TRADE EQUILIBRIUM FOR FISCAL CLIMB

The theory of Trade Equilibrium that I am proposing would not only help America avert the so called fiscal cliff, it would also place the country on a path to a fiscal climb. Over the years, it would wipe out the entire debt both public and foreign; while protecting and creating millions of net new jobs.

“Trade Equilibrium” is 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 “requiring” the dollar/trade surplus countries to eliminate their surplus over a ten year period by buying American products.

Under this concept, subject to the U.S. laws, foreign countries can continue to export to America as long as they use the dollars so obtained to import goods or services made in America; or make net new investments in it.

Fiscal Facts

In order to make this case, let me first present America’s current situation in terms of trade, jobs, and debt (Source: Bureau of Labor Statistics):

  1. Debt: As of February 2011, the U.S. debt held by the public was $9.6 trillion and the intra-governmental (foreign) debt was $4.6 trillion, for a total of $14.2 trillion.
  2. Trade deficit: During the 2001-2010 decade, the total U.S trade deficit amounted to $6.486 trillion—or an annual average trade deficit of about $649 billion.
  3. Jobs exported: During the 2001-2010 decade, the U.S. exported a total of 19.5 million jobs, or an average of 1.95 million jobs a year. In other words, the U.S. lost 3 jobs per $1 million of trade deficit.
  4. Unemployment: In 2001, 6.8 million people were unemployed (16 years and over, unadjusted). In 2010, the number of unemployed people sky-rocketed to 14.8 million (16 years and over, unadjusted).
  5. Rate of unemployment: In December 2001, the U.S. unemployment rate was 5.7%. In December 2010, the U.S. unemployment rate went up to 9.4%.

Trade Equilibrium Would Eliminate Foreign Debt

Let us assume that American lawmakers agree to pass the law of Trade Equilibrium making it effective January 1, 2013. Based on the facts presented above, this act would then have the following consequences (data related to interest and compounding have been ignored for simplicity):

Beginning 2013, considering the world as a whole, there would be no new U.S. trade deficit. In other words, no more new trade deficit of about $649 billion a year!

Beginning 2013, the foreign countries will have to buy net $460 billion (10% of $4.6 trillion) worth of goods and services from America a year for ten years. The U.S. foreign debt as such would be reduced to zero at the end of 2022.

Trade Equilibrium Would Reduce/Eliminate Public Debt

According to a study done by Isabelle Cohen, Thomas Freiling, and Eric Robinson (2012), over twenty years, investing $1.00 in sewer systems and water infrastructure returns a full $2.03 in tax revenue to federal and state/local governments, of which $1.35 specifically accrues at the federal level.

Using these findings as a “broad” guideline, the $4.6 trillion dollars coming back home (new investment) would generate, over a ten year period, about $2.875 trillion in new federal tax revenues and about $1.794 trillion in new state and local tax revenues (for a total of $4.669 trillion). These tax revenues would arise in without making any changes in the current tax code. The public debt would be reduced drastically likewise.

Under the Trade Equilibrium Act it is the responsibility of the foreign countries to decide how to spend these $460 billion dollars in America in 2013. Subject to the American laws, they can buy whatever American goods and services they want to. At the end of 2013, the American foreign debt will be reduced by that huge amount. If a foreign country does not cooperate, America, should switch its commerce to other countries. It would be suicidal for a foreign country not to cooperate.

Trade Equilibrium Would Create Jobs in America

Under the Trade Equilibrium Act, beginning 2013, there is no net export of American jobs. Accordingly, the U.S.—which has been exporting an average of 1.95 million jobs every year over the last ten years—would save them from being exported. In addition, the foreigners buying net $460 billion worth of American goods and services (to reduce their dollar holdings) would create 1.38 million net new jobs in the U.S. per year.

Where would these new found billions of dollars go? Subject to the American laws, they can go anywhere their foreign owners want them to. Trade Equilibrium law would be also hugely beneficial to the dollar surplus countries as they spend those dollars. Imagine the benefits of investing billions of dollars on improving their infrastructure: transportation, water, and food. They would reap a rate of return on these investments much higher than the meager 1.7 percent interest rate they earn for lending money to the U.S. treasury.

Trade Equilibrium, A Phenomenon

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 and Internet revolutions. And it would be a win-win, positive-sum phenomenon, not a zero-sum game. It would not only stop Americans’ earnings from declining, it would raise them—as it creates jobs worldwide.

Trade Equilibrium law would give people jobs, food, education, shelter and medical care. It would enhance democracy, peace, prosperity, and innovations around the world. Passing the Trade Equilibrium law would also be much simpler than trying to resolve the current debate over tax rates and revenues. How the American business, the American labor, and the American policy makers could not adopt a program that would provide billions of dollars in new investment; and that would create millions of net new jobs?