Warren Buffett: Here’s How I Would Solve the Trade Problem

Fortune Magazine has the article Warren Buffett: Here’s How I Would Solve the Trade Problem dateline April 29, 2016.

Buffet starts with a story about two mythological islands, and transitions to some facts about the USA trade deficit. I’ll start with an excerpt that gets to his proposed solution toward getting a trade balance.

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties–either exporters abroad or importers here–wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.

A lot of this makes sense on the surface. Let me end with an excerpt from the conclusion.

But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country’s net worth and the resulting growth in our investment-income deficit.

Perhaps there are other solutions that make more sense than mine. However, wishful thinking–and its usual companion, thumb sucking–is not among them. From what I now see, action to halt the rapid outflow of our national wealth is called for, and ICs seem the least painful and most certain way to get the job done. Just keep remembering that this is not a small problem: For example, at the rate at which the rest of the world is now making net investments in the U.S., it could annually buy and sock away nearly 4% of our publicly traded stocks.

Giving his ideas about as much time as it has taken me to start writing this article, I have a few doubts about his proposal. I am not sure how he comes to the conclusion that a declining dollar would not be enough to halt the outflow of our country’s net worth. Perhaps the key is in his use of the adjective “gently” in talking about the decline in the dollar’s value. Maybe it would take a rapid decline.

Perhaps he is thinking that the IC’s would preserve the value of the dollar investments that people have in domestic stocks. That might be good for people holding such stocks, including foreign investors. However, it would place all the burden of the cost of more expensive imports on people who do not own domestic stocks. In other words, using ICs instead of a declining value in the dollar would make the domestic wealth inequality go up.

Letting the dollar decline in value might make people of all wealth categories share the burden a tad more equally.

Of course the devil is in the details and in the unpredictable way that people all over the world would respond to either of the two policies for solving out trade deficit. It might well begoove us to have academics and practical experts explore the alternatives in more depth and detail.

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