The People are Right: It’s Time to Balance Trade

Although Donald Trump (Republican) and Bernie Sanders (Democrat) have both made opposition to U.S. trade policy a major plank of their surprisingly successful presidential campaigns, most elite “opinion leaders” in the media and politics continue to at-best condescend to these messages as a working-class phenomenon -- a movement by the “losers” in trade that fails to recognize the counterbalancing winners.

Few in the elite have yet begun to question their faith in free trade. And, as a result, it is unlikely that Congress, the executive branch, and other power centers will engage in the important rethink of U.S. trade policy that the public is calling for. Like Hillary Clinton and Ted Cruz in the current campaign, Mitt Romney in 2012, and Barack Obama in 2008, they give lip service to trade concerns, while planning to continue “free trade” policy once elected. But the voters are right, the elites are wrong. The trade jobs ‘winners’ are vastly outnumbered by those who lost millions of jobs. Why the mismatch? Our massive trade deficits.

If there is a single statistic that shows the major cause of the current malaise -- and surely it has many causes -- the trade deficit is foremost. It has worsened since 1975, as shown in the following graph:

In 1980, the U.S. trade deficit was $32 billion (in 2015 dollars). In 2008, it reached $800 billion (in 2015 dollars), no doubt contributing to the 2008-2009 recession. As a result of the global recession, the trade deficit shrank in 2009 to $434 billion (in 2015 dollars), and then it expanded again with the modest economic recovery to $530 billion in 2015. Had trade been in balance in 2015, our GDP would have been $18.5 trillion instead of $17.9 trillion. Had we kept trade in balance over the last four decades, we would now be experiencing great prosperity, not malaise.

Another problem is that trade deficits slow economic growth. The following graph shows U.S. annual GDP growth by decade:

Since 2006, U.S. economic growth has averaged a measly 2.1%, whereas, for the 50 years before 2006, the average growth rate was 4.0%. The U.S. economy has stagnated for an entire decade because hundreds of U.S. companies have moved some or all of their production of goods abroad and millions of productive manufacturing workers have lost their jobs.

According to Bureau of Labor Statistics (BLS) data released on Friday, U.S. manufacturing employment has dropped by 47,000 workers during the first two months of this year, and manufacturing employment has dropped by 12 percent over the last decade. U.S. median income in 2014 (adjusted for inflation) was only $351 dollars above that of 1989 -- an average increase of only $14 a year over a quarter century. From 1999 to 2014, median income dropped 8 percent. No wonder the economic malaise led to a popular revolt in the 2016 primaries.

To be fair, other factors have also reduced jobs in the manufacturing sector. In fact, technological change and higher productivity reduced jobs in manufacturing in all of the advanced economies. But U.S. trade deficits made U.S. job losses especially severe. From 1997 to 2011, according to BLS data, the proportion of the U.S. workforce employed in manufacturing declined by 33%, while in trade surplus Japan the decline was only 22%, and in trade surplus Germany it was only 16%.

Trade deficits don’t only hurt a country’s workers and diminish its economic growth. The harm that they do goes much deeper. For instance, there’s the problem of the foreign debt. In order to import more than it exports, a country has to borrow from abroad or sell its assets to foreigners. When the U.S. began negotiating the General Agreement on Tariffs and Trade (GATT) in 1947, it was the world’s leading creditor. By the time the ninth round of negotiations had concluded in 1994, it had become the world’s leading debtor.

As a result of buying more imports than we export, according to Bureau of Economic Analysis (BEA) data released on Thursday, the net foreign debt of the American people at the end of 2015 was $7.4 trillion, 47% of our National Income. In other words, we have run up debt on foreign credit cards amounting to 47% of our annual income. We are already making interest payments and dividend payments on that debt, and, eventually, our older selves or our children will either have to default or pay it back.

The push toward globalization that began under FDR has in recent decades turned into a disaster for U.S. workers. The ideology called “free trade,” which accompanied this push, was the unique instrument of that disaster. But as our own studies have shown, free trade only works when trade is relatively balanced. Once trade gets out of balance, a country’s primary goal needs to be “balanced trade,” not “free trade.” The ideal prescription is “free and balanced trade,” as is the case of trade between the U.S. and Canada.

Unfortunately “free trade,” has become an ideology that is not backed by economic science. History teaches us that countries often engage in mercantilist practices, imposing barriers on imports and subsidies to exports and manipulating their exchange rates, actions that the noted economist John Maynard Keynes called “beggar-one’s-neighbor” policies. Japan, Germany, China, Mexico, Vietnam, Malaysia, and South Korea are some of the countries that have “beggared” and continue to beggar the United States.

During this decline, our leaders, Republican and Democrat, did nothing about the deficits, believing that increased trade, balanced or not, was good for all trading partners. But economics shows only that balanced trade is always advantageous to all trading partners and that free trade is only an appropriate policy when neither partner employs mercantilist practices. U.S. trade with Canada is balanced because neither country engages in practices that are designed to give itself trade surpluses, while giving its trading partner trade deficits.

The Congress, having learned nothing from the trade deficits of the preceding decades, gave fast-track authority to President Obama to negotiate the pending Trans Pacific Partnership, a multistate trade and regulatory agreement which permits currency manipulation. Like our previous trade agreements, it encourages American manufacturers to move production abroad by reducing uncertainty if they do so.

The TPP agreement is so unpopular that every presidential candidate still in the race, save John Kasich, has objected to it.

Given the disaster our mismanaged trade policy has been, it is no wonder that voters are rejecting their party’s leaders’ choices for presidential nomination. If policy elites listen and learn, they will adopt the policy of balanced trade, the policy position that has only been advocated by one candidate, Donald Trump. He has called for trade to be “fair and balanced” and has threatened tariffs upon trade surplus countries to bring this about.

Sanders has also attacked past trade deals and advocated for telling “corporate America in a very forceful way that they are no longer going to throw American workers on the street and build shiny new plants in China, Mexico, or low-wage countries." How he plans to more than talk on this issue is unclear.

If trade is balanced we don’t need to be concerned about our trading partners’ wage rates, nor do we need to be concerned about their environmental policies, nor do we need to be concerned about whether they manipulate exchange rates. Every trade agreement that we sign should require that trade be kept balanced.

The best way to balance trade is to apply tariffs or import limitations solely upon countries that have trade surpluses. We urge the application of a single-country-variable-tariff, which we call a scaled tariff, because its tariff rate would rise or fall automatically as the U.S. trade deficit with a trade surplus country rises or falls.

It would give trade surplus countries an incentive to buy more from us, or they would lose market share for their exports in our markets. Donald Trump said he would threaten tariffs upon the countries with which the U.S. has large chronic trade deficits (including China, Japan, and Mexico) in order to force them into negotiations.

The scaled tariff conforms to international rules which authorize trade deficit countries to impose trade balancing tariffs. President Nixon used that rule to impose an across-the-board 10% tariff in August 1971 which led to the negotiations that balanced U.S. trade by 1973. But the U.S. elite has failed to invoke this rule for four decades, despite exploding trade deficits.

If the U.S. is to prosper, U.S. international trade has to be brought into balance. But our nation’s leaders of both political parties have been doing next to nothing.

The Richmans co-authored the 2014 book Balanced Trade: Ending the Unbearable Costs of America’s Trade Deficits, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.

Although Donald Trump (Republican) and Bernie Sanders (Democrat) have both made opposition to U.S. trade policy a major plank of their surprisingly successful presidential campaigns, most elite “opinion leaders” in the media and politics continue to at-best condescend to these messages as a working-class phenomenon -- a movement by the “losers” in trade that fails to recognize the counterbalancing winners.

Few in the elite have yet begun to question their faith in free trade. And, as a result, it is unlikely that Congress, the executive branch, and other power centers will engage in the important rethink of U.S. trade policy that the public is calling for. Like Hillary Clinton and Ted Cruz in the current campaign, Mitt Romney in 2012, and Barack Obama in 2008, they give lip service to trade concerns, while planning to continue “free trade” policy once elected. But the voters are right, the elites are wrong. The trade jobs ‘winners’ are vastly outnumbered by those who lost millions of jobs. Why the mismatch? Our massive trade deficits.

If there is a single statistic that shows the major cause of the current malaise -- and surely it has many causes -- the trade deficit is foremost. It has worsened since 1975, as shown in the following graph:

In 1980, the U.S. trade deficit was $32 billion (in 2015 dollars). In 2008, it reached $800 billion (in 2015 dollars), no doubt contributing to the 2008-2009 recession. As a result of the global recession, the trade deficit shrank in 2009 to $434 billion (in 2015 dollars), and then it expanded again with the modest economic recovery to $530 billion in 2015. Had trade been in balance in 2015, our GDP would have been $18.5 trillion instead of $17.9 trillion. Had we kept trade in balance over the last four decades, we would now be experiencing great prosperity, not malaise.

Another problem is that trade deficits slow economic growth. The following graph shows U.S. annual GDP growth by decade:

Since 2006, U.S. economic growth has averaged a measly 2.1%, whereas, for the 50 years before 2006, the average growth rate was 4.0%. The U.S. economy has stagnated for an entire decade because hundreds of U.S. companies have moved some or all of their production of goods abroad and millions of productive manufacturing workers have lost their jobs.

According to Bureau of Labor Statistics (BLS) data released on Friday, U.S. manufacturing employment has dropped by 47,000 workers during the first two months of this year, and manufacturing employment has dropped by 12 percent over the last decade. U.S. median income in 2014 (adjusted for inflation) was only $351 dollars above that of 1989 -- an average increase of only $14 a year over a quarter century. From 1999 to 2014, median income dropped 8 percent. No wonder the economic malaise led to a popular revolt in the 2016 primaries.

To be fair, other factors have also reduced jobs in the manufacturing sector. In fact, technological change and higher productivity reduced jobs in manufacturing in all of the advanced economies. But U.S. trade deficits made U.S. job losses especially severe. From 1997 to 2011, according to BLS data, the proportion of the U.S. workforce employed in manufacturing declined by 33%, while in trade surplus Japan the decline was only 22%, and in trade surplus Germany it was only 16%.

Trade deficits don’t only hurt a country’s workers and diminish its economic growth. The harm that they do goes much deeper. For instance, there’s the problem of the foreign debt. In order to import more than it exports, a country has to borrow from abroad or sell its assets to foreigners. When the U.S. began negotiating the General Agreement on Tariffs and Trade (GATT) in 1947, it was the world’s leading creditor. By the time the ninth round of negotiations had concluded in 1994, it had become the world’s leading debtor.

As a result of buying more imports than we export, according to Bureau of Economic Analysis (BEA) data released on Thursday, the net foreign debt of the American people at the end of 2015 was $7.4 trillion, 47% of our National Income. In other words, we have run up debt on foreign credit cards amounting to 47% of our annual income. We are already making interest payments and dividend payments on that debt, and, eventually, our older selves or our children will either have to default or pay it back.

The push toward globalization that began under FDR has in recent decades turned into a disaster for U.S. workers. The ideology called “free trade,” which accompanied this push, was the unique instrument of that disaster. But as our own studies have shown, free trade only works when trade is relatively balanced. Once trade gets out of balance, a country’s primary goal needs to be “balanced trade,” not “free trade.” The ideal prescription is “free and balanced trade,” as is the case of trade between the U.S. and Canada.

Unfortunately “free trade,” has become an ideology that is not backed by economic science. History teaches us that countries often engage in mercantilist practices, imposing barriers on imports and subsidies to exports and manipulating their exchange rates, actions that the noted economist John Maynard Keynes called “beggar-one’s-neighbor” policies. Japan, Germany, China, Mexico, Vietnam, Malaysia, and South Korea are some of the countries that have “beggared” and continue to beggar the United States.

During this decline, our leaders, Republican and Democrat, did nothing about the deficits, believing that increased trade, balanced or not, was good for all trading partners. But economics shows only that balanced trade is always advantageous to all trading partners and that free trade is only an appropriate policy when neither partner employs mercantilist practices. U.S. trade with Canada is balanced because neither country engages in practices that are designed to give itself trade surpluses, while giving its trading partner trade deficits.

The Congress, having learned nothing from the trade deficits of the preceding decades, gave fast-track authority to President Obama to negotiate the pending Trans Pacific Partnership, a multistate trade and regulatory agreement which permits currency manipulation. Like our previous trade agreements, it encourages American manufacturers to move production abroad by reducing uncertainty if they do so.

The TPP agreement is so unpopular that every presidential candidate still in the race, save John Kasich, has objected to it.

Given the disaster our mismanaged trade policy has been, it is no wonder that voters are rejecting their party’s leaders’ choices for presidential nomination. If policy elites listen and learn, they will adopt the policy of balanced trade, the policy position that has only been advocated by one candidate, Donald Trump. He has called for trade to be “fair and balanced” and has threatened tariffs upon trade surplus countries to bring this about.

Sanders has also attacked past trade deals and advocated for telling “corporate America in a very forceful way that they are no longer going to throw American workers on the street and build shiny new plants in China, Mexico, or low-wage countries." How he plans to more than talk on this issue is unclear.

If trade is balanced we don’t need to be concerned about our trading partners’ wage rates, nor do we need to be concerned about their environmental policies, nor do we need to be concerned about whether they manipulate exchange rates. Every trade agreement that we sign should require that trade be kept balanced.

The best way to balance trade is to apply tariffs or import limitations solely upon countries that have trade surpluses. We urge the application of a single-country-variable-tariff, which we call a scaled tariff, because its tariff rate would rise or fall automatically as the U.S. trade deficit with a trade surplus country rises or falls.

It would give trade surplus countries an incentive to buy more from us, or they would lose market share for their exports in our markets. Donald Trump said he would threaten tariffs upon the countries with which the U.S. has large chronic trade deficits (including China, Japan, and Mexico) in order to force them into negotiations.

The scaled tariff conforms to international rules which authorize trade deficit countries to impose trade balancing tariffs. President Nixon used that rule to impose an across-the-board 10% tariff in August 1971 which led to the negotiations that balanced U.S. trade by 1973. But the U.S. elite has failed to invoke this rule for four decades, despite exploding trade deficits.

If the U.S. is to prosper, U.S. international trade has to be brought into balance. But our nation’s leaders of both political parties have been doing next to nothing.

The Richmans co-authored the 2014 book Balanced Trade: Ending the Unbearable Costs of America’s Trade Deficits, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.