Warren Buffett has a simple free market solution to fix the trade deficit

[gravity]

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.

http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

I hope team Obama follows Warren Buffett's advice

[Zynx]

1. That's really not a bad idea.

[renate]

2. he's one of Obama's advisers, isn't he?

At least, he was an adviser before the election; I hope he still is.

[Posteritatis]

3. Written five years ago.. we can tell who didn't read that now I think (nt)

[Pale Blue Dot]

4. Like all proposals from Wall Street, this makes sense unless you use common sense.

Dammit, I'm tired of this. We are in this mess because lots of smart people, like Buffet, thought that you could issue "products" that make debt magically disappear. IT DOESN'T WORK. It is the Enron system. STOP IT.

[PSPS]

5. Worthless gimmick

This "new idea" doesn't take into account the difference between countries' operating conditions.

Foreign countries will still pay slave wages, literally kill anyone who talks about a union, and run roughshod over the environment. Buffett's idea simply adds another 10% windfall to the exporting country and does nothing about the real problem we have to address: turning our "free trade" hellhole into "fair trade."

The only way to do that is to impose tariffs on imported goods that are equal to the difference between making a product here, where we have environmental laws and trade unions, and making it in the foreign country which has neither. Such a move would have two beneficial effects: Discourage outsourcing and encourage rogue foreign nations to adopt pro-union and environmental laws.

[Pale Blue Dot]

6. There you go using common sense again.

I wish people would listen for once.

[gravity]

8. You basically desribed Buffett's plan

"The only way to do that is to impose tariffs on imported goods that are equal to the difference between making a product here"

That 10% (which is just a guess at the actual estimate) is the costs for the difference of producing a good in the United Sates compared to a foreign country. This number would be the costs that the importer has to pay the exporter if it chooses to buy something out of the US.

[PSPS]

11. Not hardly

If a widget can be produced in the US for $10, but Chinese slaves can make it for $1 (even less if they can slip some melamine or other toxin into it,) the US importer will gladly pay the 10% surcharge ($1.10) and start shopping for that second gulfstream to fly the kids to his private island.

The proper thing to do is to impose a $9 tarriff on imported widgets from China. Buffett's "new idea" does nothing more than further enrich the exporter while doing nothing at all about having "fair trade."

[gravity]

13. The US has to export the same dollar amount in order to import it

The free market sets the surcharge to import something, and if it is high as $9 for a $1 widget, then that's what the importer has to pay.

The net trade deficit is going to be zero no matter what the costs are, so it is fair trade.

If we decide to export nothing, then we don't get to import anything and the price of the trade credits would be infinite. If we export $2 trillion, then we can import $2 trillion and the trade credits are going to be worth about 10 cents on the dollar.

[truedelphi]

14. I wish it possible to sponsor your idea with ten thousand signatures from folks here at

DU - if only one among us had Buffet's phone number.

[Skink]

7. He's getting all Ross Perot on us now.

See this chart here shows....Yeah ross whatever you elected Clinton.

[JDPriestly]

9. It's a starting place but there are problems with the idea.

In the late 1970s the trade situation reversed, producing deficits that initially ran about 1% of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.

Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4% of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks--U.S. bonds, both governmental and private--and some in such assets as property and equity securities.

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce--that's the trade deficit--we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm
Several problems I see right offhand:

1) International business will hire the best minds to find ways to circumvent the limitations this will impose on them.

2) This could result in a lot of smuggling: black market imports.

3) Big business will play all kinds of games with value and flooding the market with cheap goods in certain industries in order to destroy other countries' ability to compete in those industries. That will force governments to make exceptions to the system in order to allow imports of desperately needed commodities and goods.

4) Politics: The American people have to be ready to accept the necessity of making the sacrifices that this plan would require. the political will would have to be developed. Right now, the problem is that the American people have been taught that wealth is their birthright, that America is just so invincible, so morally right, so ordained by God, that we Americans can do anything we want, have anything we want without consequences. It would take a lot of education. Our government would have to be very honest with the American people. This plan would have to be marketed very well.

5. We would have to renegotiate some of our trade agreements.

I have been concerned about the trade imbalance for a long time. Now that I know that Warren Buffet is also worried, I feel vindicated and encouraged. It looks to me as though he presenting the kernel of a workable plan, if . . . .

What I like about the plan is that it would afford a kind of soft landing for Americans. Warren Buffet presents the harsh reality of our trade imbalance and what it means for the future of our country, but he also offers hope. Frankly, I think that the remedy he is suggesting would change the direction of our culture and society for the better for generations to come.

But then, like Warren Buffet, I'm a midwesterner. I grew up around fare mrs. And those of us who grew up in the midwest learned that you harvest when the weather permits, not before or after no matter what you would rather be doing, and you eat the apples with the bad spots first. Further, it may be a cliche, but we truly believe that a penny saved is a penny earned. I don't have or spend a lot of money. I'm happy living a modest life and I have no desire to be super wealthy. I know that Warren Buffet is one of, if not the, wealthiest person in the U.S., but I suspect he retains his down-to-earth midwestern values.

If Americans got behind this plan and worked together to make it work, it would be a stitch in time.

[Ghost Dog]

10. Similar to J.M. Keynes's idea for an International Clearing Union:

One of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit. They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to generate a trade surplus. International debt wrecks people's development, trashes the environment and threatens the global system with periodic crises.

As Keynes recognised, there is not much the debtor nations can do. Only the countries that maintain a trade surplus have real agency, so it is they who must be obliged to change their policies. His solution was an ingenious system for persuading the creditor nations to spend their surplus money back into the economies of the debtor nations.

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency - the bancor - which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus.

Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But - and this was the key to his system - he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations' deficits.

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed". Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.

But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the American delegation at Bretton Woods, Harry Dexter White, responded to Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no."

--> http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3606744#3606895
--> http://www.guardian.co.uk/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund

[HamdenRice]

12. This system already exists. They're called dollars and RMB

The idea is that there is supposed to be a system that basically equates imports with exports. That system is called "currency." What the OP is really pointing to is that the currency markets aren't working. China's RMB is supposed to appreciate because of the trade imbalances, but it isn't letting its currency float.

Our problem is that we have the world's reserve currency so our currency also doesn't respond to international currency markets.

It just seems easier to fix the currency markets that to create a redundant system. If this were a problem between two moderate sized Latin American countries, say Brazil's Real and the Colombian Peso, it would have happened in a self correcting manner.

That said, the value of the OP's suggestion is that it would put under domestic control, what is now controlled by imperfect currency markets.

[Knight_errant]

15. wait a second...

This solution does not sound like a "free-market" solution, much like tradable pollution permits. The reason? Government coercion is necessary to ensure that people without import certificates do not import goods. I always thought that the implications of a free market were no coercion, no government, no taxes, no regulation. This is a regulation, and runs counter to the free market.

Also, I never get why there needs to be a "favorable balance of trade". While it does increase the GDP, that statistic does not tell me anything about the economy. It sounds absurd, too, when you apply it at the State, county, city, or even individual level. Is it always good to restrict what I buy (imports) and always gain more money, so that I can maintain a favorable balance of trade?

Third, every voluntary transaction is beneficial from the point of view of both parties involved, and if it was not, there would be no transaction. Like every government policy, this diverts resources from what people would have wanted with no regulation, by subsidizing exports and taxing imports. Now, the transactions do not respect the prefrences of the traders as much, and are diverted to the prefrences of the burecrat.

This "solution" instead creates problems. Government should not put this into practice, and should instead focus on demolishing its harmful policy.

[gravity]

16. It uses free market principles to allocate tariffs as efficiently as possible

It allows the most economic benefit at the least costs.

Trade does mutually benefit both individuals, but it can create negative externalities in that can outweigh the individual benefits.

Small trade deficits don't matter much, but having the ones to the extent of the US is making us lose a manufacturing base, devalues the dollar, and can damage the GDP. It also makes it so that our assets are being bought by more and more foreign capital.

[Knight_errant]

18. a response

"Trade does mutually benefit both individuals, but it can create negative externalities in that can outweigh the individual benefits."

"Small trade deficits don't matter much, but having the ones to the extent of the US is making us lose a manufacturing base, devalues the dollar, and can damage the GDP. It also makes it so that our assets are being bought by more and more foreign capital."

Ok, first of all, if importing things means that we loose manufacturing, it is because the companies from other countries are relatively more efficient at manufacturing then we are. Effectively, they have a comparative advantage, and we benefit by trading the things we are more efficient at making with them.

Second of all, I don't get how it devalues the dollar. Inflation can be caused by any of the following:

More dollars
Less demand to hold dollars
Less goods/services
More FRB (fractional reserve banking) such as lower reserve requirements

Third, if it lowers the GDP, who cares? The GDP is just an arbitrary statistic that does not depict the health of the economy. In a free market, entreprenuers do not need to know this. Instead, they look at their particular industry.

Fourth, I am unsure what you meant by our assets being bought by foreign capital, can you please clarify this?

[gravity]

19. GDP is one of the most important statistics on the economy

Dismissing it in the name a laissez-faire free markets is just ignoring reality.

Other countries have comparative advantage at making certain items, but that is mainly because they have really low labor costs. The US has the most efficient production workers in the world, and we are still losing ground because of China's policies of keeping their currency artificially low, has relaxed environment standards, and having low wages.

The plan Warren Buffett proposed implemented tariffs to lower the trade deficit, but still allow for the markets to take full advantage of comparative advantage. If China knows how to make cheaper toys, we can offset this by selling airplanes or steel to other countries.

What we are doing running these deficits is pumping dollars out into the rest of the world. The only reason we are getting away with it is because the dollar is a reserve currency and people haven't gotten sick of holding it yet. We pump too many dollars out, and the rest of the world will eventually lower their demand for dollars, which will cause devaluation and inflation.

One way that foreign countries find use for all those dollars they are acquiring is buying US assets. We run a current account deficit, but we have a capital account surplus. Some examples of this is China buying US treasuries, Dubai buying stakes in Citibank, and Anheuser-Busch being bought out by InBev.

[AdHocSolver]

21. Wrong! A true free market requires rules and regulations and referees.

A "free" market by definition means that NO one commercial entity or group of commercial entities can control prices, quantities offered for sale and offered for purchase (supply and demand), and cannot deny access to the market place by competitors.

Governments can legitimately negotiate the terms and rules of trade, and can referee the business activities of the corporations under their jurisdiction.

What we have today, and the reason we are having economic meltdowns, is a group of corporate monopolies controlling world trade to their exclusive advantage by negating the criteria for true free trade described above through the use of cartel agreements and organizations such as NAFTA, the WTO, the World Bank, the IMF, and the Federal reserve.

These cartel agreements must be negated and the U.S. government given true regulatory control over corporations similar to the regulatory authority granted by the New Deal laws and agencies. This saved the U.S. economy from collapse back in the 1930's, and provided the basis of economic growth, and the rise of a true middle class in the post-WWII years. The deregulation frenzy of the Reagan presidency and after is what brought about the economic meltdown we are experiencing now.

[Hugin]

17. Well, at least we're talking about it...

and that makes me happy. :)

[AdHocSolver]

20. Economic stability can only be achieved if each country produces a majority of the goods it consumes

When any country imports most of its goods from other countries, then it becomes a locus of economic instability to all its trading partners.

When a country is such a huge consumer and importer of most of the goods in its economy, it becomes a destabilizer of the world's economy. This is why all economies are becoming unstable as the U.S. is experiencing a meltdown.

All countries have to produce a majority of the goods they consume, the more the better. The significance is that they become less dependent on economic problems incurred by their trading partners.

Plan's like Buffett's can only work if imports amount to no more than, say, 25 percent of a country's economy. In that case, the importing country only needs to export 25 percent of its production to be "even" with its imports.

As it stands now, the U.S. imports so much goods, that it can never find enough buyers to purchase its exports in an amount that would match its imports. The U.S. is just chasing its own tail, and can never catch it.