I want to briefly compare my theory of Trade Equilibrium with that of Mr. Warren Buffett’s model for balancing trade using Import Certificates (IC’s). (Sources of data where applicable are: (a) Buffett & Loomis, 2003; (b) Bureau of Labor Statistics; and (c) my previous writings.)
Definition
Bhandari’s Model
I define “Trade Equilibrium” 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.
Buffett’s Model
Mr. Buffett suggested that the U.S. can achieve trade balance by limiting the value of imports to the value of exports by using what he called Import Certificates (ICs).
Legal Framework
Buffett’s Model
America would need to legislate it. It would require establishment of a separate governmental unit to administer it.
Bhandari’s Model
America would need to legislate it too. It would also require a separate governmental unit to administer it. Its functions would include the following:
- Monitor American trade by country and by totals.
- Monitor to assure that the exporting countries (collectively) use the dollars (that they have obtained by exporting their products (goods and services) to America) to import products from America.
- Monitor to assure that the trade surplus countries such as China and Japan (which already have accumulated huge trade surpluses against America over the years) reduce these surpluses at the rate of 10% a year by importing products from America.
- Let me emphasize that this requirement will be in addition to the requirement of not creating any new trade surplus in their favor. This requirement is totally absent in the Buffett model.
It is the responsibility of the countries exporting to America to assure that they don’t export more to America than what they import from America—if they wish to continue to do business with America.
Chronology of Trades
Buffet’s Model
Since American entities cannot import without first obtaining ICs, American entities have to export first to generate those ICs. It is another major weakness in the Buffett’s model.
Bhandari’s Model
Any country can initiate a trade anytime, importing or exporting. However, over a cycle of 2-3 years, it is the responsibility of the foreign country with a trade surplus with America to eliminate this surplus by importing products from America. How they fulfill this obligation is up to them. A reasonable way to use those surpluses, for example, would be to import products from America to improve their infrastructure. Or, spend those dollars by visiting America as tourists.
Volume of Trade
Buffet’s Model
Buffett’s model tends to limit imports for two reasons: (a) Its chronology of trade and (b) Its increased cost of imports to America.
Bhandari’s Model
A major strength of this model is that it does not place limits on Americans importing products from abroad if they need them. Limiting trade, imports or exports, tends to hamper economies, jobs, creativity, and innovation overtime.
Operational Steps for Trading
Buffet’s Model
It appears to involve the following steps: (a) An American party exports products; (b) the U.S. government awards it an IC equal to the dollar amount of exports (it is a bonus for exporting); (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 premium they get from selling their ICs to reduce the prices of products they export. This in turn 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 products in America which in turn would reduce the American imports. This in turn, would negatively affect the American industries, jobs, price levels, and consumptions based on these imports.
Bhandari’s Model
Americans can import whatever and whenever they need to. Foreigners can export to America likewise. Their prices and volume would be determined by the open market operations. This process is much simpler than Buffett’s complex model.
Trading ICs
Buffett’s Model
Since the U.S. exports billions of dollars’ worth of products (goods and services) every year, billions of dollars’ worth of ICs would have to be issued yearly. Since different American importers would have different importing needs, these ICs would have to be denominated into different dollar amounts. These ICs then would need to be traded on an exchange for the convenience of their sellers and buyers.
The governmental cost of operating this unit was one reason because of which the trade proposal, that was based on the ICs model and submitted by Senators Dorgan and 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 there is no decrease or increase in the prices of exports and imports.
Impact on Jobs
Buffett’s Model
Creating jobs appears to be a tertiary goal of this model. In their 2003 article, they mentioned it only briefly. Having said that, trade balance would definitely save American jobs.
Bhandari’s Model
Protecting current jobs and creating net new jobs are the clearly stated main goals of my model.
Once the law of Trade Equilibrium becomes effective, there would be no new U.S. trade deficit. The U.S. currently incurs a new trade deficit of about $649 billion a year, losing about 1.95 million jobs annually.
Beginning with the year in which the law becomes effective, the foreign countries will have to reduce their existing trade surplus to a zero over a ten year period— at the rate of 10% a year. This would increase American exports accordingly and create millions of net new American jobs year after year. The U.S. owed $4.6 trillion on current account to foreigners as of February 2011. Since each million dollar of net exports would create 3net new jobs, a total of 13.8 million net new jobs would be created in America by eliminating America’s existing current account deficit over a ten year period.
Bhandari’s Model for Economic Revolution
America must enact the theory of Trade Equilibrium (a) to maintain its sovereignty and (b) to create jobs, reduce poverty, increase stockholders’ wealth, increase governmental tax revenue, and trim tax rates in America.
With more jobs and higher incomes, Americans would spend more on American and foreign products. The resultant 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 Revolution. And it would be a win-win, positive-sum phenomenon, not a zero-sum game.
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