Mercantilism And Free Trade Aren't The Only Alternatives

by: Howard Richman

In his July 17 Foreign Policy blog entry, Daniel W. Drezner (You campaign in mercantilism. You govern as a free trader) excuses President Obama's hypocrisy on trade. Obama accuses Romney of being an outsourcer, even though his own trade deficits are dismal, as we pointed out in the July 12 American Thinker (Who's the Real Outsourcer: Romney or Obama?).

Drezner assumes that there are only two alternatives, the "mercantilist" philosophy of seeking a trade surplus and the realistic "free trade" philosophy. But free trade is not realistic when you let your economy be gutted by mercantilist predators.

In an July 2 OpEdNews commentary (Has Our Defense of Freedom Made America Less Independent), Hugh Cambell endorses balanced trade as a "3rd alternative," one that would work. He recommends Warren Buffett's import certificate plan, as does one of America's premier trade economists Ralph Gomory, as did my father, son and I in our 2008 book, Trading Away Our Future. Cambell writes:

The title of Dr. Stephen R. Covey's most recent book, namely, The 3rd Alternative: Solving Life's Most Difficult Problems implies that there is a globalization alternative that moves beyond the polar-opposites of isolationism and free-trade. Such a 3rd Alternative is a balanced trade model highlighted in a November 2003 Warren E. Buffet and Carol J. Loomis Fortune magazine article, titled: America's Growing Trade Deficit Is Selling The Nation Out From Under Us., which can be found at:

Similarly, in a July 16, Huffington Post commentary, Representative Marcy Kaptur (D-OH) and Pat Choate point out that balanced trade would be a tremendous boost to the American economy (Fair Trade Can Help Close America's Jobs Gap):

[I]f the U.S. had run a balanced trade account last year, the economy would have produced not only more than 7.8 million more jobs, it would have created an additional $500 billion of goods and services in the Gross Domestic Product, and almost $200 billion more revenue for the federal, state and local governments. Take note, deficit hawks.

How to create a balanced trade program is not rocket science. It begins by demanding reciprocity in trade with other nations, what we call fairness....

Unfortunately, Choate and Kaptur don't have a realistic solution. They continue:

[Balanced trade] means confronting foreign government's currency manipulation to gain a price advantage in world markets. It means stopping foreign counterfeiting, product piracy and theft of U.S. intellectual property rights. And certainly it means ending U.S. tax and regulatory policies that encourage the offshoring of our domestic production and jobs.

More and more people are realizing that balanced trade is the answer to our current economic problems. But they haven't yet discovered the Scaled Tariff, the solution that we proposed in an academic journal.

Warren Buffett's import certificate plan would also work, but it violates WTO rules, requires the setting up of a new bureaucracy and adds a new element of uncertainty to importing. Furthermore, it penalizes those non-manipulative countries with whom the United States currently has balanced trade.

The Scaled Tariff is WTO legal, requires trade reciprocity from our trade-manipulating partners and increases our imports from non-manipulative countries. It strongly encourages the manipulative countries to change their behavior. It is a simple idea that can be implemented with no additional bureaucracy whatsoever. When we wrote it up as a bill, it was extremely short.

It is a tariff that can only be charged when the United States is running an overall trade deficit. It is only applied to those countries with which the U.S. has a trade deficit, and it is set separately with each country as the rate that would take in half of our bilateral trade deficit with that country as tariff revenue.

Drezner thinks that free trade, though unpopular, is always the best policy. But there is a much better policy. It is called balanced trade. And there is a simple straightforward way that it can be achieved.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.