♠ Posted by Emmanuel in Trade
at 1/11/2009 11:39:00 AM
Trade Diversion has pointed me in the direction of this highly interesting Vox EU commentary from Jagdish "In Defense of Globalization" Bhagwati. It appears the good professor is now regretting his decision to (oddly) style Barack "China Currency Coalition" Obama as a free trader and Hillary Clinton a protectionist [!] I have always maintained that he had it backwards, but the point is academic now. Anyway, what he says makes for very interesting reading. Here he bashes Obama's appointees left and right (but especially left):Alas, his cabinet appointments include Hillary Clinton, whose revealed trade scepticism is badly muddled, at best, and Labour Secretary Hilda Solis, who reflects the anti-trade sentiments of the union federation AFL-CIO. His “superstar” advisers include Robert Rubin, who is crippled by his Citigroup’s receipt of large bailout funds, the brilliant former Treasury Secretary Larry Summers whose recent Financial Times columns on the issue of “trade and wages” suggest prudence in the current political environment, and the remarkable Warren Buffett, who is notorious for having proposed (Fortune, 26 October 2003) an import control regime which would “solve” the trade deficit by not permitting imports that exceed export earnings. The USTR position was offered to Congressman Xavier Becerra, a trade-sceptic at best, and has now gone to Mayor Ron Kirk with credentials only as a NAFTA supporter, hardly a recommendation for a forceful presence on support for the open, multilateral trading regime. A “team of rivals” indeed.Bhagwati pillorying Buffett interested me in particular. I have always liked Buffett's notion of financial weapons of mass destruction to describe derivatives. Unfortunately, Bhagwati is right in digging up Buffett's highly unconventional and unrealistic process of solving the US trade deficit. From the aforementioned Fortune article:
We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.Does this sound like a development-friendly policy? They don't call it beggar-thy-neighbor for nuthin'.
The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary—and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless.
The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise
almost certain to occur.
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.
Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities—that is, 80 billion certificates a month—and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)
For illustrative purposes, let's postulate that each IC would sell for 10 cents—that is, 10 cents per dollar of exports behind them. Other things being equal, this amount would mean a U.S. producer could realize 10% more by selling his goods in the export market than by selling them domestically, with the extra 10% coming from his sales of ICs.
