Summary
The US economy could be $ 850 billion stronger if the trade balance were simply put back into near balance. A good majority of these jobs would be higher paying manufacturing jobs. The adjustment process could take 10 years or more and would require a shift in our prevailing economy position with respect to obligations under WTO rules.
Analysis
Better than tax cuts or other inducements to spend more money, changing our nations trade policy could go a long way towards reinvigorating the American economy at a time of increasing uncertainty with repsect to the Middle Class way of life. The US consumption is currently running $ 850 billion dollars more than US production. The shift in manufacturing jobs out of the country has been encouraged not so much by tax policy, but by loose trade policy. No other country in the world has signed up to the economic orthodoxy of free trade with as much determination and vigor as the United States. With flexible labor markets, US companiesd have been able to shed jobs and close down factories without penalty. Adherence to profits rather than to workers rights has meant that companies have not had to find ways to compete with foreign imports, and open markets have forced companies that may have wanted to keep jobs at home to move abroad or face ruinous competition and bankruptcy.
The way forward is one that I have been advocating for four years and written about when I did a monthly collumn in The Manufacturers magazine. There are two basic approaches and one change of economic thinking that are necessary.
The first is to go back to WTO and demand that countrie that run sizable and sustained deficits on their balance of payments to enact across the board, nondiscriminatory, tarrifs on foreign made products until the deficits are forced back towards balance. Rather than penalize exports of countries that impose these tariffs, make it a rule that under WTO rules products from these countries can't be discriminated against until the trade is back closer to balance -- say 2% of GDP as a general rule.
An alternative approach is the one I advocated about two years before Warren Buffett drew ridicule from the "free trade orthodoxy" when he proposed "import warrants", with the government selling rights to import on the open market and limiting these to reduce the trade imbalance (and also the balance the deficit). My own proposal would be to give these rights in part to exporters to sell.
A third appraoch is to change the corporate tax laws in favor of domestic rather than foreign purchase. This could be done easily by making companies calculate their corporate tax rates based on the share of their sales in this country relative to the share of their purchases of products and services from this country. Companies that sell 70% of their sales in the United States but buy spending only 35% of their costs in the United States would pay a significantly higher corporate tax on their profits than companies that sell 30% of their products in the country and buy 70% of their inputs in the country. Companies that are entirely domestically oriented would pay a normal corporate tax, i.e. if their sales shares and their costs are equally balanced.
Higher shipping costs alone will not solve the US trade problems. Assuming the rest of the world has a large enough market, or that we continue to make the kinds of products that are currently imported by other countries in sufficient amounts to meet even a rising demand assumes that American companies have not hollowed out their factories. Companies currently considered "manufacturers" are often mainly only marketing, administration, and design bureaus with only a limited direct manufacturing presense. Productivity can be higher since they shed the direct labor, but keep the profits at home. Most calculations of productivity only measure revenues against employment and as employment of direct labor has fallen, but revenues have grown, productivity appears to be higher than it really is.
The only way to reduce the trade deficit and improve prospects is to limit foreign imports or make the costs of foreign consumption higher for companies. The only way to insure that the deficit doesn't expand when the economy grows again is to make the playing field fair and to limit foreign imports reducing the incentive of companies to move production abroad as a defensive move against facing ruinous competition.
In the end we need to ask -- What an economy is for. Is it for the mass of people or simply for the "owners of capital". It was a fundamental question that was asked in the late 19th century during the classic debates beeen Ricardo and Malthus. David Ricardo would never has suggested that the laws of comparative advantage would lead to an ever growing trade imbalance. The price of losing production would have been disasterous to the the members of society that he represented. Ricardo was speaking for English manufacturers, not for English land owners. Free trade rules were to lower the cost of food against the interests of the agricultural interests of England. I suspect he is turning over in his grave at the thought of the damaage that free trade theory has done to American manufacturing.
