GM and the Balance of Trade

A huge outcry has been generated by a General Motors announcement that it is planning to import cars from China. Ford has also announced that it is planning to move its production of its Focus auto to Mexico.

Why the outcry? Because GM was bailed out by Pres. Obama in obedience to the United Auto Workers’ request. And the UAW became an owner, displacing many creditors. But GM was not obligated by the terms of the bailout not to import motor vehicles that it produces abroad. So what’s the beef? Mercedes, Volkswagens, and BMWs are being imported from Germany, Toyota and Nissan are being imported from Japan, Hyundai, Samsung, and Kia are being imported from Korea, Fiat, Maserati, and Lamborghini from Italy, Renault and Citroen from France. Why shouldn’t GM and Ford import autos they make abroad?

The problem is not with importing foreign cars. It is the fact that we have huge trade deficits with China, Germany, and Japan, and trade deficits with Korea and Mexico. China, Germany, and Japan sell to us but do not buy enough from us, resulting in trade deficits and a decline of jobs in the U.S. Apple produces its major products in China and has closed its factories in the U.S. It is more Chinese than it is American. So are Hewlett-Packard and dozens of other American companies. There is nothing wrong with that so long as the countries in which they produce their products buy as much from us as we import from them. The five countries mentioned above do not. We have trade deficits with each of them, which has led to the loss of millions of job and a slowing of the growth of the U.S. economy.

Let there be no illusions -- countries which have chronic trade surpluses with us are pursuing what the late great economist Prof. John Maynard Keynes called beggar-one’s-neighbor policies. They grow their economies at our expense. They have decimated American manufacturing, forcing layoffs of millions of American workers and causing the American standard of living to stagnate, if not decline. And our government, led by both the Republicans and Democrats, has ignored this disaster in the making for decades, converting the U.S. from the world’s leading creditor to the world’s leading debtor at the same time.

The U.S. has pursued a policy of free trade for which there is no economic rationale. My mentor, the late Prof. Milton Friedman, was a “free trader”. But that was when the U.S. was the leading creditor nation. Economics teaches that balanced trade, no matter what barriers to trade countries impose, is beneficial to both trading partners. Of course, the ideal is “free and balanced trade”. It is not necessary to have balanced trade with every trading partner. But with important trading partners like China, Japan, Germany, Korea, and Mexico it is a disaster to ignore trade deficits that in the case of China, Germany, and Japan have lasted for years, decades in the cases of Germany and Japan. The American worker has borne nearly the entire burden. American manufacturers who were affected simply closed their factories here and moved them abroad in order to be able to compete with foreign competitors.

There is a relatively simple solution to the problem of chronic trade deficits which have had disastrous effects on the U.S. economy that conforms to the rules of international trade. Countries experiencing chronic trade deficits with another country may under World Trade Organization rules take legal defensive action and impose a single-country-variable tariff, called the “Scaled Tariff” (described at length in the book Balanced Trade (Lexington Books, 2014) by Jesse T. Richman, Howard B. Richman, and Raymond L. Richman. The tariff rises as the trade deficit rises and falls as trade becomes more balanced. 

Is it too much to ask Congress to avoid ideological slogans like “Free Trade” and adopt a policy designed to achieve balanced trade?

Donald Trump has mentioned the need to balance trade and wants to do something about it. The economists advising him should recommend the “Scaled Tariff” which will provide us with a huge amount of revenue while trade gets balanced. Of course, the price of products produced abroad will rise, but that is a small price to pay to get rid of the huge damage being caused by the trade deficits. The federal government will collect substantial tariff revenue. So far as American companies who have chosen to move to China, they should be considered Chinese companies. Foreign car manufacturers from Germany, Japan, and Korea will face substantial tariffs which will favor producing cars in the U.S. And the prices of other products imported from these countries will rise giving a significant boost to manufacturing in the U.S.