-rate approach’ means a methodology under which the level of undervaluation of the real effective exchange rate of the currency of the exporting country is defined as the difference between the observed real effective exchange rate and the real effective exchange rate, as such methodology is described in the guidelines of the International Monetary Fund’s Consultative Group on Exchange Rate Issues, if available
“(iii) REAL EXCHANGE RATES.—The term ‘real exchange rates’ means the bilateral exchange rates derived from converting the trade-weighted multilateral exchange rates yielded by the macroeconomic-balance approach and the equilibrium-real-exchange-rate approach into real bilateral terms.” 

Anyone who has tried to estimate equilibrium exchange rates knows how difficult reliable indicators can be to obtain – especially when they must be obtained from a foreign government that has no desire to cooperate and every reason to stone-wall. 

Likewise, since much of the information needed will not be reliable or available, assumptions will play a very important role – just as they do in anti-dumping and countervailing duty investigations. We all know how critical assumptions are to the conclusions reached. 

For example, the China assessment in a recent IMF External Sector Report indicated that, by the three models the IMF uses for its External Balance Assessments (EBAs), the yuan may be undervalued by as much as 12 percent – or overvalued by nearly 7 percent.  Precise calculations are obviously difficult, even for an organization as talented as the IMF when it comes to exchange rates. 

Likewise, a study by Ostry and colleagues at the IMF indicates that, even with time series as long as 25 years, “estimating separate real exchange rate equations for each country gives very imprecise results.” The thought of basing America’s international trade and currency policy on such wobbly data boggles the mind.

The report by Ostry et al also indicates that the above list of data and indicators is only the tip of the complexity iceberg when it comes to calculating exchange rate misalignments. For example, for just one of the three methods mentioned, the following data are required:
“(a) Productivity of tradables and nontradables relative to trading partners.;  (b) Commodity-based terms of trade;  (c) Net foreign assets to trade and Government consumption–to-GDP ratios ;  (d) Trade restriction index ; (e) Share of administered prices ; (f) Other dummy variables regarding judgments on "specific factors and structural breaks." 
The other name for item (f) is, of course, “fudge factors.”


The Market Access Charge (MAC) Approach

Compare the above complexity of a CMT to the simplicity of a Market Access Charge (MAC) for fixing currency misalignment:
  1. The Market Access Charge (MAC) would correct and prevent future overvaluation of the dollar and trade deficits driven by overvaluation by reducing net returns to those seeking to invest in dollars and dollar-based assets in U.S. financial markets, thereby moderating the net inflow of foreign capital, a key factor driving the dollar to overvalued, non-competitive levels.  The MAC would apply to all capital inflows whenever the U.S. trade deficit exceeds one percent of GDP.
  2. The charge, which would start at one half of one percent (50 basis points), would be deducted electronically from each transaction exceeding $10,000, and the proceeds would be credited directly to the U.S. Treasury.
  3. If the U.S. trade deficit continued to rise, the MAC rate would rise every six months by half of the percentage point increase in the trade deficit over the previous year.
  4. Once the inflow of foreign capital had moderated to the point that the dollar exchange rate was moving to a more competitive equilibrium level as indicated by falling trade deficits, the MAC rate would decrease according to the same formula. When the U.S. trade deficit dropped below one percent of GDP, the MAC rate would drop to zero.

Clear. Straightforward. And based on a readily available objective indicator, the US trade deficit as a percentage of GDP, that is published every month. 

Furthermore, the Market Access Charge would actually balance U.S. trade and keep it balanced in the future. It would stimulate exports as well as moderating imports, and it would do this for all products traded with all countries rather than focusing exclusively on restricting imports of specific products from specific countries and specific factories in those countries. It would not create serious economic distortions and potentially serious international conflicts. It would be completely legal under both international and national law. 

And very important, its implementation would not risk depending on the unwilling cooperation and unreliable data of countries like China. The MAC would be completely under the control of the United States.

Well, that’s my quick take on why the MAC would be a better way to fix America's trade deficits than a CMT that requires charging more taxes that Americans would have to pay on selected imports from selected producers in selected countries. 

I would greatly welcome your comments.

 John



America Needs a Competitive Dollar - Now!

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