John Komlos warns Donald Trump that shooting yourself in the foot is not the remedy for toe pain and prescribes an oracle’s application.
It is common knowledge that the U.S.’s twin deficits have been abominable. The twins in this case refer to the balance-of-payments deficit and the federal government deficit, as the two usually go hand in hand. However, it is not widely known that the problem became endemic under Reagan’s presidency, with both twins exceeding $1 trillion in today’s money. More precisely, the cumulative trade deficit was approximately $1.5 trillion during his tenure, while his budget deficits averaged $1 trillion per year for eight consecutive years.
It seems unbelievable, but it is nonetheless true. Both deficits accumulated over the successive 45 years, with the former reaching an astronomical $24 trillion (again in today’s dollars) and the latter hitting a staggering $36 trillion by 2025. This means that the U.S. stimulated the global economy with an astonishing $24 trillion. Just think about how many millions of jobs were exported as a consequence. Just think about what those trillions would have meant to U.S. society if spent domestically.
Workers displaced by imports lack access to the expanding IT or finance sectors, being unqualified to work in Silicon Valley or on Wall Street.
But there is yet another well-kept secret: namely, that the U.S. has become a dual economy, one in which the labour market consists of a low-skilled and a high-skilled segment, and where a lack of educational attainment impedes the movement from the low-wage to the high-wage sectors. This has significant implications because it suggests that the trade deficit is not a reliable indicator of the extent of pain generated by globalisation.
Instead, the size of imports alone serves as a better indicator of the pain, as the workers displaced by imports lack access to the expanding IT or finance sectors, being unqualified to work in Silicon Valley or on Wall Street. Therefore, the fact that imports reached a phenomenal $4 trillion in 2024 indicates the difficulties faced by those without the credentials to take advantage of the new knowledge economy.
In short, globalisation has clobbered millions, but more than that, it destroyed neighbourhoods and towns across the Rust Belt, practically annihilating America’s manufacturing base. It is difficult to believe, but in states like Ohio, Wisconsin, and Michigan, the real median household income today is lower than it was at the end of the 20th century. These displaced workers became fertile ground for the Trumpian revolution. Hence, the trillions in trade deficits had tremendous political implications, not only economic ones.
The consumer sentiment index, at 57, has fallen 14 points since Trump came into office and is at a level that is usually associated with recessions.
Thus, something had to be done to mitigate the haemorrhage, but the establishment elites were clueless. That’s where Trump comes in. Yet, only a sociopath or a megalomaniac would declare a trade war against the rest of the world that has zero chance of success due to retaliatory measures that have already begun to hurt Americans across the spectrum. This is emptying both barrels into both feet.
Boeing, Jack Daniel’s, Harley-Davidson, and other iconic firms have been adversely affected, as have soybean growers in Iowa and Illinois whose exports to China have practically ceased. China also canceled 12,000 tons of pork orders and prohibited the exports of rare earths. The list of those who suffered losses is ridiculously long, not to mention U.S. consumers. The consumer sentiment index, at 57, has fallen 14 points since Trump came into office and is at a level that is usually associated with recessions.
However, an ingenious solution has been proposed as far back as 2003. It would enable the U.S. to transition smoothly into a balanced international trade era without allowing for the possibility of retaliation. Warren Buffett, the legendary investor, implored policymakers to “halt this trading of assets for consumables” in an article in Fortune magazine: “America’s Growing Trade Deficit Is Selling the Nation Out from Under Us. Here’s a Way to Fix the Problem — and We Need to Do It Now.”
He suggested 22 years ago a clever way to fix the problem without targeting China or any other nation, and also without raising tariffs on any single good. Unfortunately, his suggestion has been neglected, despite his warning that “The U.S. trade deficit is the biggest threat to the domestic economy… and could lead to political turmoil.” His brilliant diagnosis of the potential for political turmoil is especially noteworthy.
By establishing a market for import certificates, foreign countries would have strong incentives to buy American products.
His suggestion was for the U.S. to issue import certificates to all exporters, in amounts equal to the value of their exports. In turn, exporters could sell these certificates to importers, who could import only if they possessed the appropriate amounts of these certificates. By establishing a market for import certificates, foreign countries would have strong incentives to buy American products. All foreigners sending goods to this country would have to purchase the certificates from the exporters.
To ensure a smooth transition, the policy could be phased in over several years to give everyone time to adjust to the new system. Initially, one could import $1.25 for each dollar exported. Then, in successive years, the value of these certificates could be decreased to $1.15, $1.10, and voilà, by the fourth year, trade would be balanced.
Importantly, America’s trading partners would not have the means to retaliate. The price of American exported goods would decline by the amount that the exporters received for the certificates from the importers. This would give U.S. firms an advantage in finding markets abroad. Implicitly, importing firms would pay for an export subsidy. Thus, U.S. companies would find it easier to export their products, thereby expanding production and creating jobs. Admittedly, the price of imports would increase, but the millions of jobs created, which would eliminate America’s decades-long trade deficit, would be well worth it.
Mainstream theory has not been working. Import certificates are the way to go. It is not rocket science. Yet the Oracle of Omaha’s admonition has been ignored by economists and policymakers alike, although he reiterated his warning in the same magazine in 2016: “Here’s How I would Solve the Trade Problem.” So, what we have instead is Trump’s chaotic aggression on the global trade order that is guaranteed to fail, to the embarrassment of the U.S. and diminish its credibility into the foreseeable future.
