Donald Trump argues that recent trade deals and trade deficits have been bad for American workers, and that he could do better. Some have argued that his proposals would start a trade war. But if he comes up with the right BATNA (
Best
Alternative
To a
Negotiated
Agreement), he could move trade toward balance without a trade war.
In August 1971 President Nixon used a 10 percent across-the-board tariff as his BATNA in order to force the successful negotiations which brought U.S. trade into balance by 1973. But U.S. trade deficits were small in Nixon’s day and huge today. Trump will need a much more powerful BATNA than the across-the-board tariff used by Nixon.
Trump has proposed single-country tariffs against Mexico and China of 35 percent to 45 percent. Such tariffs would indeed provide a very powerful BATNA. They would balance trade, even if the negotiations fail, because the United States would shift its import purchases to balanced-trading countries that buy more from us when we buy more from them. The revival in American manufacturing that Trump desires would occur.
But such tariffs could lead to a trade war. The countries involved would likely place counter-tariffs upon politically-sensitive U.S. products, such as American agricultural goods. Fortunately, there is a BATNA that Trump could choose which would avoid a trade war altogether.
The Scaled Tariff is a system of single-country tariffs that are applied to all countries that have significant trade surpluses with the United States. The tariff rate would be proportional to the size of each country’s trade surplus with the United States. It prevents a trade war because the U.S. tariff rate goes up on a trade surplus country’s goods if it reduces its purchases of U.S. products.
Moreover, the Scaled Tariff complies with the same World Trade Organization rule used by Nixon, which lets trade deficit countries impose trade-balancing tariffs. But unlike Nixon’s across-the-board tariff, no tariff would be applied to balanced-trading countries, such as Canada. The tariffs would only be applied to those countries whose exports (goods plus services) to the United States were more than 110 percent of their imports from the United States over the last year. Moreover, any trade surplus country could eliminate U.S. tariffs upon its products simply by buying more from the United States.
If Hillary Clinton wins the November election, she will likely continue the trade policies of the past three decades that have steadily worsened U.S. trade deficits. For example, she would probably lock-in Obama’s Trans Pacific Partnership Agreement, which, besides worsening our overall trade deficit, would encourage movement of U.S. factories to Vietnam and Malaysia.
As a result of current U.S. trade policies, the U.S. average trade balance (as a percentage of GDP) sank from a positive 0.6 percent during the 1956-1965 decade to a negative 3.8 percent from 2006-2015. U.S. economic growth followed U.S. trade deficits downward, sinking to just 1.4 percent per year from 2006-2015 after averaging 3.4 percent per year over the previous five decades.
If either President Trump’s negotiations or his BATNA succeed in balancing U.S. trade, aggregate demand for American products would explode. This is simple economics. Trade deficits subtract from aggregate demand, while moving the trade balance in a positive direction increases aggregate demand.
There is a long term global good here too. Unbalanced trade contributes to global economic slowdowns (e.g., 1873-1879, 1929-1934 and 2008-present) because loss of industries and growing debt eventually cause economic stagnation and financial problems in trade deficit countries which, in turn, hurts the export markets and lenders in trade surplus countries. For a classic case consider Greece and Germany and the current economic stagnation within the euro zone.
As the world’s premier trade deficit country, the United States would benefit from balanced trade in both the short run and the long run. Aggregate demand would grow. Manufacturers would build new factories. R&D would accompany factories. Learning by doing would occur in the new factories. Wages would rise. Median family income would rise. U.S. economic growth would likely resume its normal 3.4 percent rate, more than twice the 1.4 percent rate of the last decade.
The Richmans co-authored Balanced Trade (2014), published by Lexington Books. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
