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Monday, May 29, 2017

If the economy were a patient – medicine for trade imbalances

Posted by steve on December 14, 2010

When doctors gather around a patient the goal is clear: they know that they need to cooperate to apply the best medicine and interventions to get the patient on the road to recovery.

So too, when economists, politicians and civil servants gather to consider what to do to put the economy on the right path. The goal is clear, and the steps taken proposed by each specialist should work together.

Most of the globe is working with a market economy. If a sound enough incentive structure can appear in the economy – an incentive harmonizing private good and long term public good – and at the same time externalities are internalized in the market, then, by definition, market forces will automatically work to solve the problems.

This is the same as in medicine. It is ultimately the body that heals itself, the role of the doctor is to harness and stimulate the process.

An accumulated foreign debt presents a challenge which can have a great impact on the health of the country as a whole and especially on future generations. Such a debt will force future generations to work harder and to give up a considerable portion of their income to pay for the debt financed consumption of the previous generation.

The temptation could be to relax environmental constraints on firms, giving them an economic advantage. Although this lowers costs and may drive demand, the costs will be transferred to society and its resources depleted, again affecting future generations.

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 export is to pay for 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 sustain­able 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 expan­sion 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 infla­tion and the rate of asset price inflation can be harmonized within the region.

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