Americans worry about their trade deficit for at least two reasons. For most people, their immediate concern is the loss of jobs and wealth generation involved when domestic demand is satisfied by imports rather than domestic production. A
Naturally, the countries with the largest trade surpluses with the USA are the focus of American disapproval, especially those whose governments apparently promote trade surpluses by their exchange rate regime or by import tariffs and other trade controls, policies labelled as "mercantilist" by their detractors. At present, the most prominent of these countries is China, which pegs its currency to the US dollar at a rate that makes its exports relatively cheap to Americans. To fix the
An obvious solution to America's problem of unwelcome persistent trade deficits with countries which restrict capital inflows is to simply limit the amount of dollar assets that their governments and their agents are allowed to own. Alternatively, foreign government holdings of dollar assets could be penalised by levying a special withholding tax on their returns. By tackling the problem at source using an instrument (control of trade counterparts' reserves accumulation) that directly influences the objective (the trade deficit with a particular country), this approach – call it Reserves Control – provides an efficient solution in the spirit of Mundell's Principle of Effective Market Classification, which should recommend it to macroeconomists. The sanctioned country would either have to allow their currency to appreciate against the dollar, select certain exports to be given priority access to the American market, or buy more American products of some kind. Unlike conventional trade restrictions, such as tariffs or import quotas, Reserves Control would affect all industries the same, with no opportunity for lobbying by firms and trade unions etc to obtain favourable treatment for their particular interests. Reserves Control would be difficult to evade, given the volume of dollar asset purchases necessary for a country to sustain a significant trade surplus with the USA. Existing money laundering regulations and supervision should make it impossible for countries to evade Reserve Control by disguising government acquisition of dollar assets, such as by using agent fund managers, on anywhere near the scale necessary to affect exchange rates. And not enough offshore dollar investments exist with sufficient size, liquidity and security, or independence from the US authorities to offer a significant alternative to US assets for reserves accumulation.
The difference between Reserves Control and Warren Buffett's clever Import Certificates scheme is that Reserves Control exclusively targets intervention by specific foreign governments in support of their country's exports to the USA. In brief, the Import Certificate scheme would grant US exporters tradable certificates to the dollar value of their exports, which importers need to present to the US authorities to be allowed to import goods and services of the same value into the USA, and would therefore need to buy from American exporters. This would act like a variable tariff that automatically adjusts to maintain a zero balance of trade while giving priority to the most valuable imports, regardless of their country of origin. Under Reserves Control by contrast, a trade deficit could still exist, but only to the extent that the foreign private sector is willing to hold financial claims on the importing country, and countries that are not considered to be mercantilist need not be penalised. In fact, Reserves Control is not trade restraint per se, and the restriction it does impose is a matching response to a trade partner's closed capital account.
In truth, it is not hard to think of ways around such controls – for example, government guarantees for export credit in the case of Reserves Control and transfer pricing in the case of Import Certificates – that would undermine either scheme before long, so RebelEconomist sees them both as