Trade-Equilibrium vs import certificates
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American trade deficit is responsible for losing millions of American jobs. Many suggestions have been made for bringing it under control. These include Buffett's import certificates (ICs) model, the Simpson-Bowles' model, and my model of trade equilibrium.

It is important to evaluate the pros and cons of each approach before selecting, rejecting, or modifying it. As a starter, therefore, let me compare the relative merits of Buffett's ICs model with that of my trade-equilibrium.

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In 2003, Warren Buffett proposed a noteworthy solution. He suggested that the U.S. can achieve trade balance by limiting the value of imports to the value of exports by using Import Certificates (ICs).

Writing since 2004, I define trade equilibrium (Bhandari, JIBR 2014) as a situation when trading among different countries is such that the trading partners remain generally deficit-free from one another over a cycle of every 2-3 years. This theory has two major goals: (a) to stop exporting of additional American jobs, and (b) to regain the American jobs already exported by legally requiring the dollar/trade surplus countries to eliminate their surplus over a ten year period by buying American products (goods and services).

Now, I compare the relative merits of the two models using some of their salient points.

TRADING PROCESS

Buffett’s Model

It appears to involve the following steps: (a) An American party exports products; (b) American government awards it an IC equal to the dollar amount of exports (an export incentive); (c) a foreign party interested in exporting to America, or an American party interested in importing into America, would have to first buy those ICs for a price in the open market to be able to make those trades.

The American exporters can use the benefit they get from selling their ICs to reduce the prices of products they export. This would increase American exports. Similarly, the American importers or foreign exporters would have to pay a price to buy the ICs to do the trade. This would increase the cost of importing which in turn would reduce the American imports.

More exports would help create American jobs. Less imports would hurt employees who are engaged in the imports related jobs (retailers, etc.). Consumers would also pay higher prices for products made in America.

Bhandari’s Model

Americans and foreigners can import or export whatever and whenever they want to. Their prices and volume would be determined by the open market operations. This process is much simpler than Buffett’s complex ICs model.

IMPACT ON JOBS

Buffett’s Model

Creating jobs appears to be a tertiary goal of Buffett's model. In his 2003 article, he mentioned it only briefly. Having said that, trade balancing would definitely save American jobs.

Bhandari’s Model

Keeping and creating American jobs are the central goals of my model. A dollar surplus country must use those dollars to buy American products within a period of 2-3 years.

Under the trade equilibrium model, America would enjoy elimination of foreign debt, new investments, and new jobs. With more jobs and higher incomes, Americans would spend more on American and foreign products. Foreigners would do the likewise. The resultant geometric multiplication of trade between countries will give birth to the next economic revolution—effects of which would be many times more than that of the industrial and the Internet revolutions. All that in an environment of free and fair trade. (For numerical details, see Bhandari, The Hill, Aug. 21, 2016).

CHRONOLOGY OF TRADES

Buffett’s Model

Since American entities cannot import without first obtaining ICs, American entities have to export first to generate those ICs. It is a limitation of the Buffett’s model.

Bhandari’s Model

Any country can initiate a trade anytime, importing or exporting.

VOLUME OF TRADE

Buffett’s Model

Buffett’s model tends to limit imports for two reasons: (a) Its chronology of trade and (b) America has to pay more for imports because the IC’s impose an unnecessary additional cost.

Bhandari’s Model

A major strength of this model is that it does not place limits on America importing products from abroad. Limiting trade, imports or exports, would hamper economies, jobs, creativity, and innovation.

TRADING ICs

Buffett’s Model

Since the U.S. exports billions of dollars’ worth of products every year, billions of dollars’ worth of ICs would have to be issued yearly. These ICs would have to denominated into different dollar amounts and would need to be traded on an exchange for the convenience of their sellers and buyers.

The governmental cost of operating such a process was one reason for which a trade proposal, that was based on the ICs model, and submitted by Sens. Byron Dorgan and Russell Feingold in 2006, did not reach the Senate floor for a vote.

Bhandari’s Model

It does not have any instruments such as ICs for trading. As such it would avoid all the complexities and costs involved as those in the Buffett's model.

LEGAL FRAMEWORK

Both models would require legislation to come into existence. Both would require establishment of a separate governmental unit to administer them.

CONCLUDING THOUGHTS

I believe that my model is simpler, more logical, and more beneficial. But I may be biased. What is your opinion?

Narendra C. Bhandari, Ph. D., is a Professor of Management at Pace University, New York.


The views expressed by authors are their own and not the views of The Hill.