On April 3, President Trump announced his reciprocal tariff proposal. His tariff rates were calculated on a country-by-country basis by dividing half of each country’s trade surplus with the U.S. by that country’s exports to the U.S., with a floor tariff rate of 10%. Although Trump’s tariffs appear to be completely novel to the chattering classes, they actually have several important antecedents.
John Maynard Keynes in 1933
In 1933, Keynes helped put into effect Britain’s Imperial Preference System, which created a duty-free zone within the British Commonwealth, with high tariffs on countries outside of the Commonwealth, including the primary trade-surplus countries of the day, the U.S. and France. As a result, factories moved into Commonwealth countries to access markets, and Britain quickly climbed out of the Great Depression.
Later, in his magnum opus, published in 1936 (The General Theory of Employment Interest, and Money), Keynes included an entire chapter about the danger of tolerating trade deficits:
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Trump, like Keynes, realizes that an unfavorable trade balance is unsustainable and is willing to use tariffs to rectify such an imbalance.
Rep. Gephart, Sen. Levin, and Sen. Riegel in 1985 and 1987
The first bill that would have required balanced trade was introduced by Democrat congressman (and future majority leader) Dick Gephart and by Senators Carl Levin and Donald Riegel in 1985 and 1987. Their bill would have applied a tariff to countries that had a large trade surplus in non-petroleum products with the U.S.
In such a case, the U.S. Trade Representative would enter bilateral negotiations in order to achieve an annual 10-percent reduction in that trade surplus each year. If the trade representative were unable to achieve such an agreement, then the president would be required to limit imports from that country in order to achieve those reductions. Trump, like Democrat leaders of the 1980s, is willing to use negotiations to bring trade toward balance.
Warren Buffett in 2003
In an article in Fortune, Buffett argued, “America’s growing trade deficit is selling the nation out from under us.” He wrote,
In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce — that’s the trade deficit — we have, day by day been both selling pieces of the farm and increasing the mortgage on what we still own.
In order to balance U.S. trade, Buffett proposed a system of tariffs whose proceeds would be used to subsidize exports. Like President Trump, he saw America’s trade deficit as a huge problem and came up with a dramatic plan that would solve it.
Peter Morici in 2008
Maryland business professor Peter Morici (2008), former director of the Office of Economics at the U.S. International Trade Commission, was the first to propose a tariff whose rate would go up or down depending upon actions that cause a trade deficit. He proposed a dollar-yuan conversion tax that would be applied to Chinese imports into the United States at a rate continually adjusted to the rate of Chinese currency market interventions. He wrote,
China subsidizes exports by selling its currency, the yuan, for dollars at artificially low values in foreign-exchange markets, making Chinese goods artificially cheap at Wal-Mart. The U.S. government should tax dollar-yuan conversions at a rate equal to China’s subsidy until China stops manipulating currency markets. That would reduce imports from, and increase exports to, China.
Both Trump’s trade adviser, Peter Navarro, and former trade representative Peter Morici are prominent economists who have long advocated strong government action to bring our trade deficit with China toward balance.
Our Proposal in 2011
In 2011, our own forebear of Trump’s reciprocal tariff was published in the Estes Center Journal of International Law and International Trade. We were developing ideas about trade first published by one of us, Raymond Richman, who had received a Ph.D. from the University of Chicago in 1957 with Milton Friedman as his dissertation adviser and then worked as a university professor and economics department chairman and as a consultant for the OEEC, the World Bank, the IMF, the Inter-American Development Bank, the U.S. Agency for International Development, and the Asian Development Bank.
Our tariff would apply only to the goods of trade-surplus countries with a rate designed to take in 50% of the trade deficit as tariff revenue. It would be adjusted quarterly and suspended whenever trade reached balance. Trump’s formula for calculating specific country tariff rates is remarkably similar to our proposal.
Keynes’s Attempt to Keep Future Trade Balanced
The world economy would be balanced today if John Maynard Keynes’s proposal had been accepted in July 1944 at the Bretton Woods Conference, which led to the establishment of the International Monetary Fund (IMF). Keynes, representing Britain, would have required that trade-surplus countries take down their barriers to imports, stimulate their economies, and/or make loans to trade deficit countries. In contrast, trade-deficit countries would be allowed to use export subsidies, devaluations, import restrictions, and tariff barriers.
Unfortunately, Keynes was opposed at every turn in the negotiations by chief U.S. negotiator Harry Dexter White, a Soviet spy in the U.S. Treasury Department, who may have wished to weaken trade-deficit Britain so as to bring about a U.S.-Soviet partnership after World War II. Alternatively, it is possible that White opposed Keynes simply because he wanted to enshrine “free trade,” not “balanced trade,” as the IMF’s goal. White’s counterproposal for an International Stabilization Fund became the basis for the modern IMF.
Free trade is a wonderful ideal. Each country produces what it can produce with comparative advantage and trades it to another for what that country produces with comparative advantage. As a result, the people of both countries benefit. But in order for free trade to work, it has to be reciprocal. If a trade-surplus country produces products and trades them in return for IOUs, the trade-surplus country gets industries, wealth, and prosperity while the trade-deficit country loses industries, goes into debt, and loses its prosperity.
Trump’s tariffs would have been unnecessary had Keynes, Gephart, Levin, Riegel, Buffett, Morici, or ourselves succeeded in enacting a system that would continue balanced trade into the distant future. Trump has come up with and is implementing a strategy to achieve that worthy end.
The Richmans co-authored the 2014 book Balanced Trade, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.
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