Will the Market Access Charge Cause Inflation?

Question: Since the Market Access Charge (MAC) will reduce imports of inexpensive foreign goods and encourage the production and consumption of more expensive domestic goods, won't this cause inflation?

Short Answer: Prices would probably increase for raw materials that America cannot produce and for finished goods that are labor-intensive, both of which would almost certainly continue to be imported. However, these increases would tend to be offset by three important factors: First, foreign exporters may lower their prices to maintain market share. Second, imports are a small share of US GDP and expenditures. Third, the MAC may stimulate economies of scale in US production that reduce the price of made-in-America goods. Also, the stimulus to demand for US-made goods would lead to employment and wage increases, so many consumers would end up better off despite some higher prices. The CPI should not increase by more than about 0.2%, a tiny price to pay for a revitalized American economy.

1. Foreign Exporters may Lower Price to Retain Market Share

Foreign exporters, faced with a devaluation of the dollar are likely to reduce their prices at least temporarily to maintain market share. Price cutting to maintain market share has been noted as a common business practice in both domestic and international trade. As Ferry has reported, this happened when the Trump administration imposed heavy tariffs on goods from China.  As it commonly takes tariffs and devaluations several years to "pass through" and affect trade balances, this spreads out any inflationary impact, resulting in lower yearly inflation rates. Furthermore, full pass-through may never occur.

2. Imports Represent a Very Small Share of US GDP

In 2020, US imports (GNFS) were only 13 percent of GDP –  a ratio lower than for any other country except Sudan and Cuba. Consequently, price changes for imported inputs and consumption goods have a minimal impact on US prices because of the following factors: *

(a) the low share of imports in gross domestic product (13%);

(b) the time required for the MAC to reach a level that balances US trade (5 years);

(c) the percent of dollar devaluation that finally passes through to domestic prices for imports (90% est.);

(d) the trade margins inside the US between port of entry and final sale including domestic costs of transport, storage, retail operations, and profit margins – all costs that directly affect the final selling price and thus the CPI but have little or no imported content, further reducing the inflationary impact of imported goods (33% est.); and

(e) the share of imported goods in the CPI consumption basket (12%).

When all these factors are considered and multiplied together, the final increase in the CPI driven by a 30% devaluation would only be about 0.3% per year.  

3. Economies of Scale

The increased domestic and foreign demand for made-in-America goods that the MAC would generate with a truly competitive exchange rate – a value for the dollar that allows Americans to earn as much producing exports as they spend on import – would lead to economies of scale, new investments, and higher productivity.

These developments, which can sharply reduce unit prices, would probably offset more than 100 percent of any inflation that might otherwise be caused by more expensive imports. The MAC could therefore reduce rather than increase inflation.

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* These estimates are currently under review but are thought to be representative.

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America Needs a Competitive Dollar - Now!