A Trade Strategy for the 21st Century

The Washington Post recently asked a very good question: “If Not the Trans-Pacific Partnership, Then What?”   Since the problematic TPP is clearly not a gold standard that can define trade policies for the 21st century, what principles should?

Forty years of trade deficits, lost jobs, and closed factories make it clear that America’s current trade policies do not work in a world where exchange rates, driven by capital flows rather than trade in real goods and services, are rarely the rates required to balance trade. This note provides an outline for a new U.S. approach to foreign trade policy, anchored to balanced trade, that is suitable for the realities of today’s globalized, financialized world.

1. Balanced Trade: 

America’s nearly unbroken string of trade deficits since the 1970s has been driven by two major factors: the failure of international markets to maintain the dollar at a trade balancing equilibrium exchange rate, and foreign country currency manipulation. America’s foreign trade policy for the 21st century should start by restoring balanced trade with the following currency-related actions:

• Implement a Market Access Charge (MAC)  that would bring the dollar back to its trade-balancing equilibrium exchange rate and keep it there – regardless of what other countries may do. 

• Implement a Countervailing Currency Interventions (CCI)  policy to discourage and counteract any resurgence of currency manipulation by trading partners. 

• Establish quantifiable triggers for all currency-related actions so that they come into effect automatically. 

2. Fair Trade: 

Other countries hurt American exports, domestic production, corporate profitability and family incomes with their unfair trade practices. America needs to restore fair trade with the following actions:

• Fully enforce adherence to obligations in existing trade agreements. 

• Implement policies such as those in the Trade Facilitation and Trade Enforcement Act of 2015 that enforce payment of penalties levied in accordance with America’s countervailing, antidumping, and other trade remedy laws.

• Revise existing rules, preferably in collaboration with other countries, where current rules fail to prevent unfair trade. 

3. Growing Trade: 

Once America has assured that its international trade is and will remain balanced, expand trade through multilateral and bilateral agreements such as a revised TPP. Such agreements should:

• Have benefits that clearly exceed their costs -- including the costs borne by adversely affected workers and industries.

• Assure that the benefits of expanded trade are distributed in an equitable manner, taking into account costs to groups hurt by expanded international competition. 

• Provide an enforceable framework of rules consistent with contemporary realities to assure that trade under such agreements is fair and balanced. 

4. Strategic Trade and Domestic Development:

Along with these actions on the international front, America should implement domestic policies that will help all Americans gain the greatest possible benefits from the opportunities provided by trade that is balanced, fair and growing.  Such policies should accomplish the following:

• Develop America’s manufacturing capacity in strategically important areas through industrial policies that build up the R&D capacity and diffusion mechanisms needed to assure that U.S. manufacturing can develop internationally-competitive capacity in high value added and advanced manufactured goods. 

• Develop America’s “industrial commons.” Grow the network of researchers, suppliers, producers, investors, workers, and markets throughout America who provide the essential basis for America’s international competitiveness. 

• Restore and Expand America’s Infrastructure. Today’s crumbling, inadequate infrastructure, especially in transportation, but also in areas such as utilities ranging from safe drinking water to high-speed internet, take a daily toll on America. 

• Improve the American systems of education and health to assure that all Americans have an opportunity to realize their full potential, both for personal development, and to assure that America has a healthy, well-trained workforce that is second to none. 

• Improve America’s social safety net. Special attention should be given to assisting workers most adversely affected by increased competition from abroad to prepare for, find and take new jobs that are well paying. 

• Preserve America’s right to maintain its rule of law for the well-being of all American people. Protect them from decisions of private international tribunals that could over-rule our nation’s laws, thereby creating possible environmental damage, health hazards, monopolistic competition, and national security weakness. 

• Preserve America’s right to retain natural and man-made resources for the future of America – including, for example, production technology and other forms of intellectual property developed in America.

Conclusion

Trade that is balanced, fair, and growing on the basis of rules that are suitable to the realities of the 21st century should form the core of America’s international trade policy for the future. Externally-focused measures to accomplish this should be supported by domestic policies focused on preparing America to compete successfully in global trade and improve the quality of life for all Americans.

Rev. 9/19/2016

TPP: As Strong as its Missing Link – Fair Currency Values

The Trans-Pacific Partnership (TPP) will not produce the benefits promised for America unless policies are in place that link currency values directly to balanced trade. In fact, the TPP is not even likely to become law unless America implements a mechanism that moves today’s overvalued dollar to an equilibrium level that balances U.S. imports and exports and keeps it there. Only then will Americans be able to earn as much producing exports as they spend on imports.

How Much Government Revenue Would a MAC Charge on Foreign Investors Generate?

Estimating the revenues that a MAC charge could generate is exceptionally difficult because this policy tool has never been used in a large, wealthy, reserve-currency country. Policies involving charges of various kinds on some types of capital have been tried in smaller economies such as Chile, Brazil and Malaysia. But nothing like the MAC has ever been tried in the United States. We therefore have little basis for estimating the response of foreign speculators and investors to the MAC and thus potential MAC revenues.

Nevertheless, it is useful to know the range within which the revenues might fall – if for no other reason than to satisfy curiosity. To help meet this need, two models are presented here based on cases designed to bracket the range of revenue that the MAC might generate.

Summary

In brief, the MAC is likely to generate at least $1.0 billion per year in the short term and could possibly generate up to $1.0 trillion per year if high-speed, in-and-out trading is not moderated by the MAC.

In the longer term, as the MAC moderated excessive foreign capital inflows, MAC revenues would decline. However, this reduction would be offset partially or fully by taxes on the additional economic growth stimulated by a MAC-based competitive exchange rate -- even if tax rates were reduced as part of a much-needed reform of the US tax code.

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.

Trade Deficits -- Growth Stimulant or Depressant?

Summary

Understanding the impact of trade deficits and foreign debt on economic growth is vital to understanding the origins of America’s current economic problems and to designing trade and monetary policies that will put America back on the path to prosperity for all in the 21^st century. 

Unfortunately, economists are sharply divided regarding the impact of trade imbalances on growth.

Progressive economists such as Scott and Baker generally say that trade deficits are the leading cause of slow growth, excessive unemployment and growing social inequality in the United States, that trade deficits threaten the nation’s long-term economic viability. 

In sharp contrast, conservative economists such as Riley, Griswold and Ikenson would generally say that trade deficits mean faster economic growth and falling unemployment, that the foreign loans used to finance these deficits are an important vote of confidence in America.

The 2015 Economic Report of the President by the Council of Economic Advisors presents both of these conflicting positions but fails to reconcile them or to provide meaningful policy options for action. 

This note reconciles the conservative and progressive views and presents a possible consensus position on U.S. trade policy for the 21^st Century, one that could simultaneously increase business profitability, stimulate innovation, maximize employment, and reduce income inequality.

A Perfect Storm Brewing for American Manufacturing -- Greek Crisis and Fed Interest Rate Liftoff

Greece has just announced the closure of its banks and stock market for a week. With falling unemployment, rising wages and improved economic prospects, the Federal Reserve is likely to start raising interest rates this year. Together, these developments are a perfect storm brewing  that could derail the hesitant recovery of America's manufacturing sector, push external trade deficits even higher, and throw large numbers of Americans out of work.  Why?

Currency-Based CVD Penalties: Wrong Tool for Solving America's Trade Deficits

The currently proposed legislation that would use currency-based countervailing duty surcharges to help reduce America's trade and unemployment problems will have almost no impact because CVDs are designed to fix firm-level, product-specific problems, not macro-economic imbalances. The note concludes that a macro-level policy designed to correct the dollar's global overvaluation is needed instead.

Fighting Currency Manipulation = Fighting the Last War

I would highly recommend Steven Mufson's excellent article in the May 14 issue of the Washington Post entitled "Senate passes bill targeting currency manipulators."

The article makes it very clear that focusing on the increasingly small fraction of currency misalignment represented by currency manipulation per se will do little if anything to help America's factories, workers, and trade balance. Consider the following quotes about currency manipulation:

•  “The whole effort seems to be fighting the last war,” said David Dollar, a senior fellow at the Brookings Institution. “There is not really any case right now to say that China is manipulating its exchange rate. It has appreciated a lot over the past few years and now appears to be at fair value.”

• “It seems like a very stale issue,” said Ed Yardeni, president of the investment advisory firm Yardeni Research. “Now to take it up when there is much less evidence of currency manipulation and as we’re seeing China’s exports flattening out kind of raises some questions about what’s the point.”

•  Nick Lardy, a Peterson economist specializing in China, says that in 2014 China’s trade surplus dropped to 2.2 percent of gross domestic product, a level considered an indicator of fair exchange rates. At their peak in 2007, China’s exports amounted to 10 percent of GDP, he said.

• “Since last year, we have seen . . . a very significant appreciation of the renminbi,” Markus Rodlauer, deputy director of the IMF’s Asia and Pacific department, said during the fund’s spring meetings. Given that the Chinese currency was “moderately undervalued” last year, Rodlauer said, “we are now reaching a point where we are close to it no longer being undervalued.”

These comments are fully consistent with a recent note from Fred Bergsten where he stated:

• "When the Chinese intervention and surpluses, and the US deficits, were at record highs around 2006-08, Joe [Gagnon]’s estimates implied that manipulation was causing half or even more of our deficits.  Today, by contrast, intervention is much less and the macro-economic/monetary differences among the advanced countries are much greater.  So, the share of manipulation in the total is much smaller. 

The implication of these quotes is very clear:

To assure that the TPP and other proposed trade agreements help the average American and the American economy at large, Congress must focus on currency misalignment including misalignment of the U.S. dollar, not just on the manipulation of foreign currency values.

Balance U.S. Trade with a MAC Attack on Currency Misalignment

Introduction

Responding to widespread pressures from the American public, many members of Congress are seeking to add language to the 'fast-track' or Trade Promotion Authority (TPA) legislation requiring that tough rules against currency manipulation be negotiated in the Trans-Pacific Partnership (TPP) agreement. This approach is highly unlikely to fix America's trade deficits for the following reasons:

• The TPA bill simply repeats ineffective language similar to what has been in the IMF's rule books for years.
• It does nothing to provide an enforcement mechanism.
• It focuses only on currency manipulation by TPP members, totally ignoring the much bigger and more important problem of overall currency misalignment.

As promised in my previous post, an alternative policy is presented here that avoids the above problems and offers real promise of increasing the international competitiveness of America's factories and workers, stimulating growth and employment, and bringing America's imports and exports back into balance.

These highly desirable goals could be accomplished by moderating the inflow of foreign capital to levels consistent with America's need for foreign financing and with the economy's ability to use such capital efficiently. With this, Congress could prevent the overvaluation of the dollar caused by excessive foreign demand for dollars and dollar-denominated assets.

Why a New Mechanism is Needed to Balance U.S. Trade in the 21^st Century