February 25, 2016

MAC vs a Nixon-Connally "Strategic" Tariff

Rather than implementing the Market Access Charge (MAC) as proposed on this blog-site, should America instead restore its external trade by implementing a “national strategic tariff” like the additional 10 percent tariff that President Nixon and John Connally, his Secretary of the Treasury, applied to all dutiable imports when the U.S. went off the gold standard in 1971. /a 

No. Aside from being almost impossible because of America's commitments to the WTO, such a tariff would not be as effective as the MAC for moving the dollar to a trade-balancing equilibrium exchange rate for the following reasons:

(a)   Tariffs reduce imports but do almost nothing to stimulate exports.

(b)  Consequently, tariffs tend to reduce rather than to expand economic growth.

(c)   Tariffs do nothing to correct fundamental exchange rate misalignments. Tariffs provide no automatic exit strategy, no automatic move to self-sustaining balance. Once in place, they have to stay in place, and this creates distortions.

(d)  Because tariffs affect only half of the current account balance equation, they have to be set at rates roughly twice the level that would be needed if adjustment were coming from increased exports as well as reduced imports -- exactly what the MAC is designed to accomplish.

(e)   Decades of global experience indicate that, once producers become accustomed to a certain level of tariff protection, reducing these tariffs is very hard. This creates an ongoing bias towards relatively inefficient import substitution and against more efficient export expansion.

Politically speaking, a tariff on incoming goods creates bigger problems than an exchange rate adjustment for at least two reasons:

·       First, those protected by import tariffs fight their elimination and will seek their expansion during business cycle downturns, thereby ratcheting up tariffs.

·       Second, those consuming imported goods will fight the introduction and maintenance of tariffs.

The MAC -- a tiny charges on financial transactions that the average person knows almost nothing about – will be far more palatable politically thanks to its relative invisibility – and to the fact that the MAC will (rightly) be seen as a charge that borne by foreign exploiters, not by good U.S. citizens.

Also, a MAC will be much easier to adjust up and down for two reasons. First, the entire process is basically invisible. Second, given the way the MAC is designed, changes in the rate will happen automatically through a formula linked directly to the CAB. Changes will never need to be discussed in Congress, and the charge will quietly disappear when the CAB has dropped below 1 percent of GDP, indicating that the dollar’s exchange rate has reached a sustainable equilibrium level.

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a/ An interesting historical note: Abandoning the gold standard, which had been central to the post-war Bretton Woods monetary system, was triggered by America's gradual loss of gold reserves. However, 10 percent tariff was implemented in response to the exploding current account US trade deficit, which  reached a frightening 0.1 percent of GDP in 1971 - America's first deficit since the post-Civil War Reconstruction Period. What would Nixon have done if faced with the six percent trade deficits that America experienced during 2005-2006?

America Needs a Competitive Dollar - Now!

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