Friday, February 29, 2008

Warren Buffet's trade idea: Import Certificates


In reading Paul Craig Roberts' article Obama & Global Trade, I came across the best idea I ever heard in balancing the US Trade Deficit, from a Warren Buffet essay, which is based on Buffet's idea of Import Certificates.

The US has been in a trade deficit since 1971, with 100B+ annual deficits in most years since 1984. Not surprisingly, WOAT Bush has made the situation 2X worse, with the then record 2000 deficit of 379 B going to 700+ B in each of 2005-7.

Some smart dumb economists say a perpetual trade deficit is good. But I never got it, & some economists & non-economists with COMMON SENSE share my view. How can any economic entity be operating at a loss for 37 consecutive years?!

A family or individual cannot operate at a loss for more than a few years without wiping out their savings, going deep in debt, & having to declare bankruptcy

Even in the IT/dot-com boom circa 1999, startup companies could not operate at a loss for more than say 5 years without going bankrupt, or acquired by a competitor for a deep discount.

Fortune 500 companies can't lose money for more than a few quarters without massive layoffs & CEO/mgt team firings.

Other countries, like Argentina, are never allowed to do this. The US gets away with it, since the US Dollar is the global favorite reserve currency of our main exporters, such as China & the Arab Oil exporters like Saudi Arabia.

I would like the smart dumb economists to point out ANY example of ANY economic entity (person, company, or country) that operated at a loss for 37 consecutive years, in ALL OF WORLD HISTORY. I doubt it's ever happened!

I personally had thought that the US will eventually have to do 1 or more of the following problematic actions to balance the trade deficit:
1 use tariffs to make the US a primarily domestic economy.
Problem: the government has to pick & choose which products/industries to protect. The way the US political system in 2008 is dominated by special interests, there's a big chance this process will be corrupt, & far from optimal for the US economy.

2 pick a few high-tech industries, such as genomics, green energy equipment, nanotechnology, etc, that the US will try to be a global export leader in, & subsidize those heavily. These exports will balance out the imports.
Problem: It may be impossible to create enough exports from a few such industries, because the labor cost advantage of ChIndia, & ChIndia's increasing ability to innovate in high-tech itself.

3 Deflate the US Dollar to make US exports more competitive & US imports more costly
Problem: Obvious! This will cause serious inflation, & would be a hidden tax on most US Citizens, since most of us US citizens' assets are 100% in Dollar related assets such as a home, US stocks, & USDs themselves in CDs/money market accounts. Personally, I don't want my Dollars to be worth say 1/2 as much 5 years from now, they already have become significantly weaker during the WOAT Bush regime.

IMHO Buffet's idea of Import Certificates is superior to these & any other idea I've heard. The idea is
1 to import "stuff" (goods or services) in the US, you need to buy an Import Certificate
2 Import Certificates will be limited to the amount of exports, hence balancing the US trade deficit
3 US Exporters will be given Import Certificates equal to the amount of stuff they export, which they can sell in a liquid financial market like stocks

The effect will be that US Exporters will be encouraged, & US Importers will be discouraged.

Import Certificates will work like a tariff, however the "invisible hand of the free market" will decide which "stuff" gets tariffs.

Which jobs will come back the US? Clothing manufacturing or software engineering? The US Fed Gov will not decide it, the market will based on the marginal utility of having to pay X% of the cost of their stuff for Import Certificates.

I think 1 effect of this policy, would be to help the rural American economy. OK, you can't offshore the call center to India because you can't afford the Import Certificates. OTOH, you can't afford the labor cost of Atlanta or Dallas? Solution: put your call center in the economically devastated Flint, Michigan.

I really hope Obama gets elected, & brings in Buffet as Treasury secretary to implement the Import Certificate policy.

Pls give your take on Import Certificates, by hitting up the comments.

8 comments:

vinnie mirchandani said...

thanks for link to my Deal Architect blog on another post...

I am not sure restricting imports is the solution. I am much bigger on increasing exports ...we are still the world's consumption engine - slowing our imports down affects our trading partners, and they shrink also.

elgringocolombiano said...

^Vinnie, thx for the comment. Your blog is excellent, keep up the great work.

How does the USA increase exports to a level which would balance the US trade deficit, given that other countries have lower standards (environmental, labor, etc), as well as a 5X+ labor cost arbitrage?

I don't have an answer, but am open to ideas. IMHO the Import Certificate idea is the best I've heard thus far.

vinnie mirchandani said...

GE, Boeing, Caterpillar and several others do a pretty good job....but for every one of them there are 10X US companies who only want to sell in Europe...it's not a simple issue but everyone today - particularly politicians want to shut down our borders - are import focused and I think that just deepens global recession

Anonymous said...

IC's will increase import prices but overall the prices are increasing anyway because of the falling dollar. I vore for introducing IC's instead of doing nothing = stimulus check? WTF??
USA needs to consume less, enough pigging out and pulling the whole country in deep debt!!!

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Supposn said...

Excerpted from the dot com web site of
“ USA-Trade-Deficit.Blogspot “

“Many of us regret the draft was not self-funding. We prefer that goods leaving the USA be assessed and certificates issued only for exporter that choose to pay fees covering all government expenses due to this trade act. The open market value of transferable import certificates would sufficiently motivate exporters. …………………………….
…………… We also regret that assessments would not be adjusted to exclude the value of specifically listed scarce or precious minerals integral to the goods being assessed. We should discourage the export of cast gold paper weights encrusted with gems in order to facilitate importing high-tech or labor intensive goods.

[This should be a deal buster. The absence of such an exclusion would undermine, (if not completely evade) the act’s purpose].
The 2006 draft did completely exclude assessment of gas and petroleum products within the five years duration after the act’s initial enactment”.

Respectfully, Supposn

Supposn said...

Vinnie, I agree that significantly increasing USA’s exports is crucial to an improved trade policy.

The 2006 Senate draft based upon Buffett’s concept is too much stick and insufficient carrots.

I’m a proponent of USA goods exporter’s obtaining Import Certificates at fee rates that would only cover federal expenses due to this proposal. Rewarding exporters of USA goods would effectively decrease the prices of our goods to foreign purchasers.

Our nation would greater benefit from increased exports rather than from auctions' additional revenue.

It’s been estimated that each dollar decrease of our trade deficit would increase USA's GDP by three dollars.

Such a trade policy would increase USA’s sum of aggregate imports plus exports.

Respectfully, Supposn

Supposn said...

VinnieMichandani, the proposal for import certificates issued only to exporters that CHOOSE to pay fee to acquire transferable Import Certificates is a superior trade proposal. The fees fund all direct federal expenses.

Although at first glance it seems to be a boon for exporters of U.S. Goods, competitive market forces will induce lower (than otherwise) prices of U.S. goods to foreign purchasers; (it’s effectively an export subsidy funded by U.S. purchasers of foreign goods).

This policy would benefit every U.S. producer that competes or aspires to compete with foreign goods within and beyond our borders. Sales will increase for U.S. products produced by GE, Boeing, and Caterpillar. They can offer lesser prices to their foreign purchasers and foreign goods’ prices are increased for U.S. purchasers.

Respectively, Supposn