Why a Flat Tariff on All U.S. Imports Would Work

We can come together here to share ideas on how we can make this idea work, where a local community on a county level produces most if not ALL of their basic needs. You can choose to do it alone, with your family or make it work for your community. We need to change our raw materials from dead-hydrocarbon sources to a living-carbohydrate sources (HEMP). You will be amazed to see how many thousands of everyday used products are made from this bountiful raw material resource.....
pokerkid
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Why a Flat Tariff on All U.S. Imports Would Work

Post#1 » Sun Feb 27, 2011 7:46 am

uh... is America finally waking up.
pk


Why a Flat Tariff on All U.S. Imports Would Work
http://www.activistpost.com/2011/02/why ... would.html
Ian Fletcher
Activist Post

I advocate protectionism. But one standard criticism is that this would just result in politically connected industries getting tariffs raised on the products they produce. This would corrupt our economy, force consumers to pay higher prices, and serve no legitimate economic logic.

Sounds logical enough. As the 19th-century American radical economist Henry George put it, "introducing a tariff bill into a congress or parliament is like throwing a banana into a cage of monkeys."

So let's just cut that Gordian knot right now: what America needs isn't some complicated system of tariffs, but a flat tariff, the same on every imported good and service.

The exact level at which to set the tariff is an open question. For the sake of argument, we can take 30% as a hypothetical figure, because it is in the historic range of U.S. tariffs and is close to the net pressure on America's trade balance due to foreign nations' VAT or value-added taxes. The right level will not be something trivial, like 2%, or prohibitive, like 150%. But there is no reason it shouldn't be 25 or 35%, and this flexibility will provide wiggle room for the compromises needed to get a tariff through Congress.


A flat tariff would be imperfect, but it would be infinitely better than free trade and relatively politics-proof. Above all, it is a policy people are unlikely to support for the wrong reasons (AKA producer special interests) because it does not single out any specific industries for protection. It would thus maximize the incentive for voters and Congress to evaluate protectionism in terms of whether it would benefit the country as a whole--which is precisely the question they should be asking.

A flat tariff would also create the right balance of special-interest pressures: some interests would favor a higher tariff, others a lower one. This is a prerequisite for fruitful debate, as it means both views will find institutional homes and political patrons.

A flat tariff's uniformity across industries would avoid the problems that occur when upstream but not downstream industries get tariff protection. For example, if steel-consuming industries do not get a tariff when steel gets one, they will become disadvantaged relative to their foreign competitors by the higher cost of American-made steel. And why should steelworkers be protected from foreign competition at the price of forcing everyone else to pay more for goods containing steel? The only reasonable solution is that steelworkers should pay a tariff-protected price for the goods they buy, too. This logic ultimately means that all goods should be subject to the same tariff.

A flat tariff would have other benefits, too. For one thing, it would avoid the danger of getting stuck with a tariff policy that made sense when it was adopted but gradually became an outdated captive of special interests over time, always a risk with tariffs. Although it is a fixed policy, it would not be fixed in its effects, but would automatically adapt to the evolution of industries over time. In 1900, it would have protected the American garment industry from foreign (then mostly European) competition. It wouldn't do that today. As which industries are good industries changes over time, which industries it protects will change accordingly.

A flat tariff would trigger the relocation back to the U.S. of the right industries. For example, a 30% tariff would not cause the relocation of the apparel industry back to the U.S. from abroad. The difference between domestic and foreign labor costs is simply too large for a 30% premium to tip the balance in America's favor in an industry based on semi-skilled labor. But a 30% tariff quite likely would cause the relocation of high-tech manufacturing like semiconductors. This is key, as these industries are precisely the ones we should want to relocate. These capital-intensive, knowledge-intensive industries support high wages and have bright technological futures.

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Another objection to a tariff is that if any industry is granted protection, it will just slumber behind it. Some industries indeed long to shut out foreign competition, reach a lazy detente with domestic rivals, then coast along with high profitability and low innovation. But a flat tariff resists this danger because it does not hand out a blank check of protection: it gives a certain percentage and no more. Any industry that cannot get its costs within striking distance of its foreign competitors will not be saved by it. This discipline, although unpleasant for the losers, is the price we must pay for having a tariff that actually works, rather than one which eliminates the discipline of foreign competition entirely and protects all industries indiscriminately.

The political bickering that a tariff varying by industry would cause also militates in favor of a flat tariff. The inability of different industries to coalesce around a common tariff proposal sabotaged efforts to achieve a tariff in 1972-74, but this is a policy around which the greatest possible number of industries can unite.

A flat tariff is also more ideologically palatable than most other tariff solutions. Above all, it respects the free market by leaving all specific decisions about which industries a tariff will favor up to the marketplace. It will thus be considerably easier for ideological devotees of free markets to swallow than some scheme in which tariffs are set by a federal agency, leading to that nightmare of free-marketeers: government picking winners. In the real world, zero government intervention in the economy is impossible, so the issue for believers in economic freedom and small government is to design policies that work through the smallest possible, carefully chosen interventions. This is precisely what the natural strategic tariff offers because it operates at the periphery of our economy, leaving most of its internal mechanisms untouched. In fact, the more wisely we control our economic border, the less we will probably need to control the inside of our economy.

(One final note: a flat tariff would need to include a rebate on reexported goods in order to avoid handicapping American exporters. This would include both goods that are transshipped without modification and goods that are exported after value-added processing. The latter includes everything from chocolate made from imported cocoa to computers made from imported chips. This is implied by its intrinsic logic as a tax on domestic consumption. Other nations follow the same logic in rebating VAT to their exporters.)


Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

Recently by Ian Fletcher:
In Praise of Mercantilism, Or Why Economic History Isn't Boring
Yes We Can! (Fix Our Trade Mess)
Why Have Nations At All? The Case of Economic Borders
American Manufacturing Slowly Rotting Away: How Industries Die
Challenging The Conventional Wisdom on Free Trade

pokerkid
Site Admin
Posts: 7781

Currency Revaluation Won’t Fix America’s Trade Mess

Post#2 » Sat Mar 05, 2011 9:26 am

Friday, March 4, 2011
Currency Revaluation Won’t Fix America’s Trade Mess
Ian Fletcher
http://www.activistpost.com/2011/03/cur ... ricas.html

It is sometimes suggested that our trade problems (job losses, international indebtedness) will go away on their own once currency values adjust. Bottom line? A declining dollar will eventually solve everything.

In the short and medium term, of course, foreign currency manipulation will prevent currency values from adjusting. But even if we assume currencies will eventually adjust, there are still serious problems with just letting the dollar slide until our trade balances.

For one thing, our trade might balance only after the dollar has declined so much that America's per capita GDP is lower, at prevailing exchange rates, than Portugal's. A 50 percent decline in the dollar from early-2011 levels would bring us to this level. And how big a decline would be needed to balance our trade nobody really knows, especially as we cannot predict how aggressively our trading partners will try to employ subsidies, tariffs, and non-tariff barriers to protect their trade surpluses.

Dollar decline will write down the value of wealth that Americans have toiled for decades to acquire. Ordinary Americans may not care about the internationally denominated value of their money per se, but they will experience dollar decline as a wave of inflation in the price of imported goods. Everything from blue jeans to home heating oil will go up, with a ripple effect on the prices of domestically produced goods.

A declining dollar may even worsen our trade deficit in the short run, as it will increase the dollar price of many articles we no longer have any choice but to import, foreign competition having wiped out all domestic suppliers of items as prosaic as fabric suitcases and as sophisticated as the epoxy cresol novolac resins used in computer chips. (Of the billion or so cellular phones made worldwide in 2008, not one was made in the U.S.) Ominously, the specialized skills base in the U.S. has been so depleted in some industries that even when corporations do want to move production back, they cannot do so at feasible cost.


Another problem with relying on dollar decline to square our books is that this won't just make American exports more attractive. It will also make foreign purchases of American assets--everything from Miami apartments to corporate takeovers--more attractive, too. As a result, it may just stimulate asset purchases if not combined with policies designed to promote the export of actual goods.

A spate of corporate acquisitions by Japanese companies was, in fact, one of the major unintended consequences of a previous currency-rebalancing effort: the 1985 Plaza Accord to increase the value of the Japanese Yen, which carries important lessons for today. Combined with some stimulation of Japan's then-recessionary economy, it was supposed to produce a surge in Japanese demand for American exports and rectify our deficit with Japan, then the crux of our trade problems. For a few years, it appeared to work: the dollar fell by half against the yen by 1988 and after a lag, our deficit with Japan fell by roughly half, too, bottoming out in the recession year of 1991. This was enough for political agitation against Japan to go off the boil, and Congress and the public seemed to lose interest in the Japanese threat. But only a few years later, things returned to business as usual, and Japan's trade surpluses reattained their former size. Japan's surplus against the U.S. in 1985 was $46.2 billion, but by 1993 it had reached $59.4 billion. (It was $74.1 billion in 2008 before dipping with recession.)

Relying on currency revaluation to rebalance our trade also assumes that the economies of foreign nations are not rigged to reject our exports regardless of their price in local currency. Many nations play this game to some extent: the most sophisticated player is probably still Japan, about which the distinguished former trade diplomat Clyde Prestowitz has written:

If the administration listed the structural barriers of Japan--such as keiretsu [conglomerates], tied distribution, relationship-based business dealings, and industrial policy--it had described in its earlier report, it would, in effect, be taking on the essence of Japanese economic organization.

We cannot expect foreign nations to redesign their entire economies just to pull in more imports from the U.S.

In any case, the killer argument against balancing our trade by just letting the dollar fall comes down to a single word: oil. If the dollar has to fall by half to do this, this means that the price of oil must double in dollar terms. Even if oil remains denominated in dollars (it is already de facto partly priced in euros) a declining dollar will drive its price up. The U.S., with its entrenched suburban land use patterns and two generations of underinvestment in mass transit, is exceptionally ill-equipped to adapt, compared to our competitors.

Fundamentally, allowing the dollar to crumble is a way of restoring our trade balance and international competitiveness by becoming poorer. That's not what Americans want, or should want. A tariff is a much better solution.


Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

Recently by Ian Fletcher:
In Praise of Mercantilism, Or Why Economic History Isn't Boring
Yes We Can! (Fix Our Trade Mess)
Why Have Nations At All? The Case of Economic Borders

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Posted by Activist at 8:25 AM Labels: free market economics, free trade, Ian Fletcher
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Currency Revaluation Won’t Fix America’s Trade Mess
2 comments:

Anonymous said...

Even if oil doubles there always exist unforeseeable "unintended consequences" which subsequently arise because it is the nature of the free markets. Fundamentally the global fiat monetary system is the crux of the issue. Regardless if tariffs do get imposed it will be too little too late. Unemployment is at 22% and the current wealth distribution concentration disallows for currency flow in addition to the fact that the economy has increasingly become financialized with no real production; concordantly, the velocity of money will rapidly increase, because the majority of Americans have become destitute and will use their monies immediately for sustenance considering that there is no extra cash for savings, and will be magnified considering that the real peoples economy will have contracted so radically resulting in hyperinflation. You're solution goes against the neoliberal model, which I might add is quite unorthodox and unpopular in our times but you nailed it Mr. Fletcher.
March 4, 2011 9:09 AM
Anonymous said...

If allowed to decline through market forces the off balance sheet currency created by Fed, Cia, Mossad and other agencies would have a profound effect on the value likely bringing hyperinflation and a zimbabwe like economy.
March 5, 2011 7:41 AM

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