Congressman Mike Michaud

FEATURES

A Bold and Serious Solution to America’s Trade Deficit Crisis

America has a big problem.  Each year, we import far more than we export.  Because of this, we are now suffering from a massive and growing $726 billion dollar annual trade deficit.  This stunning figure is over 6 percent of our output of goods and services or Gross Domestic Product (GDP).  Historically, countries that run trade deficits in excess of 4 percent of GDP have faced serious economic difficulties.  The United States is not an average country; we still have significant economic strength and resilience.  However, the clock is running.  We’re living high on the hog on borrowed money and time.

The massive trade deficit quantifies the complete failure of our national trade policies.     Our trade policies are taking away the tools our workers need to compete in the global economy.   Our trade policies have undermined our defense industrial base and therefore our national security.   Our trade policies have put downward pressure on middle class wages and eroded the economic well being of our communities.   Our trade policies have encouraged corporations to chase low wages and standards around the globe.   And our trade policies have undermined the standard of living of people at home and abroad.   On this Labor Day, 2006, we have to acknowledge that failed trade policies are a major cause of the diminishing opportunity and anxiety that workers are experiencing in Maine and across the country.   Today, I will propose a bold new approach to trade policy that tackles the trade deficit head on and that if adopted, will begin to restore opportunity to American workers and businesses.

The gargantuan size of the trade deficit is the result of failed U.S. economic policy.  We don’t value manufacturing production in the United States strongly enough.  We blindly follow a free trade ideology that makes availability of cheap consumer goods the predominant value.  We forget that to consume one has to first earn the money by producing and selling goods of value.  Our fascination with free trade, which is increasingly at odds with the realities of the global economy, has meant that in the last decade thousands of our factories have closed their doors, some going out of business for good, others moving their operations overseas – and taking their R&D centers with them. 

Since 2001, over 2.9 million high-paying manufacturing jobs have been lost across the country.    That means that under the Bush Administration, 17 percent of our manufacturing jobs have vanished.  And the situation in Maine is even worse.  Since January 2001, Maine has lost 24 percent - one quarter of its manufacturing jobs.   In our state, 19,000 great jobs have disappeared because of failed national economic and trade policies.

Each of the 19,000 Mainers who lost these high wage, high skill jobs have a story to tell.   They and their families have faced adversity, and have too often found themselves scraping and scraping to try to hold together their former middle class lives with jobs that pay less and don’t take advantage of skills built up over years of hard work.

Our trading partners are the primary cause of our free trade woes.  Most nations have national manufacturing and trade objectives.  They play by a different set of rules than we do and game the system to maximize their advantage.

U.S. manufacturers and their workers are working harder than ever to cope with hostile foreign practices such as currency manipulation, intellectual property theft, subsidies, dumped products into our markets, tariffs, non-tariff barriers, and a host of other practices that give other nations a significant competitive advantage.  Unlike their foreign counterparts though, U.S. manufacturers enjoy little, if any, help from our government, which remains indifferent to their plight and that of its employees.

This situation cannot continue indefinitely.  We are borrowing money – now over $2 billion a day – to buy foreign goods.      This has not only serious economic consequences, but may have long-term political consequences as well. What happens when foreign governments don’t like a particular U.S. government policy and threaten to dump their dollar holdings unless we change our approach?

And finally, what happens if the foreigners decide that they hold too many U.S. assets and that we are no longer a good credit risk - because we can never generate the exports to earn back the money to repay them?  Conventional economics provides one logical answer: foreigners could dump their dollar holdings on international markets, potentially setting off a dollar crisis and throwing the global economy into a deep recession, if not depression. 

The US trade deficit continues to skyrocket, up 13 percent through June of this year.  This trend is unsustainable. We’re already suffering the effects of stagnant wages, lost healthcare and pensions, and a declining tax base – the result of so many cases of unfair foreign competition.   We need a big new bold proposal to begin to level the playing field, reduce the trade deficit, and to enable America to regain its economic footing.  

We need to take a new approach to bring our lopsided trade deficit back into balance.  This can’t be done by negotiating more of the same free trade agreements that delivered increasing trade deficits and job losses or by saving more when most middle class families are stretched to the breaking point just trying to make ends meet, or by job training in industries that are facing an assault by unfair foreign competition. 

Something more forward-looking and daring is called for in these treacherous times. Today, I want to advocate an across-the-board surcharge on U.S. imports until balance is restored to our trading relationships.  While this is strong medicine, we must realize that the patient – our economy in this case – is very sick, and serious corrective action is required.

Under world trade rules, a surcharge on imports can be imposed by a country facing a major trade deficit.  When the GATT agreement for the WTO was written, it incorporated a section called Article XII which provides for “Restrictions to safeguard the balance of payments.”  The specific language in section one of Article XII states that “…any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported…”  Noting that the United States is now hemorrhaging $2 billion every day to pay for imported goods, it’s pretty clear that our external financial position is in real jeopardy.  And so, based on Article XII, I believe the time has come for the U.S. to apply an import surcharge in order to get our imports in line with our exports.

Now I know that the mere suggestion of a surcharge will invite charges of “protectionism” from conventional wisdom economists.    But today’s trade situation is so out of balance that we must think outside the box. I welcome any proactive solution that lifts us out of our current mess, but I don’t see any as clear and as direct as a trade balancing tariff.   So, I am putting one bold idea on the table, and I encourage others to do so as well.   A national dialogue on how to reduce the massive record trade deficit would be welcome.

In fact, we are in a crisis situation that defies all of the so-called laws of conventional neo-classical economics. Currency adjustments are supposed to prevent countries from reaching crisis situations with trade deficits like ours.  But the markets aren’t working as they are supposed to because they are being manipulated by foreign central banks that intervene to keep the values of their currencies low and thus the prices of the goods that they sell to Americans artificially low.  This managed trade by our competitors closes U.S. factories, hollows out our industrial base, and puts pressure on the wages of millions of middle class Americans. 

Some people have suggested that the solution to our trade problems is to devalue the dollar.  While that will make American exports more competitive, it will also make imports much more expensive, stoke inflationary pressures, and push the price of gas and other critical raw materials much higher.  Further, it makes all American assets cheaper and could set up one large fireside sale of U.S. assets to foreign interests. Finally, it may set off a race by other countries to competitively devalue their currencies and won’t have any effect at all on countries such as China, which peg the value of their currency to the dollar.  Thus, while the dollar should come down somewhat in value in response to our overwhelming trade deficits, devaluation alone is a very problematic option.

Similarly, increasing our national savings rate would allow us to forego some of the foreign borrowing that we need to do on a daily basis to pay for our excessive imports.  The trouble is that no one knows how to increase our savings rate substantially and easily.  Most American families are already pressed to the wall, with job loss and stagnant wages.

Better education and job training is an important national competitiveness objective, but that does nothing to address the structural imbalance of the trade deficit.  Our economy must be creating the jobs people are training for in the first place.  Unfortunately, in far too many cases, we are training Americans for jobs that either don’t exist or exist in insufficient numbers.

Even if we could figure out how to make these solutions work, they would take years, and our domestic manufacturers do not have years.  If our trading partners wanted to cooperate and stop intervening in currency markets, stop stealing our intellectual property, adjust their indirect systems of taxation, stop their subsidies, and buy more American goods, they could do so starting today.  But they don’t want to cooperate.

We have to continue the dialogue with nations like China and Japan to persuade them to do the right things, revalue their currencies upward, open their markets to U.S. exports, and add inducements to increase consumer spending at home.   However, progress in the diplomatic arena is far too slow.  Even if the negotiations were fully successful, they would come too late to save our domestic manufacturing base.  Our factories and jobs are migrating overseas at alarming rates.  We must act now to stop the bleeding.

That’s why I intend to introduce the Balanced Trade Act of 2006 as soon as I return to Washington. I believe that in order to bring into balance our imports and exports, we must impose a trade-balancing, temporary import surcharge on all goods entering the United States. Such a surcharge, which would exempt critical items such as oil and other raw materials, is, as I have said, permissible under Article XII of the WTO Charter.  I recommend it be imposed until the U.S. trade deficit falls to 1% of GDP or lower from its current level of well over 6 % of GDP.

An Article XII inspired temporary import surcharge would grab our trading partners’ attention and show that we are serious about restoring our manufacturing base, retaining good jobs here in the Untied States, and our preserving our national security. 

A temporary import surcharge is an idea whose time has come.  Whether our free trade ideologues and academic economists like it or not, the American people need and demand a realistic solution that preserves their middle class way of life and their very dignity. A trade-balancing tariff is the only realistic approach to a very real and increasing trade crisis.

9/5/2006 4:41:07 PM