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Saturday, August 30, 2014

The sticky problem of trade deficits

Posted by steve on March 16, 2012

But what about the balance of trade?

By Anders Höglund with Stephen Hinton

Trade imbalances which persist for long periods of time tend to warp the infrastructure of the economy and create imbalances which will harm the economy in the long run. Sooner or later these structural imbalances will have to be remedied at a cost.

The sole purpose of the export is to pay for the import. Just like the need for a household budget to balance outgoings with incomings, Acting according to this principle is the only long-term, responsible and sustainable way of handling the trade between countries.

Viewing a large trade surplus as positive indicators in the economy and failing to take action or even worse; trying to increase the amount of exported goods and services by various means, above what is needed to pay for the import, is harmful. The harmful side effects include warping the structure of the economy both in countries with an export surplus and in countries with an import surplus.

There are some straightforward methods to eliminate an accumulated trade debt and to turn a trade deficit into a balanced trade. The method is to charge a, sector neutral, import control fee, designed as a flat percentage of the value, on all imported goods and services.

It must be publicly and internationally announced that the sole purpose of the import control fee is to achieve a gradual and steady, controlled shift towards a sustainable, balanced trade.

It must also be made totally clear that the import control fee is not a trade-impeding measure but instead a measure to improve the balance of trade both regionally and globally and make it long-term sustain¬able and beneficial for all countries.

The income from the import control fee can be used, in full, as a budget revenue. Another possibility is to use the income from the fee to pay for an export control subsidy using the same percentage as the import percentage fee. As long as the value of the import is greater than the value of the export, there will be a net budget revenue.

The import and export markets should be continuously monitored and the percentage fee should be adjusted regularly and sufficiently often for a control fee futures market to emerge spontaneously.

For countries with a trade surplus the import fee can be replaced with an import control subsidy and the export subsidy can be replaced with an export control fee following the same basic logical principles as the control of the above mentioned import control fee and export control subsidy.

To minimize the total societal cost of creating a sustainable economic structure and balancing the trade, the trade control fees should be used with caution and the restructuring of the economy is best done over a period of several years. However the beneficial psychological effects on the market can be immediate as soon as the principle and the long-term effects of the trade control measures are understood.

The trade control fee should not be viewed as a permanent solution to the problem of trade imbalances. These problems need to be solved by proper control of the credit volume and the rate of credit expan¬sion in the economy so that the average real wage, in the long term, can reflect the average real labor productivity and so that the rate of consumer price infla¬tion and the rate of asset price inflation can be harmonized within the region.

Or to use the analogy of the economy like a football game – to clearly define the goal posts. Then, introduce a flexible system of subsidies and fees. Adjust these often enough to stimulate the market to ensure targets are met. The uncertainty created will mean futures markets will emerge spontaneously. The financial sector will then start to follow even more closely factors salient to reaching targets including real estate, pollution abatement, aggregate demand and balance of payments.

This, I believe, is the right strategy for the modern economy. To spare citizens the unfair hardships of laissez faire whilst avoiding the stifling restrictions of a planned economy approach.

The ideas I put forth today are not new. All the principles proposed regarding human psychology, incentive structures and stabilizing feedback control are based on an abundance of well proven know¬ledge freely available from fields outside economics. I propose they are made part of the national economic paradigm.

So to sum up, communicating clearly, setting acceptable targets, using control system thinking, market forces can drive the change for good, and sustainability. We can ensure that business does that which it does best: in a way that women understand best -providing a good life for all citizens.

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