President Barack Obama departs today for a trip to Asia. While he’s flying there, and now that he’s won the election, he might contemplate his pledge to double U.S. exports by 2015 and reduce the nation’s staggering $560 billion trade deficit.
Think about that number. It means the United States is sending more than half a trillion dollars abroad annually instead of spending it domestically. The trade deficit has claimed a huge chunk out of the economy and kept millions of U.S. workers on the unemployment rolls as the country imports products it might otherwise have produced. During the last two decades, this has amounted to a $10 trillion stimulus package for the rest of the world.
According to economic theory, the free market should resolve the problem on its own. But it hasn’t. So, as we get ready for a second term, what’s really needed is some fresh thinking about how to finally get out of this mess.
Fortunately, a good idea exists, although it’s nearly been forgotten. Warren Buffett, the famous investor, proposed it in a magazine article nine years ago. He suggested an ingenious way to fix the problem without picking on China or any other single nation, and also without raising tariffs on any single good.
His suggestion was for the United States to issue import certificates to all exporters, in amounts equal to the value of their exports. In turn, the exporters could sell these certificates to importers.
By establishing a market for import certificates, firms would have powerful incentives to bring the trade deficit into balance. All foreigners sending goods to this country would have to buy the certificates in appropriate amounts from our exporters. Overall, trade would become balanced.
Importantly, our trading partners would not have the means to retaliate. The price of our exported goods would decline by the amount that the exporters received for the certificates from the importers. This would give U.S. firms an advantage in finding markets abroad. Implicitly, importing firms would pay an export subsidy.
U.S. companies would find it much easier to export their products, and thereby could afford to hire the unemployed. At least 2 million U.S. jobs would be created, which would also generate new government tax revenues and ease the budget deficit.
Admittedly the price of imports might increase, but likely not by much. You might have to pay a dollar more for a shirt or $100 more for a BMW. The gains would be concentrated among the unemployed who really need a break, while the inconveniences would be diffused throughout the rest of the population and would be so small that we would hardly notice.
There could be variations on the policy and exemptions for strategic products such as oil. We could also have “threshold values” so small importers would be exempted. And the policy could be phased in over a number of years to give everyone time to gain experience with it.
In 2011, U.S. imports were $2.66 trillion, or 27 percent higher than the $2.10 trillion worth of exports. If we phased in the balanced trade policy, we might initially grant, say, $1.20 worth of import certificates for every $1.00 worth of exports. That would reduce the deficit by only 6.6 percent of the value of exports, or $140 billion. Still, that would eliminate a quarter of the trade deficit and create a half-million jobs. Not bad for starters, and we could build from there.
Although this system would create additional work for U.S. customs officials, they already collect duties and enforce export controls for high-tech products, so they should be able to integrate these measures with a slightly larger staff. We’d also need an eBay-type market for the certificates. But here, too, the challenges seem manageable and the benefits likely far outweigh the costs.
After Warren Buffett published his idea nearly a decade ago, two U.S. senators introduced a bill to turn it into law, but it went nowhere. Now, instead of embarking on another round of China-bashing and partisan stalemate, we should give his idea another look.
We know that standard approaches to solving the trade deficit aren’t working. As the president heads for Asia, it’s past time to stop stimulating the rest of the world’s economy and bring the money back home.
John Komlos is a visiting professor of economics at Duke University.