On January 4, 2013, Rep. Marcy Kaptur (Democrat of Ohio)
H.R. 192, the Balancing Trade Act of 2013
that every $1 billion of trade deficit costs more than 5,000
In an effort to stem job losses as a result of the trade
deficit, I have also introduced and will fight passage of
, the Balancing Trade Act. This legislation requires the
President to take the necessary steps to eliminate or
substantially reduce a trade deficit the United States has
with any country if the trade deficit totals $10 billion or
more for three consecutive years. Some economists estimate
that each $1 billion in the trade deficit costs the United
States more than 5,000 jobs. H.R. 192 would ensure that those
job losses are stopped and the bill would prevent them from
occurring in the future.
Rep. Kaptur is correct about the job losses, but the problem
goes much deeper than that. The United States has been stuck in a
depression (a long period of economic stagnation with high
unemployment) since the fourth quarter of 2007 as a result of our
chronic trade deficits. The economics is quite simple. Trade
deficits subtract from aggregate demand and income while trade
surpluses add to aggregate demand and income.
In the chapter about mercantilism (the strategy of running
intentional trade surpluses) from his 1936 magnum opus, "
The General Theory of Employment, Interest and Money
", the great economist John Maynard Keynes pointed out that it is
normal for trade deficit countries to get stuck in depressions. He
)) favorable [trade] balance, provided it is not too large,
will prove extremely stimulating; whilst an unfavorable
balance may soon produce a state of persistent depression.
Kaptur's bill is quite short. It simply requires that the
President take some unspecified action "to create a more balanced
trading relationship" should another country run three consecutive
deficits in excess of $10 billion:
To require that, in cases in which the annual trade
deficit between the United States and another country is
$10,000,000,000 or more for 3 consecutive years, the
President take the necessary steps to create a more balanced
trading relationship with that country….
Action by the President- If in 3 consecutive calendar
years the United States has a trade deficit with another
country of $10,000,000,000 or more, the President shall take
the necessary steps to create a trading relationship with the
country that would eliminate or substantially reduce that
trade deficit, by entering into an agreement with that
country or otherwise.
It also requires that the President submit to Congress an
initial report and annual reports setting forth why the U.S. has
chronic trade deficits with each of those trading partners.
(1) INITIAL REPORT- Not later than 3 months after the
date of the enactment of this Act, the President shall submit
to the Congress a report setting forth--
the likely reasons for the trade deficits with each
country to which subsection applies, as of the date of the
)) the steps the President intends to take under subsection
with respect to each such country.
(2) ANNUAL REPORTS- The President shall submit to the
Congress, not later than December 31 of each year, a report
on actions taken to carry out this section.
But there is no need of a report. Commerce Department statistics
already reveal the names of the countries with which the United
States has had trade deficits of more than $10 billion for each of
the last three years. There are 10 such countries. The numbers
following each country's name is our approximate trade deficit in
2012 with that country. (These numbers include my guesstimates
regarding the, as yet unreported, 2012 service trade
- China - $296 billion
- Germany - $65 billion
- Japan - $61 billion
- Mexico - $49 billion
- Saudi Arabia - $32 billion
- India - $26 billion
- Russia - $17 billion
- Venezuela - $16 billion
- Thailand - $15 billion
- Nigeria - $12 billion
But this is not the list of trade manipulators that we should
use. We should immediately take the list down to 7 by crossing out
Mexico, India and Nigeria. Our trade deficits with them are caused
by triangular trade which does not hurt the United States. Although
these countries have chronic trade surpluses with the United
States, their trade is balanced with the world.
Furthermore, Germany should be removed, taking the list down to
6. The central banks of the other six manipulate their exchange
rates in order to perpetuate their trade surpluses, but Germany's
currency is the euro which is maintained by the European Central
Bank, and U.S. trade with the euro area, as a whole, is actually
balanced. A bill like this should treat each currency area as a
So, how do we balance trade with these six countries and any
others who follow their beggar-thy-neighbor path to prosperity. My
father, son and I wrote a 2008 book,
"Trading Away Our Future,"
in which we recommended auctioned import certificates to balance
trade. But since then, we have invented a better method, the scaled
tariff, and have had a professional article about it ("
The Scaled Tariff: A Mechanism for Combating
Mercantilism and Producing Balanced Trade
") published in a refereed academic journal.
In order to balance trade, the U.S. simply needs to place
tariffs upon imports from the trade surplus countries with which
the U.S. has a trade deficit. The rate of the tariff should be
scaled to the size of our trade deficit with each country. When the
trade deficit with a country goes up, the rate should go up. When
the trade deficit goes down, the rate should go down and when the
trade deficit approaches balance, the tariff should disappear
altogether. The tariff rate would, thus, give each trade surplus
country an incentive to take down its tariff barriers and let its
currency rise to a trade balancing level.
The rate of the tariff would be calculated quarterly so as to
take in 50% of the U.S. trade deficit with each trade surplus
country over the most recent four quarters. The second column in
the table below shows the initial tariff rate, based upon my
estimates of the 2012 trade data and the third column shows the
approximate amount of government revenue that would be produced in
2013, were the tariff applied today:
Initial Scaled Tariff /
Initial Tariff Revenue
The scaled tariff would give teeth to a trade balancing bill. It
would consist of the following key provisions:
Applied only to goods
. The Commerce Department would charge the Scaled Tariff on all
Goods originating from each trade surplus country with which the
United States had a sizable trade deficit in goods and services
over the most recent four quarters. The rate would be applied
upon the declared dollar value of such goods on the entry summary
Rate of duty designed to take in 50% of trade deficit
. The rate of the duty would be adjusted quarterly and calculated
as the rate that would cause the revenue taken in by the duty
upon imported goods from the particular country to equal 50% of
the trade deficit (both goods and services) with that country
over the most recent four economic quarters.
Rebated to exporters.
The Commerce Department would rebate Scaled Tariff payments to
U.S. exporters to the extent that they were paid on inputs to
those particular exports.
Suspended when trade reaches balance
. The Scaled Tariff would be suspended whenever the Commerce
Department determines that during the most recent calendar year
the current account of the United States was in surplus.
Collection would resume when the Commerce Department determines
that during the most recent calendar year the current account
deficit of the United States was at least 1% of United States
The scaled tariff would not be the only way to put teeth into a
trade balancing bill. In 1985 and 1987, Democratic Congressman and
future Majority Leader Dick Gephardt and Senators Levin and Riegel
wrote an excellent trade balancing bill that had teeth. As
originally written, Gephardt's bill would require the
- The International Trade Commission ((
)) would identify any country that: had a total U.S. bilateral
trade of $7 billion or more, had a total bilateral non-petroleum
surplus of $3 billion or more, and ((
)) exported 1.75 times more non-petroleum products to the United
States than it imported;
- The United States Trade Representative ((
)) would determine whether the above "excessive surplus"
countries maintained "unjustifiable, unreasonable, or
discriminatory" trade practices that adversely affected U.S.
commerce and contributed to their trade surpluses;
- The USTR would enter negotiations for 60 days (60 day
extension) with each country identified in steps 1 and 2. The
purpose of negotiations would be to achieve an annual 10 percent
reduction in trade surplus from the preceding year;
- If the USTR were unable to enter such an agreement, then the
President would take any of the actions specified that he
considers "necessary or appropriate." If action in the first year
did not achieve the reductions, then the President would be
required to limit imports to achieve the reductions;
- The President could allow less than a 10 percent reduction in
surplus, if the other country had balance of payments
difficulties; or waive Presidential retaliation, if such action
would harm the national economic interest. In each case, the
President would have to submit an alternative plan to Congress.
Congress could disallow the President's decision by joint
Proponents of Gephardt's bill argued that it correctly targeted
the largest and worst trade offenders, Japan and other countries
that had been intentionally produced large trade surpluses with the
United States through unfair trade practices that keep out American
products. They noted that it would not place any barriers upon the
products of countries with which the United States has little trade
or balanced trade.
The Gephardt provision forced the Reagan administration into
taking action against Japanese mercantilism. As a result of the
bilateral negotiations that ensued, the Japanese car automobile
companies agreed to restrict their exports of vehicles to the
United States, and so they built automobile factories in the United
States which have benefited American workers and parts
manufacturers ever since.
Unfortunately, Congress did not enact the Gephardt bill because
they were told that it would violate GATT, the predecessor to the
World Trade Organization. If they had passed it, U.S. trade would
be balanced today and the U.S. would be a much more prosperous
The scaled tariff was written in order to comply with WTO rules.
It takes advantage of a special rule which lets trade deficit
countries impose trade balancing duties, so long as those duties
were applied in a way that does not discriminate between countries.
President Nixon made use of this particular rule when he imposed an
across-the-board 10% tariff in August 15, 1971 which balanced U.S.
trade by 1973.
Moreover, the scaled tariff is immune to retaliation. If a trade
surplus country retaliated by increasing its barriers to American
products, it would be automatically raising the tariff rate on its
products. Its effects would be quite beneficial for three
- The trade surplus countries would take down their barriers to
American products or lose market share in the United States.
- The United States would import more from countries that buy
more from the United States when we buy more from them.
- U.S. exports would increase and U.S. imports would decrease.
U.S. manufacturing would become more profitable resulting in more
investment in technology, tools and structures. U.S. economic
growth would surge.
In 1933, Britain was in a similar situation to the one that the
United States is in today. It had been in a depression since 1925
due to large trade deficits that resulted when Britain set an
overly-high exchange rate and France and the United States set
overly low exchange rates. Britain got right out of its depression
in 1933 by enacting tariffs on the trade surplus countries, but not
upon its primary trading partners. The British Commonwealth
established the commonwealth preference system in which they traded
freely among themselves, but placed high tariffs upon the rest of
The only disadvantage of the scaled tariff is that the costs of
some goods would rise for consumers. However, higher incomes would
more than make up for higher prices. The American people are way
ahead of Congress in their understanding of this:
- An October 2007
Wall Street Journal
/NBC News poll found that 59 percent of
agreed with the statement that: "Foreign trade has been bad for
the U.S. economy, because imports from abroad have reduced demand
for American-made goods, cost jobs here at home, and produced
potentially unsafe products."
- Similarly, a
conducted in April 2010 for the Alliance for American
Manufacturing found that 71% of the American people would:
"Impose tariffs on products from China unless it stops cheating
on its trade commitments with the United States."
- A December 2010 National Review/Allstate 2010 poll found that
68 percent of respondents supported a policy requiring that "a
certain percentage of every high-end manufactured product, such
as automobiles, heavy machinery, and transportation equipment,
sold in the U.S. be produced or assembled within the U.S., even
if that means higher prices for their products."
Balancing trade is essential in order to restore American
manufacturing jobs, manufacturing investment, and economic
prosperity. Rep. Kaptur is on the right track. But a balancing
trade bill needs teeth.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
ISM Manufacturing Weaker Than Expected