The Scaled Tariff: A Mechanism for Combating Mercantilism
and Producing Balanced Trade
Jesse T. Richman
Assistant Professor, Department of Political Science and Geography,
Old Dominion University
Howard B. Richman
Research Associate, Ideal Taxes Association
Professor Emeritus, Graduate School of Public and International Affairs,
University of Pittsburgh
In this article we first discuss whether or not the modern form of
mercantilism that contributes to the trade deficit of the United States
and other countries is a self-destructive and thus self-correcting strategy.
We argue that it is not self-correcting. Then we discuss mechanisms
that a trade-deficit country could utilize in order to produce balanced
trade. The mechanisms differ in six respects, with the Scaled Tariff
excelling in each.
Keywords: free trade, import certificate, mercantilism, tariff, trade
The United States has run a trade deficit in goods and
services for more than two decades. There have been important policy arguments
about whether and to what extent balancing trade should be a policy priority.
Classical economists believed that free market forces would correct trade
imbalances automatically. But the evidence is clear that the
U.S. trade deficit has been growing at a rapid pace during the last two
decades, and market forces have been largely ineffective in restoring
a trade balance .
Some economists attribute the enduring U.S. trade deficit to a new form
of mercantilism by Americas trading partners, dubbed monetary mercantilism
by Joshua Aizenman and Jaewoo Lee (2005), who defined it as hoarding
international reserves in order to improve competitiveness. Under
the classical form of mercantilism, countries encouraged exports and discouraged
imports in order to build up their gold hoards. Under the new form, countries
build up their foreign currency reserves as part of currency manipulations
designed to encourage exports and discourage imports.
Japan had gradually invented monetary mercantilism in the years following
World War II. Then Taiwan, the Asian Tigers, and China copied the policy
that had converted Japan from a weak and backward economy to a world powerhouse.
In recent years, more and more countries have been joining the bandwagon,
with the United States as their primary target. They have accumulated
dollar assets in order to manipulate currency values and preserve the
conditions that produce trade surpluses for them and trade deficits for
the United States. Chinas foreign exchange reserve buildups have outstripped
all the others put together. Navarro and Autry (2011) summarized the disastrous
effect of Chinese mercantilism upon the U.S. economy:
Chinas weapons of job destruction include massive
illegal export subsidies, the rampant counterfeiting of U.S. intellectual
property, pitifully lax environmental protections, and the pervasive use
of slave labor. The centerpiece of Chinese mercantilism is, however, a
shamelessly manipulated currency that heavily taxes U.S. manufacturers,
extravagantly stimulates Chinese exports, and has led to a ticking time
bomb U.S.-China trade deficit close to a billion dollars a day.
The belief in the United States is now widespread that free trade is
not working. A solid majority of the American people favour steps that
would shift U.S. trade toward a new policy. A December 2010 national poll
(National Review/Allstate 2010) contained an extensive battery of questions
on trade and U.S. manufacturing. The poll revealed strong public majorities
against free trade. For example, 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 United States be produced or assembled within the United States,
even if that means higher prices for their products. Similarly,
only 21 percent of respondents favoured the pursuit of more free trade
agreements, as opposed to 73 percent who favoured either tariffs or subsidies
to strengthen Americas competitive position.
Yet American policy makers and economists have been reluctant to take
any action to balance trade. They have argued that the best response to
mercantilism is a policy of unilateral free trade because mercantilism
is a self-destructive strategy which eventually corrects itself. But if
they are wrong, then the obvious response to mercantilist-produced trade
deficits would be a counter strategy which requires balanced trade. In
this article, we first discuss whether or not the modern form of mercantilism
is a self-destructive and thus self-correcting strategy. Then we discuss
mechanisms that a trade-deficit country could utilize in order to produce
Mercantilism a Self-destructive Strategy?
The Obama administration and the Federal Reserve have relied upon jawboning
in order to persuade the Chinese government to change from its mercantilist
strategy. For example, in his January 22 written testimony at his Senate
confirmation hearing, Treasury Secretary designate Timothy Geithner (2009)
indicated that he would seek to persuade China to change policy in its
More generally, the best approach to ensure that countries do
not engage in manipulating their currencies is to demonstrate that the
disadvantages of doing so outweigh the benefits. If confirmed, I look
forward to a constructive dialogue with our trading partners around the
world in which Treasury makes the fact-based case that market exchange
rates are a central ingredient to healthy and sustained growth.
Federal Reserve Chairman Ben Bernanke (2010) gave similar advice to countries
that were practicing monetary mercantilism:
Third, countries that maintain undervalued currencies may themselves
face important costs at the national level, including a reduced ability
to use independent monetary policies to stabilize their economies and
the risks associated with excessive or volatile capital inflows....
Perhaps most important, the ultimate purpose of economic growth is to
deliver higher living standards at home; thus, eventually, the benefits
of shifting productive resources to satisfying domestic needs must outweigh
the development benefits of continued reliance on export-led growth.
Geithner and Bernanke were echoing arguments given by the classical economists
of the 18th and 19th centuries that mercantilism is a self-destructive
strategy. But in his chapter about mercantilism in his 1936 magnum opus,
The General Theory of Employment Interest and Money, Keynes questioned
the conclusions of the classical economists. He reported that he had changed
his own opinion after discovering that mercantilism works:
So lately as 1923, as a faithful pupil of the classical school who
did not at that time doubt what he had been taught and entertained on
this matter no reserves at all, I wrote: If there is one thing
that Protection can not do, it is to cure Unemployment.
There are some arguments for Protection, based upon its securing possible
but improbable advantages, to which there is no simple answer. But the
claim to cure Unemployment involves the Protectionist fallacy in its
grossest and crudest form. As for earlier mercantilist theory,
no intelligible account was available; and we were brought up to believe
that it was little better than nonsense. So absolutely overwhelming
and complete has been the domination of the classical school. (p. 334)
Later in that chapter, Keynes summarized the argument for mercantilism
from the standpoint of its practitioners and against mercantilism
from the standpoint of its victims:
(A) 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. (p. 338)
Other economists have experienced a similar change of position. For example,
in their international economics textbook, Krugman and Obstfeld (2000)
argued that classical economist David Hume had proven that mercantilism
cannot work. But a decade later Krugman (2010) argued that the U.S. failure
to respond to Chinas predatory trade policy creates a world
in which mercantilism works.
The classical argument against mercantilism had three components: (1)
the comparative advantage argument of David Ricardo, (2) the reduced consumption
argument of Adam Smith, and (3) the market forces balance trade argument
of David Hume. We will discuss these three arguments in turn.
Comparative Advantage Argument
The advantages of international trade based on comparative advantage
are clear. Each country specializes in what it can produce with a comparative
advantage and exchanges those for products that other countries produce
with a comparative advantage. Each country trades a bundle of goods it
can produce more efficiently for a bundle of goods the other country can
produce more efficiently. In 1821, David Ricardo (1911) summarized the
case for free trade as follows:
Under a system of perfectly free commerce, each country naturally devotes
its capital and labour to such employments as are most beneficial to
each. This pursuit of individual advantage is admirably connected with
the universal good of the whole. By stimulating industry, by rewarding
ingenuity, and by using most efficaciously the peculiar powers bestowed
by nature, it distributes labour most effectively and most economically:
while, by increasing the general mass of productions, it diffuses general
benefit, and binds together, by one common tie of interest and intercourse,
the universal society of nations throughout the civilized world. It
is this principle which determines that wine shall be made in France
and Portugal, that corn shall be grown in America and Poland, and that
hardware and other goods shall be manufactured in England. (p. 81)
In this context, government interventions that distort market incentives
are unambiguously bad. For instance, a tariff that limits trade would
make both countries worse off than they otherwise would be. But what would
be the result if trade is out of balance? What if Country A produces both
those products with which it has a comparative advantage as well as those
products that Country B produces with a comparative advantage and trades
both to Country B in return for Country Bs IOUs?
And what if comparative advantage is not something fixed, such as the
advantage that Portugal and France have with the production of wine in
Ricardos example? What if comparative advantage in manufacturing is based
upon economies of scale, as Gomory and Baumol (2000) demonstrated? Then
can Country A obtain Country Bs comparative advantage?
Normally when trade is balanced, jobs that are lost competing with imports
are replaced by even more productive and better paying jobs producing
exports. But when trade is kept imbalanced by Country A, there are not
as many jobs producing exports in Country B. Country As workers gain
jobs and incomes, while Country Bs workers lose jobs and incomes. Country
A gains industries, and Country B gets debt.
Smiths Consumption Argument
Adam Smith deserves much credit for ending the era of mercantilism which
dominated the economic policies of the European powers from the 16th through
18th centuries. According to that doctrine, the goal of economic policy
was the accumulation of gold. To accomplish that end, mercantilist countries
limited their imports and maximized their exports, which limited the growth
Smiths chief argument, in his magnum opus Wealth of Nations, was that
mercantilism hurts the economy of the country practising it because it
hurts consumers in order to benefit producers. He wrote:
Consumption is the sole end and purpose of all production; and the
interest of the producer ought to be attended to only so far as it may
be necessary for promoting that of the consumer. The maxim is so perfectly
self-evident that it would be absurd to attempt to prove it. But in
the mercantile system the interest of the consumer is almost constantly
sacrificed to that of the producer; and it seems to consider production,
and not consumption, as the ultimate end and object of all industry
and commerce. (iv.8.49)
But Smith missed a short-run vs. long-run dimension. According to modern
mercantilist theory, the mercantilist country sacrifices consumption in
the short run in order to get even more consumption in the long run. The
late University of Chicago Professor Jacob Viner (1948) laid out the twin
goals of mercantilism as the following: (1) maximizing a countrys power
through accumulation of foreign assets and (2) maximizing long-term consumption
by delaying present consumption in favour of future consumption.
In order to accomplish these ends, it places tariffs (and other barriers)
upon foreign products while at the same time buying foreign assets (mainly
interest-bearing bonds today; gold in the past). In other words, mercantilist
governments maximize their power and their peoples future consumption
through the combination of import barriers and foreign loans.
Heng-Fu Zou (1997), then a World Bank senior economist and now dean of
the China Economics and Management Academy at Central University in Beijing,
demonstrated mathematically that Viners goals are compatible. First,
he found that the more the mercantilist country was willing to sacrifice
present consumption by accumulating foreign assets, the more power the
mercantilist government would gain and the more consumption the mercantilist
people would have in the long run. Second, he found that the more successfully
a mercantilist government applied tariff barriers to foreign consumer
products, the more it would gain in wealth and power and the more its
people would gain in long-run consumption.
Zou did not address the effect of mercantilism upon trading partners.
In fact, he assumed for the purposes of mathematical tractability that
the mercantilist country was a small economy with little effect upon its
trading partners. But it is obvious that the effect upon the trading partner
is exactly reciprocal to the effect upon the country practising mercantilism.
The trading partner gets increased consumption in the short run in return
for reduced consumption and power in the long run.
Humes Market Forces Balance Trade Argument
The third classic argument against mercantilism was the gold-flow theory
presented by David Hume (1742) in Part II of his Essay on the Balance
of Trade, an essay that influenced Adam Smiths writing. Hume began:
Can one imagine, that it had ever been possible, by any laws,
or even by any art or industry, to have kept all the money in SPAIN, which
the galleons have brought from the INDIES? Or that all commodities could
be sold in FRANCE for a tenth of the price which they would yield on the
other side of the PYRENEES, without finding their way thither, and draining
from that immense treasure? What other reason, indeed, is there, why all
nations, at present, gain in their trade with SPAIN and PORTUGAL; but
because it is impossible to heap up money, more than any fluid, beyond
its proper level? The sovereigns of these countries have shown, that they
wanted not inclination to keep their gold and silver to themselves, had
it been in any degree practicable. (ii.v.12)
According to this argument, imbalanced trade cannot long last under a
gold standard. If a trade-surplus country were to collect gold from its
trade-deficit trading partners, the increased money supply in the trade-surplus
country would cause its wages and prices to go up. Meanwhile the reduction
in the money supply in the trade-deficit countries would cause their wages
and prices to fall. The change in the relative costs of production would
However, Hume never figured on the modern version of mercantilism in which
the government of the mercantilist country stocks up on the currency of
the deficit country and uses it to buy financial assets in the deficit
country. These are acts which are appropriately called mercantilism because
they are intended to perpetuate the surplus of exports over imports and
they short-circuit the normal market correction no matter whether the
world is on a gold standard or on a standard of freely traded currencies.
A modern version of Humes argument holds that the capital inflows that
accompany trade deficits benefit the country that receives the capital.
When one country has higher returns on capital (i.e., higher interest
rates), capital tends to flow into it. This capital will produce fixed
investment, as did the inflow of capital to the United States during the
19th century or the inflow of capital that helped rebuild Europe after
World War II. The resulting economic growth will make up for the temporary
trade deficits and balance trade in the long run.
But while private capital indeed flows to where it can obtain the highest
return, public capital does not. Mercantilist governments buy foreign
financial assets even when the rates of return on capital are higher in
their own country than abroad. They even suppress their own peoples access
to credit in order to collect this capital and make loans abroad.
Moreover, the effect on the recipient country of financial inflows may
be detrimental. Prasad, Rajan, and Subramanian (2007) found that the more
a nonindustrial country was importing financial capital, the slower its
growth. They concluded that the deleterious effect of the foreign capital
is due to the resulting higher exchange rate that makes the recipient
countrys exports less competitive in world markets. They wrote:
To summarize, we have presented evidence that capital inflows can result
in overvaluation in nonindustrial countries and that overvaluation can
hamper overall growth. To bolster this claim, we have shown that overvaluation
particularly impinges on the growth of exportable industries.
Despite the empirical evidence that foreign financial capital hurts nonindustrial
countries, Prasad et al. contended, without providing any evidence, that
the inflow of financial capital may benefit industrialized countries.
Indeed this is possible, but foreign capital only makes an economic contribution
to growth and employment when it is invested in new productive assets.
The purchase of financial and existing assets instead leads to house-
or stock-price bubbles or increased consumption of consumer goods, providing
only short-term benefit. Eventually, the loans must be paid back with
interest even though they have already adversely affected the industries
that compete in world markets.
Figure 1 illustrates a similar pattern in an analysis of all world economies
running trade deficits or surpluses in excess of 5 percent of GDP. When
countries run large current account deficits they accumulate debt in one
form or another. And this debt can later cause serious economic harm.
Figure 1 compares the growth rates of countries that ran large average
current account deficits (more than 5 percent of GDP) in the 2002 to 2007
period with growth rates for countries that ran large current account
surpluses during this period (more than 5 percent of GDP).
For the 2002 through 2007 period there are differences - the average growth
rate was higher for countries with surpluses. The differences are even
more pronounced in the 2010 growth estimates. Countries with a history
of running trade surpluses have recovered rapidly from the 2008 financial
crisis and recession and are growing quickly. Countries with a history
of running current account deficits have not. This is the pattern Keynes
(1936) predicted, and it directly contradicts classical theory.
In the case of the United States, it is not clear that the net loans associated
with trade deficits provided investment benefits. Indeed, it is possible
that such loans simultaneously lowered interest rates and took away investment
opportunities during the 1998 to 2009 period. Figure 2 shows that net
investment in American manufacturing, which averaged 1.00 percent of U.S.
GDP per year from 1947 through 1996, fell to just 0.35 percent of GDP
from 1998 to 2007.
Figure 1 Consequences of current account deficits and surpluses
for economic growth (IMF data; analysis by the authors).
In the case of the United States, it is not clear that the net loans
associated with trade deficits provided investment benefits. Indeed, it
is possible that such loans simultaneously lowered interest rates and
took away investment opportunities during the 1998 to 2009 period. Figure
2 shows that net investment in American manufacturing, which averaged
1.00 percent of U.S. GDP per year from 1947 through 1996, fell to just
0.35 percent of GDP from 1998 to 2007.
In summary, although monetary mercantilism reduces short-term consumption,
it increases long-term consumption and power in the mercantilist country.
Meanwhile, it has the exact opposite effect upon its trading partners,
giving them short-term gains in consumption combined with long-term losses
in consumption and power. Furthermore, market mechanisms do not correct
the resulting trade imbalances, nor do they compensate for the long-term
shift in production and consumption towards the mercantilist.
Figure 2 Net manufacturing investment in the United States (source:
BEA tables 3.7ES, 3.6ES, and 1.1.5).
for Balancing Trade
What if a country is trading with mercantilist trading partners and doesnt
wish to exchange short-term gains in consumption in return for long-term
losses in consumption and power? What can the trade-deficit country do?
There are a variety of approaches it might take. In this section we present
four interventions in free markets that have been proposed in order to
balance trade. All aim to counter mercantilism without becoming mercantilist.
The first two proposals utilize import licenses, called Import Certificates
(ICs), to balance trade. The second two proposals utilize tariffs. The
proposal which we believe most likely to succeed is the Scaled Tariff.
Import Certificate Plan
Financier and businessman Warren Buffett first proposed ICs to balance
trade in a Fortune Magazine article (Buffett and Loomis, 2003).
His proposal may have been modeled upon the cap-and-trade
plans that had successfully reduced pollution, but instead his plan would
cap imports to the level of exports, thereby balancing trade. Buffett
We would achieve this balance by issuing what I will call Import Certificates
(ICs) to all U.S. exporters in an amount equal to the dollar value of
their exports. Each exporter would, in turn, sell the ICs to parties
- either exporters abroad or importers here - wanting to get goods into
the U.S. To import $1 million of goods, for example, an importer would
need ICs that were the byproduct of $1 million of exports. The inevitable
result: trade balance.
Under the Buffett plan, whenever American producers exported American
products abroad, they would earn ICs that they could profitably sell to
prospective importers. Meanwhile, imports would face the additional cost
of the required ICs.
In September 2006, Senators Byron Dorgan and Russ Feingold fleshed out
the Buffett Plan into bill form, which they named the Balanced Trade Restoration
Act of 2006. Their bill would have the Department of Commerce issue ICs
(which they called Balanced Trade Certificates) directly to exporters.
Each $1 of exports (based upon the appraised value declared on the shippers
export declaration) would earn the exporter a $1 IC, which the exporter
could then freely market to importers of goods to the United States. The
value of imports allowed by an IC would change over time. During the first
year of the program, a $1 certificate would allow up to $1.40 of imports,
during the second year, $1.30 of imports, during the third year, $1.20,
and so on until by the fifth year $1 of exports would allow $1 of imports.
The exporters would freely market the ICs to those who wished to import
goods, and the Commerce Department would require that the certificates
be submitted with imports.
Dorgan and Feingolds bill exempted oil and gas imports from the IC requirement
during the first five years of the program and then phased them in thereafter,
perhaps so that, as Papadimitriou, Hannsgen, and Zezza (2008) pointed
out, the ICs would be less expensive, since demand for fuel products is
relatively inelastic. On the other hand, requiring ICs for fuel imports
would have given American consumers an incentive to conserve fuel products
and American producers an incentive to produce more fuel products.
Import Certificate Plan
Richman et al. (2008) developed a Targeted IC Plan in which the ICs would
be auctioned by the government and would be country specific. The targeted
ICs were designed to gradually balance trade over a five year period with
countries that practice mercantilism, as evidenced by excessive foreign
exchange reserve accumulations by their governments. The plan had five
- Auctioned in the open market. The targeted ICs would be auctioned
monthly by the Treasury Department in the open market.
- Expire in six months. Each targeted IC would expire if not
used within six months of the date that it was issued and would not
be tradable in the open market.
- Each targeted IC permits a certain value of imports. Possession
of the targeted IC by physical or electronic means would enable the
bearer to import a specific value of goods or services from the targeted
country. Each targeted IC could only be used once.
- Reduce trade imbalance over five years. The targeted ICs
would be issued in the proper quantities in order to gradually reduce
the maximum trade ratio between American exports to a country and
American imports from that country over a five year period. The trade
ratio every year during the first five year period would be lower
than the trade ratio of the preceding year, but the rate of decline
from month to month would be set by the Treasury Secretary.
- Not needed when trade approaches balance. Whenever the actual trade
ratio were to fall below 1.05:1 over a calendar year, the Treasury
Secretary would cease auctioning the targeted ICs and would cease
requiring that they accompany imports of goods and services from the
targeted country. If, after that, the trade ratio were to increase
to over 1.15:1 over a calendar year, the targeted IC program could
be re-instated with that country at the discretion of the Secretary
of the Treasury.
Targeted ICs preclude trade retaliation. If a mercantilist government
were to respond with counter-restrictions of its own, it would actually
be reducing the amount of its own exports to the country issuing the certificates.
Rate Reform Bills
During the 2009-2010 Congress, two currency rate reform bills were proposed
to target currency manipulations. The Currency Exchange Rate Oversight
Reform Bill was introduced by Senator Charles Schumer, and the Currency
Reform for Fair Trade Act was introduced by Representative Timothy Ryan.
Each bill had a different method for determining whether a country was
manipulating its currency and the extent of those manipulations. The Senate
bill relied upon the Treasury Secretary to make that determination, while
the House bill relied upon statistics that are voluntarily reported by
governments to international organizations.
Both bills provided for the U.S. Commerce Department to assess the amount
that a currency is overvalued when deciding individual industry-by-industry
antidumping and countervailing duty suits. The result would be many suits
on the Commerce Departments docket that would be expensive and time consuming
for each individual industry to put together. Any tariffs that would be
applied would be piece-meal, not across the board.
University of Maryland business professor Peter Morici (2008), a former
director of the Office of Economics at the U.S. International Trade Commission,
was the first to propose a tariff for which the rate would go up or down
depending upon actions that cause a trade deficit. He proposed a dollar-yuan
conversion tax that would be applied to Chinese imports into the United
States at a rate that would be adjusted to the rate of Chinese currency
market interventions. He wrote:
China subsidizes exports by selling its currency, the yuan, for dollars
at artificially low values in foreign-exchange markets, making Chinese
goods artificially cheap at Wal-Mart. The U.S. government should tax
dollar-yuan conversions at a rate equal to Chinas subsidy until China
stops manipulating currency markets. That would reduce imports from,
and increase exports to, China.
However, the central bank involved in these currency market interventions
may or may not choose to report them. China, for example, reports only
the dollar value of its foreign exchange reserves to international organizations,
not their currency composition.
Moreover, China is not the only country that intervenes in currency markets
in order to manipulate currency exchange rates. Bernankes (2010) figure
8 shows that 13 of the 16 emerging market governments that Bernanke considered
had devoted more than 3 percent of their countries GDP to currency market
interventions (i.e., accumulating currency reserves) from September 2009
to September 2010.
We have proposed a Scaled Tariff that is similar to Moricis proposal.
But instead of being designed to take in 100 percent of voluntarily reported
currency conversions as tariff revenue, it is designed to take in 50 percent
of the bilateral trade deficit (goods plus services) as revenue. It would
be applied to all countries that have had a sizable trade surplus with
the United States over the most recent four economic quarters.
The country with both a current account deficit and a foreign debt would
simply charge the Scaled Tariff at the appropriate duty rates upon imported
goods from the trade-surplus countries while rebating Scaled Tariff payments
to U.S. exporters to the extent that they were paid on inputs to those
Heres how the numbers of the Scaled Tariff would work with China in a
particular year. In 2009 the United States imported $305 billion of goods
and services from China, while China imported $86 billion of goods and
services from the United States, creating a trade deficit of $219 billion.
An initial tariff rate of 37 percent on $297 billion of imported goods
from China would be designed to collect $109.5 billion (50 percent of
$219 billion) in tariff revenue, if the trade deficit were to continue
at the 2009 level.
The specifics of the Scaled Tariff, if enacted by the United States, would
be the following:
- Applied only to goods. The Commerce Department would charge
the Scaled Tariff on all goods originating from each country with
which the United States had a sizable trade deficit in goods and services
of at least $500 million over the most recent four quarters. The rate
would be applied upon the declared dollar value of such goods on the
entry summary form.
- Rate of duty designed to take in 50 percent 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 percent 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 determined that during
the most recent calendar year the current account of the United States
was in surplus. Collection would resume when the Commerce Department
determined that during the most recent calendar year the current account
deficit of the United States was at least 1 percent of United States
The Scaled Tariff differs from the currency reform bills in that (1)
the duty rate is determined from readily available statistics that each
country collects about its own trade, (2) the rate of the duty gets reduced
as trade moves toward balance, and (3) the duty rate is applied across
the board to all goods arriving from that country.
of the Balanced Trade Plans
In this section, we will discuss the four proposals in terms of their
benefits, their administrative costs, and their legality under international
of the Plans
The Buffett Plan, the Targeted IC Plan and the Scaled Tariff are all
designed to balance trade. The currency reform bills only balance trade
if mercantilist countries decide to give up their trade manipulations
in response. If they instead decide to respond with counter tariffs, the
currency reform bills reduce exports as well as imports.
Not all of the plans produce perfectly balanced trade. The Buffett Plan
provides a guaranteed path to balanced trade since, after a certain period
of time, it only permits imports that total the same value as exports
into a country. The Targeted IC Plan only applies to currency-manipulating
countries, so it only balances trade with those countries and allows trade
from the currency-manipulating countries to be routed through a non-currency
The Scaled Tariff would largely balance trade since it applies to all
countries with which a trade-deficit country has significant trade deficits.
If trade to a trade-deficit country is rerouted by a trade-surplus country
through a non-trade surplus country, it can produce a trade surplus in
that country, which would cause the Scaled Tariff to be applied to that
The Buffett Plan has the additional benefit of providing export subsidies
from the sale of the ICs to the trade-deficit countrys exporting industries.
In a commentary endorsing Buffetts plan, Ralph Gomory (2010) pointed
out that balancing trade and rewarding productivity are the two components
that are needed in order for a country to recover industries it has been
losing due to manipulations of manufacturing comparative advantages.
In a Levy Economics Institute working paper, Papadimitriou, Hannsgen,
and Zezza (2008) analyzed the costs and benefits of the Buffett Plan,
making quantitative estimates of the effects. They pointed out that the
Buffett Plan would cause an immediate macroeconomic boost to the economy,
increase profits of businesses that produce for export, increase government
tax collections (because it would increase American income), and reduce
the trade deficits to a sustainable level.
The Targeted IC Plan and the Scaled Tariff would also revive exporting
industries by increasing exports, although neither plan would provide
the direct subsidies associated with the Buffett Plan. If the mercantilist
governments refused to increase their imports, then the trade-deficit
country would increase its imports from countries that themselves import
more when their economy grows.
All but the currency manipulation bills would provide significant amounts
of government revenue from tariffs or the selling of the ICs in the first
years of the plan. That government revenue would be gradually replaced
by increased income for producers of tradable goods as investments in
new production would move trade toward balance.
The currency reform bills, however, would only provide a modest boost
to government revenue and to the income of import-competing industries.
If the currency-manipulating countries retaliated by further restricting
their imports, these bills could end up protecting import-competing industries
at the expense of exporting industries.
The currency reform bills require that each industry seeking tariffs
put together a legal antidumping case that would be adjudicated by the
Commerce Department. Such procedures are expensive, both to the Department
and to the affected industries.
The two IC plans require that a new government bureaucracy be set up to
administer the ICs. In addition, they add a new cost to businesses, the
cost of obtaining the ICs in order to obtain imports. Papadimitriou et
al. argue that these costs would produce significant uncertainty on the
part of businesses needing imported products. But importers and exporters
already deal with future uncertainty in foreign trade due to changing
exchange rates. Both IC plans would place expiration dates upon the ICs
so that the futures market for ICs would be liquid.
Papadimitriou et al. also pointed out that if, as under the Buffett Plan,
ICs could be earned by service exports, not just goods exports, this would
create a large incentive to fraudulently obtain ICs from intra-corporate
transactions. The Targeted IC Plan and the Scaled Tariff avoid this problem
because they do not provide export subsidies.
The Scaled Tariff has the lowest administrative costs of all of the plans.
Countries already calculate the trade statistics that are used to determine
the duty rate. Countries already have customs at their borders that determine
the value of imported goods. There is no danger of ICs losing liquidity,
since there would be no ICs. The administrative cost would be negligible.
under International Law
In an Economics Policy Institute working paper, Stewart and Drake (2009)
discussed the legality of the various IC plans in terms of international
law. They held that auctioning ICs, as in the Targeted IC Plan, would
be more consistent with WTO rules than distributing them to exporters,
because providing the certificates to exporters would lead to potential
inconsistencies with WTO prohibitions on export subsidies.
They also discussed the legality of the IC plans with regard to Article
XII of GATT 1994, annexed to the Agreement Establishing the World Trade
Organization. This framework permits any country that has (1) a perilous
external financial position and (2) a balance-of-payments deficit in the
current account to restrict the quantity or value of merchandise permitted
to be imported in order to bring payments toward balance. Even though
the United States was a net foreign creditor in 1971, IMF and GATT agreed
that the United States had a perilous financial position simply because
its reserves only equaled the value of about three months worth of imports.
As Stewart and Drake noted, the IC plans met the basic criteria of the
Article XII framework for two primary reasons:
First, the program is specifically designed to limit imports
only to the extent needed to restore equilibrium to the trade balance.
It is thus consistent with provisions in Article XII that require countries
to limit import restrictions to those necessary to address balance-of-payments
problems and that urge countries to take steps to restore equilibrium
in their balance of payments on a sound and lasting basis. (p. 11)
Second, the program does not distinguish between products, and thus
it is not designed to provide special protective benefits for certain
domestic industries. The program is therefore consistent with Article
XII provisions regarding the avoidance of uneconomic employment
of productive resources, as well as with provisions in the 1994
Understanding that require import restrictions to control the general
level of imports, to minimize incidental protective effects, and to
be transparent. (p. 11)
However, they noted that the Buffett Plan, but not a Targeted IC Plan,
would comply with another Article XII provision, one that prohibits targeting
of specific countries, especially poor countries. Stewart and Drake wrote:
Third, the [Buffett] program does not distinguish between countries,
and thus it does not unduly disadvantage some countries to the benefit
of others. This approach is consistent with Article XII provisions regarding
the avoidance of unnecessary damage to trading partners. While the proposal
does not exempt imports from less-developed countries as suggested in
the 1979 Declaration, this is not a mandatory requirement, and the advantages
of universal application may outweigh the benefits of special and differential
treatment in this regard. (p.11)
On the other hand, targeting currency manipulators would be consistent
with the International Monetary Fund Articles of Agreement, which require
(Article IV) that countries avoid manipulating exchange rates or
the international monetary system in order to prevent effective balance
of payments adjustment or to gain an unfair competitive advantage over
other members. And the International Monetary Fund would be involved
whenever a country invokes Article XII. As Stewart and Drake note:
In any case, imposition of a trade balancing program under Article
XII will precipitate consultations at the WTO and may lead to a challenge
under WTO dispute settlement procedures. Given the deference the WTO
accords to IMF determinations regarding balance-of-payments issues in
such proceedings, implementation should also be accompanied by U.S.
efforts to explain the policy to Fund officials. (p. 12-13)
In contrast, it is not clear whether the currency reform bills would
be consistent with WTO rules. They would be imposed under antidumping
provisions even though the WTO has not yet recognized that currency manipulation
qualifies as dumping.
Of all the plans, the Scaled Tariff may be the most consistent with the
Article XII framework for three reasons:
- Article XII expressly permits import duties that are in excess of
the duties inscribed in the WTO schedule for a member.
- Article XII requires that countries relax their import duties as
the trade deficit grows smaller. The Scaled Tariffs rate goes down
as trade with a country approaches balance and disappears entirely
when bilateral trade approaches balance or the balance of payments
in the current account reaches balance.
- Article XII does not allow unfair targeting of specific countries.
The duty set by the Scaled Tariff is fairly set as the rate required
to earn 50 percent of the value of the bilateral trade deficit with
Monetary mercantilism reduces the short-term consumption in the mercantilist
country while increasing its long-term consumption and power. It has the
exact opposite effect upon its trading partners, giving them short-term
gains in consumption combined with long-term losses in consumption and
power. Market mechanisms do not correct the resulting trade imbalances.
The classical argument that mercantilism is a self-defeating strategy
applied only to the classical form of mercantilism. Monetary mercantilism
is a self-sustaining, successful strategy. When the country practising
mercantilism intervenes in currency markets to buy foreign currencies
and then lends those currencies back to its trading partners, market mechanisms
do not correct the resulting trade imbalances.
In this article, we have discussed four mechanisms to balance trade, two
of which rely upon import certificates, while the other two rely upon
tariffs. The mechanisms differ in six respects, with the Scaled Tariff
excelling in each:
- Balanced trade. The Buffett Plan and the Scaled Tariff balance trade.
The Targeted IC Plan could let trade-surplus countries reroute trade
through non-targeted countries. The currency reform bills could simply
result in a reduction in trade.
- Exporting industries. The Scaled Tariff and the Targeted IC Plan encourage
exports by changing the incentives to mercantilist countries. The Buffett
Plan encourages exports by providing export subsidies.
- Government revenue. The Scaled Tariff and the Targeted IC Plan provide
a significant amount of government revenue.
- Counter-tariffs. The Scaled Tariff and the Targeted IC Plan discourage
counter-tariffs. A trade-surplus country that responds with counter-tariffs
would be further restricting its own exports.
- Administrative costs. Only the Scaled Tariff is free of administrative
costs. The Buffett Plan and the Targeted IC Plan require that a new
government bureaucracy be set up and that firms wishing to import obtain
ICs. The currency reform bills have the costs associated with prosecuting
and adjudicating a separate antidumping case for each industry.
- WTO rules. Only the Scaled Tariff would clearly comply with WTO rules.
It closely follows the provisions of Article XII of GATT 1994, annexed
to the Agreement Establishing the World Trade Organization. The tariffs
under the currency reform bills could violate WTO rules. The export
subsidies of the Buffett Plan could violate WTO rules. The Targeted
IC Plan could violate the provision in the WTO rules against targeting
specific countries, but ICs could be justified as being enforcement
procedures under the IMF rule against currency manipulations.
The effects of the Scaled Tariff upon international trade would be quite
beneficial. During the 1940s, John Maynard Keynes tried to establish a
world trade system based upon balanced trade. Volume 25 of his collected
writings (Keynes, 1980) is full of his plans for the institution that
would regulate the world economy after World War II. Both the IMF and
the WTO were founded, partly based upon Keynes advice. But the institution
that Keynes would have created would have required that trade-surplus
countries take down their trade barriers while letting trade-deficit countries
use export subsidies, import restrictions, and tariff barriers to bring
trade into balance.
Keynes had anticipated that there would be a huge growth in world trade
after World War II and wanted to insure that it would be balanced, so
that it could continue to grow. He realized that imbalanced trade eventually
leads to financial crises in the trade-deficit countries, such as the
financial crises that engulfed the United States, Greece, Portugal, and
Spain beginning in 2008.
If the United States were to implement a Scaled Tariff, other trade-deficit
countries would likely follow suit. The world trade system would once
again be placed on a sound financial basis, since balanced trade can grow
forever, but trade imbalances eventually produce financial crises in the
trade-deficit countries, ruining the markets for the trade-surplus countries.
The scourge of beggar-thy-neighbor mercantilism would finally be ended.
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1. Some economists, following Robert Triffin (1960),
assume that trade deficits are inevitable in the country whose currency
serves as the worlds reserve currency. But there is nothing inevitable
about it. When trade is balanced, a country earns enough foreign exchange
to pay for its imports. In any case, it is not necessary to have a favourable
balance of trade to create reserves, although countries may prefer to
build reserves by a surplus of exports over imports, employing mercantilist
barriers to imports. After all, reserves can also be created by currency
swaps, with the United States building comparable reserves of foreign
currencies. Bernankes currency swaps in October 2008 demonstrate this.
After the Federal Reserve closed Lehman Brothers without protecting its
creditors, the dollar spiked upwards in currency markets due to a sudden
international dollar deflation. As a result, many foreign businesses that
had borrowed money in dollar-denominated loans couldnt make their payments.
The Federal Reserve offered currency swaps to many of the worlds central
banks, which in turn made those dollars available to their businesses
so that they could avoid bankruptcy. Two-sided currency flows can provide
international liquidity without requiring trade imbalances. [Back
The views expressed in this article are those of the author(s) and not those
of the Estey Journal of International Law and Trade Policy nor the
Estey Centre for Law and Economics in International Trade.
© Copyright 2011The Estey Journal of International Law and Trade
Policy ISSN: 1496-5208
T., Howard B. Richman and Raymond
L. Richman, 2011. The Scaled Tariff: A Mechanism for Combating
Mercantilism and Producing Balanced Trade. The Estey Centre Journal
of International Law and Trade Policy 12(2), 82-103. Retrieved [date]
from the World Wide Web: http://www.esteyjournal.com