Tools for Balancing American Trade -- The MAC is Best

A variety of measures are currently on the table to solve eliminate U.S. trade deficits including tariffs, border-adjustable taxes, and various currency related measures. Each of these tools is needed for specific tasks. However, the Market Access Charge (MAC) is the best tool for providing the overall foundation of an equilibrium exchange rate that balances total trade.

Conventional Measures 

General tariffs, used as a threat, can be a useful bargaining tool. However, such tariffs are illegal, do not solve the dollar’s fundamental overvaluation, can easily trigger destructive trade wars, tend to escalate as interested parties argue their case for preferential treatment (i.e. higher tariffs), and adjustments as global realities change require politically-charged discussions.

Countervailing and anti-dumping duties are legal, provided specific conditions are met, and can be a very useful remedy for specific products, but they affect such a small part of total trade that they cannot fix the dollar’s overvaluation.

Border-adjustable taxes (BATs) have been proposed in the Ryan/Brady “Better Way” plan are not exactly “conventional” tariffs, but share many of the same characteristics: they are probably illegal, have encountered stiff resistance even within the Republican Party because of the negative impact on importers, would make dollar’s overvaluation even greater rather than fixing the overvaluation, and, like ordinary tariffs, provide no exit strategy.

Once in place, America would be forever dependent on BATs. Furthermore, they have no self-adjusting mechanism to respond to changes in relative global prices and productivity levels. The one advantage of BATs over normal tariffs, which tend to be recessionary because they only suppress imports, is that they subsidize exports. However, this involves a serious loss of potential budgetary revenues, making balancing the budget while supporting necessary investments in infrastructure, for example, even more difficult.

Market Access Charge (MAC) 

The MAC overcomes all the problems of conventional measures. It works quickly. It solves the underlying problem – the dollar’s overvaluation. It encourages the domestic production of expanded exports as well as of import alternatives. It generates billions of dollars of net revenues that are derived, not from the average American family, but from foreign speculators and from increased U.S. economic activity that would not have taken place had the MAC not been implemented. And it automatically adjusts to changing global realities without need for political intervention. (For details on the MAC mechanism, see here.)

America Needs a Competitive Dollar - Now!

Fixing the Bloated Dollar - Guest Blog by Jeff Ferry of CPA

Jeff Ferry, Research Director for the Coalition for a Prosperous America, recently published an excellent discussion paper on options for fixing the overvalued dollar, one of America's most serious trade problems today. Not only is the Market Access Charge (MAC) among the options listed. It is given top marks.

The CPA has kindly agreed to let us re-post Jeff's paper here on the Americans Backing a Competitive Dollar (ABCD) blog site. Enjoy!
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Fixing the Bloated Dollar

February 14, 2017

By Jeff Ferry

Research Director, Coalition for a Prosperous America [1]

Fear is growing that a rising dollar could sabotage any effort by the Trump Administration to improve the U.S. trade balance as a means of improving the health of our manufacturing industry.

Commentators have suggested that the prospect of rising interest rates and higher U.S. economic growth, combined with any moves to boost net exports, could quickly lead to a rising dollar, throwing improvements in the trade balance into reverse. But there are bold, new solutions to get the overvalued dollar under control, including a plan to charge foreigners a fee to hold dollars, known as a MAC, that the government should consider.

The U.S. needs to address what could be called “macho dollar syndrome,” the belief that a strong dollar is somehow good for the U.S. economy. In reality, a strong dollar makes our exports more expensive, our imports cheaper, thus leading to a larger trade deficit, slower economic growth, and fewer jobs. That dynamic has been taught in introductory economics classes for years.

You can see the living proof simply by looking at Britain’s economic performance in the second half of last year. In June, the Brits voted to leave the European Union. The pound sterling promptly fell 15% as speculators worried about turmoil and trade agreements. The fall in sterling boosted British exports (up 18% year-on-year), leading to a significant uptick in economic growth in the fourth quarter, enabling Britain to finish 2016 with annual growth of 2.0%, the highest growth rate among the G-7 group of large countries.

Recently, some have shown renewed enthusiasm for labeling some of our most mercantilist trading partners currency manipulators. Senate Minority Leader Charles Schumer (D-NY) urged the president to put the label on China. The “currency manipulator” label, under current law, triggers dialogue with the offending country which could lead to further action at the discretion of the president.  The problem with this approach is that persistent Chinese currency manipulation has ebbed recently. According to an October report from the U.S. Treasury, China actually spent $566 billion pushing its currency up not down.

For an economist, “currency manipulation” is better understood not as direct intervention in exchange rates, but as policies that prevent a nation’s trade balance from balancing over a full economic cycle (typically 5-7 years).  According to economist Brad Setser, East Asian countries are managing today their economies to save as much as 40% of their GDP, contributing to their trade surpluses and our trade deficits.  Last October, Setser wrote: “The problem of the global savings glut is now more acute than in 2005…The social costs—and therefore also political costs—of relying on the United States and a few other countries as consumers of last resort are increasingly evident.”

A novel idea to address dollar overvaluation was advanced by Joe Gagnon and Gary Hufbauer of Washington’s Peterson Institute in a 2011 article, Taxing China's Assets.The core of the proposal was a 30% withholding tax on the interest paid on the holdings of U.S. financial assets by entities based in nations the U.S. deemed persistent surplus nations. The benefits of the proposal are that it would exert downward pressure on the dollar (and upward pressure on the renminbi), and it would make it plain to the Chinese and other surplus nations that they are not doing the U.S. a favor by buying our Treasury bonds. On the contrary, they are enabling their economies to grow at our expense, and we would much prefer they increase domestic consumption rather than rely upon U.S. consumers for growth.

The biggest problem with the Gagnon-Hufbauer withholding tax is that it raises an enforcement challenge because it creates incentives for foreign investors to disguise their country of origin. For that reason Joe Gagnon himself is intrigued by another, even more radical proposal, called the Market Access Charge or MAC.  The MAC is the brainchild of economist John Hansen, now retired after a career at the World Bank. Hansen’s vision is for a charge, starting at 50 basis points (half of 1%) on inflows of foreign capital into U.S. financial assets. The one-time charge upon entry would be levied not on the interest but on the principal invested into U.S. assets. There would be no political debate required over which nations pay the MAC. They all would. The revenue flowing to the Treasury would be counted in billions of dollars.

The advantages of the MAC are that it is relatively easy to administer and it is highly likely to drive down the dollar. Most important, it demonstrates to the world that the U.S. is serious about making sure that its currency serves the needs of its domestic economy instead of the other way around.

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Thanks, Jeff. A great message of support for the MAC.

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[1] The Coalition for a Prosperous America (CPA) is a nonprofit organization representing the interests of 2.7 million households through its agricultural, manufacturing and labor members. The CPA is working hard to working for a new and positive U.S. trade policy that delivers prosperity and security to America.

America Needs a Competitive Dollar - Now!

Foreign Direct Investors will Love the Market Access Charge (MAC)

Would the MAC discourage foreign direct investment in the United States? 

Some readers have suggested that capital being brought into the United States to finance greenfield foreign direct investment should be exempted from the MAC. We should not, they argue, do anything to discourage productivity enhancing investment in America's manufacturing sector, for example.

Although the MAC is explicitly designed to cover all incoming capital, the MAC will not adversely affect greenfield investments. In fact, the MAC will make foreign direct investments in productivity-increasing projects based in the US far more attractive.

Make the "Better Way" Even Better Add Exchange Rate Reform

                                                                                                                                                     John Hansen

Today we propose a new tax code built for growth -- for the growth of paychecks, for the growth of local jobs and economy, and the growth of America’s economy.”           
Kevin Brady

With these words, Representative Brady, as Chair of the Ways and Means Committee and leader of the Tax Reform Task Force, unveiled A Better Way for tax reform.

The Better Way notes that a Made in America Tax (MAT) puts American-made goods and services at a severe competitive disadvantage. The MAT exists because U.S. exports face two tax burdens not borne by the exports from most foreign countries: First, made-in-America goods must compete in U.S. markets with imports that are not similarly taxed. Second, when U.S. goods are shipped to foreign markets, they must pay the VAT charged by those countries.

To fix the Made in America Tax problem, the Better Way plan suggests a border-adjustable tax (BAT) that would exempt American exports from paying the “company tax” proposed in the Better Way to substitute for the current corporate income tax. It also proposes that America effectively impose a tariff-like charge on imports from foreign countries based on the company tax rate.

Although the BAT holds considerable promise, it also contains a potentially serious risk. As its proponents, have noted, the border taxes would serve as tariffs. As such, the proposal has been challenged by those concerned that the tariffs would raise the price of imports, hurting U.S. consumers of both finished and intermediate goods. Also, the BAT may conflict with WTO rules.

However, the proponents argue that the tariff effect of the BAT would be offset by appreciation of the dollar, leaving no net change in the dollar cost of imported goods to consumers.  This is sound thinking according to economic theory. However, this exchange-rate / tariff offset raises two other concerns. First, why are we considering a measure that will make the overvalued dollar even more overvalued? Second, what if the dollar valuation offset to tariffs overshoots the mark.

If the offset mechanism works, at least the dollar’s overvaluation will be no worse than it is today, but on the other hand, the BAT does nothing to make U.S. production more competitive against imports. Furthermore, if the exchange rate rises in line with the BAT rate, the BAT exemption on exports will be offset by the higher exchange rate. 

The Market Access Charge as a Complement to the Better Way

Given these problems with the BAT, I would suggest that, while considering ways to avoid the Made in America Tax, Congress needs to eliminate an even more serious tax on American goods – the overvaluation of the dollar that creates an Overvalued Dollar Tax (ODT). With a Market Access Charge (MAC), the ODT tax can be eliminated in a way that generates revenues that would help finance both a reform of the corporate tax system and the urgently-needed infrastructure problem proposed by the Trump Administration.

Data from the Peterson Institute for International Economics and the Federal Reserve indicate that the U.S. dollar is overvalued by about 35 percent today. Unlike the corporate tax, which is basically a tax on a company’s often small profits, the overvalued dollar tax is a tax on 100 percent of the final selling price of all US goods. Consequently, the Overvalued Dollar Tax can impose a far larger burden on corporate profitability than the corporate profits tax.

The overvalued dollar weakens the competitiveness of American producers both at home and abroad. In the short run, this weakness is often papered over with money borrowed from abroad to cover the deficits caused by America’s booming demand for “cheap” foreign products. But in the medium term, the dollar’s overvaluation makes American producers less competitive, less profitable, less able to maintain U.S. jobs, and less inclined to undertake the investments in real productivity urgently needed for America’s long-term strength and greatness.

The primary cause of the dollar’s massive overvaluation is an excessive inflow of capital from foreigners seeking profits by purchasing dollars and dollar-based assets in America’s attractive financial markets. Most of these flows go into trading that does little or nothing to improve the physical productivity and international competitiveness of America’s manufacturing sector.

Adding a Market Access Charge (MAC) to the Better Way proposal help resolve this problem. A modest MAC would be assessed on foreign capital inflows whenever the dollar was significantly overvalued as indicated by a trade deficit exceeding one percent of GDP. The MAC would reduce net returns to foreign investors ­ especially foreign speculators. With a MAC in place, foreign demand for dollars and dollar-based assets would moderate, and the dollar would gradually move back to its trade-balancing equilibrium exchange rate. Note that foreign traders, not Americans, would pay the MAC charges!

A trade-balancing equilibrium exchange rate would increase domestic and foreign demand for made-in-America goods, accelerate growth, and create more jobs with higher wages. Higher growth would mean larger tax revenues – even if tax rates were reduced as proposed in the Better Way plan. Thus, adding a Market Access Charge to the reform package proposed by Chairman Brady and his task force would make it easier to balance the budget  – while simultaneously increasing critical investments in our nation’s infrastructure and reducing the national debt.

In sum, a Market Access Charge (MAC) would be an invaluable component of the Better Way strategy because it would:

1. Increase the competitiveness and thus the profitability of U.S. companies – by about three times as much as would a border-adjusted tax.
2. Move the dollar closer to its trade-balancing equilibrium exchange rate. (The BAT could actually raise the dollar’s value, making U.S. goods less rather than more competitive.)
3. Stimulate the growth of well-paying jobs throughout the economy and reduce the incidence of poverty in our great nation.
4. Fix the key underlying problem causing the decline in America’s competitiveness – a seriously overvalued dollar.
5. Comply fully with WTO, IMF, and U.S. Government rules, laws, and agreements – thereby avoiding the WTO problems that face the border-adjustable tax proposal.
6. Stabilize the financial sector, thereby reducing the systemic risk of major disasters such as the Crash of 2008. This might even make it possible to reduce the sector’s regulatory burden.
7. Make important contributions to balancing the budget while providing a solid basis for reducing tax rates significantly, simplifying America’s broken tax code, and improving essential government services. 

For more on the Market Access Charge (MAC) and related issues, see the blog site Americans Backing a Competitive Dollar (www.abcdnow.blogspot.com).

March 23, 2017 (rev.)

John Hansen, PhD          Former World Bank Economic Adviser            hansenj@bellsouth.net

Founding Editor              Americans Backing a Competitive Dollar       www.abcdnow.blogspot.com

Would US Tax Treaties Need to be Changed to Implement the MAC?

Would existing US tax treaties have to be changed before a Market Access Charge (MAC) could be implemented? The simple answer is, no.

U.S. tax treaties focus on income taxes, and the Market Access Charge (MAC) is not an income tax. The MAC is a user fee, and there is no evidence that user fees are subject to international treaties.

The facts that the MAC is not an income tax, not a tariff, and not germane to merchandise trade appear to remove it completely from the jurisdiction of all US tax and trade treaties. Thus, no conflict.