Fixing Our Other Deficit 3

Using Trade Vouchers to fix America's trade deficit.

How do you earn your living?  If you are on welfare, you aren't earning anything but rather using government force to extract it from others who do.  If you are not on welfare, you earn your living by performing a useful service that someone else is willing to pay for.  You take your earnings and use them to buy useful goods and services that other people provide, and the economy moves on.

It's the same way with international trade: unless you are North Korea and try not to trade with anybody, each country sells something to other countries and buys their goods in exchange.  Like any other buyer, a country needs to try to sell roughly as much as it buys.  Otherwise a trade deficit results, and like any other deficit, eventually it will destroy wealth because you spend more than you earn.

America's trade deficit is particularly troublesome because, as we saw in the last article in this series, a large portion of it is caused by our retreat from manufacturing.  There are many things that American factories built 40 years ago which no American factory makes any more.

Not only did that cost us jobs and national wealth, the loss of whole industries costs us expertise and experience.  Rebuilding an industry is not like building a house; it takes many decades for the thousands of skilled workers to develop the skills and experience required to do a good job.

Because America's regulatory costs, taxes, and overall costs of labor are so high, however, many industries simply can't compete with China, India, Mexico, and many other countries that like taking our jobs.

Wrong Way Round

Politicians know this, and they have an answer: If an industry is really important and can't compete, the government should subsidize it from taxpayer dollars to make sure it doesn't go away.  That was Mr. Obama's argument for why hundreds of millions of your dollars should be used to bail out GM and Chrysler - though the real reason was to line the pockets of Democrats' union cronies.

French economic history shows that this doesn't work.  France has tried harder for longer to subsidize its heavy industries than almost anywhere else, but those industries are still moving away, only a bit more slowly.  The more France protects its firms, the weaker they become.

We should have learned this back in the 80s, when America's diplomats negotiated automotive trade restrictions with Japan.  The Japanese agreed to limit the number of cars they imported into the United States, then built their own factories in America to get 'round the restrictions.  Detroit was ultimately no better off.

But America was far better off.  The workers in a Toyota or Honda plant in the South are still American no matter whose name is on the factory wall, and those skills still exist right here in the United States.  Admittedly a lot of the profit goes whizzing off to Tokyo, but at least we're in the game.

Does this mean that we're supporting trade restrictions?  Not really, because they are entirely political.  Auto imports were restricted only because the Big Three had piles of money and dozens of bought politicians.  How about the manufacturers of simple nuts and bolts, which are every bit as important?  Nobody cares about them.

So, what we need is a way to assist and encourage manufacturing in the United States that is not subject to the whims of politics or the arbitrary dictat of a bureaucrat who knows nothing whatsoever about industry or business.  Is there such a thing?

As it happens, there is - but it's never been tried.

Balance, Enforced

Let's go back to talking about personal budgeting for a moment.  Someone who has a hard time controlling their money is often advised to stop all spending by checks or credit cards and to spend nothing but cash.  As soon as they get their paycheck they go to the bank and get it all out in cash, which they use to pay their bills and make purchases.  When the cash is gone, that's it, they have to stop spending.

There is a method to accomplish the same thing with trade.  Remember, with a cash budget system the person doing the spending gets to decide what is most important, the only thing controlled is the total amount of spending.  We can create a similar effect with our trade by awarding each exporting company, for free, a Trade Voucher of the dollar amount of whatever it was they sold to another country.

What can they do with the Trade Voucher?  Simple: we require any company that wants to buy something from another country, to turn in that number of Trade Vouchers.

Now, remember: the Trade Vouchers are free.  The government doesn't sell them, so they're not an additional tax.  They can be generated in unlimited amounts by exporting goods or services to any other country.  Whatever the value of the export is in dollars, the American exporter gets that many Trade Vouchers.

If our trade were in balance, or we had a trade surplus, the Trade Vouchers would be nearly worthless.  There'd be plenty to go around; their "value" would simply have to cover the cost of exchanging them.

But since we are not in balance, since we are currently buying more than we're selling, the Trade Vouchers suddenly have a value.  To import foreign goods requires that many Trade Vouchers, and there aren't enough to go around!

What does this create?  A market - which means that a price is put on importing.  The natural result is that we'll soon be importing only the most valuable and irreplaceable goods, not stuff we don't really need or can just as well make here.

Boeing is still going to import titanium.  We can't mine it in America and you need it to make planes, which are worth far more.  Boeing would have plenty of Trade Vouchers from exporting planes, they could peel off a few to cover necessary imports.

It might also be worthwhile to import French cheese and wine.  We make perfectly good cheese and wine here, it might not be worth it to everybody to pay the premium to have genuine French stuff, but maybe it would be for some people.

At this point, you might be thinking that this sounds a lot like a tariff.  It's not!  A tariff is a special tax applied to a certain type of goods, or to goods imported from a disfavored country.  That means it's subject to politics.

The Trade Voucher scheme takes politics out of the equation.  The government doesn't care what you're importing or exporting and doesn't tilt the playing field for or against anyone.  Since there's no cash changing hands there's far less opportunity for corruption.

Over time, the result would be very helpful to our economy: more exports, fewer imports, more American jobs, maybe even whole industries saved.

If this were the only positive effect of a Trade Voucher scheme, that alone would be good enough reason to give it a try.  But it's not.  In the final article in this series, we'll examine two more beneficial results from enforcing a net trade balance in the United States.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Business.
Reader Comments

I can't help it, I have to go to bat once again for the Fair Tax. Please don't tell me that no tax is any good because i do agree with you but given our government we need a better method of collecting taxes. The FT is revenue neutral, it is not a tax increase for a tax decrease. It was devised by economists at Harvard and MIT. Here is the simple way to increase our manufacturing. Since manufacturers are not involved in retailing, which is where the FT is collected, the current 35% tax rate imposed on industry would be gone since all federal taxes, payroll taxes, all, would be eliminated. The price of manufactured goods would fall by 22% since that is what is embedded in all of our products. With our technical advantage no country would be able to compete with us. A poll was taken of the top 400 companies in the world outside of the US and asked if the FT were passed how that act would affect their decisions in the future. 240 said that they would build their next factory here and the remaining 240 said that they would move their corporate headquarters here.Trillions would come home since there would be no taxes. Our unemployment would go down quickly and would stay there. Joe six pack would have more money in his jeans as he would no longer paying taxes and the retail price would remain the same since the 22% reduction in price would allow for the 23% rate to be collected at the retail level. Why does it not pass? Simple, our rock stars in DC would no longer have the taxing power and the power to give sweetheart deals to certain companies in the form of a tax break. Lobbyists would no longer be needed to push crooked tax laws favoring one company over another and the list grows and grows. If Joe Six Pack is ever told the truth about the FT he will me madder than an old wet hen. The FT would be the stimulus that we all could use.

May 21, 2014 9:33 PM

In principle, there are many good points about the Fair Tax. But in practice, it simply wouldn't work anything like as well as its advocates claim. I wrote about this awhile back:

May 21, 2014 9:58 PM
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