Equity of Trade Versus Free Trade

by Thayne Cozart
Director of Communications, National Organization for Raw Materials

The U.S. has a huge trade imbalance with most trading nations. The imbalance is not in agriculture, although many food products -- both raw and processed -- enter the U.S. at prices below those for comparable U.S.-grown foodstuffs.

To a large degree the imbalance is in manufactured goods. One reason is that many nations have lower costs of production -- based upon a lower standard of living, cheap labor, inexpensive raw materials, protective government policy, etc. Multinationals who have moved their plants to foreign locations enjoy the best of both worlds -- inexpensive manufacturing costs and unlimited access to the world's biggest consumer market, the USA.

Our laissez-faire trade stance, when coupled with many nations' protective trade stances and the inherent disparity of living standards around the world, is proving to be a recipe for ever-increasing trade deficits. Exacerbating the situation, GATT and NAFTA are proving difficult to implement when other nations improvise phony trade issues and drag their feet at every opportunity. Bottomline, the U.S. is having problems with free trade.

There is an alternative to free trade. It's called EQUITY OF TRADE. It would work like this:

Under equity of trade, if the nation or other trading entity in question wants to export some manufactured item or food product into this country, and if the item in question is priced lower than a comparable item manufactured or grown in the U.S., then the trading entity is required to pay a tariff (import duty) at the Port of Entry that equals the difference between the landed-price of the good and the average cost of a comparable American-made good. Example: A shirt made in Sri Lanka lands on U.S. shores with a cost of $15, while a comparable shirt made in the U.S. would cost $25. The foreign entity would then pay a tariff of $10 per shirt.

However, instead of good ol' Uncle Sam pocketing the tariff income on behalf of the federal government (which it's not entitled to and which creates ill-will and does nothing to foster long-range, mutually-beneficial trading relationships), deposit the collected tariff monies into an interest-bearing trading account in a U.S. bank in the exporting nation's name (or company or any other entity). Then give the foreign trading entity 12 months to redeem the trade credit and accrued interest by purchasing any U.S. raw material, manufactured good, or service. If the trading entity doesn't redeem the accumulated trade credit within 12 months, only then does the deposited import duties go to Uncle Sam.

It's logical to believe that the foreign trading entity will not leave all the tariff money and accrued interest to go into the U.S. Treasury by default. It will purchase a like amount of goods and services to wipe out the trade credit account.

Analyze what happened: No one got taken advantage of. America got the imported goods. The foreign entity received a like amount of American goods or services. The trade books are balanced. All monies earned interest every step of the way.

The U.S. didn't allow inexpensive foreign goods to displace American goods on price alone. It made the foreign goods compete on a quality basis with American goods. American consumers will make the choice of which is better at a comparable price. If the foreign goods are really superior to the American goods, then the foreign manufacturer will have earned an increased share of the world market and the U.S. manufacturer or ag producer will have to get more competitive or go out of business. The reverse is also true -- so the free market and the law of supply and demand still gets a chance to work, but it works on the basis of quality and value, not upon inherent differences in world standards of living.

Is it logical for the U.S. to unilaterally adopt Equity of Trade? It is logical if Americans want to continue the nation's constitutional directive to "protect" the American way of life and the economy from any sort of foreign threat or unfair competition. The nation has never shirked its responsibility to go to war when necessary to "protect, defend, and preserve" the American way of life and American way of government for ourselves and future generations.

Therefore, it is illogical for Americans to stand aside and passively let our standard of living decline because our economy isn't worth "protecting, defending, and preserving" for ourselves and future generations. Do Americans want their grandchildren working in the world's most "competitive labor market" if those grandchildren have to work and live like a maquilladora in a Mexican factory or farm with oxen like a farmer in China to make that claim?

The point is this ... anyone can be competitive with his or her labor if he or she is willing to sacrifice in living standards. What's difficult is to be competitive while maintaining or improving your standard of living. If the U.S. and other nations are to be competitive in world markets, then isn't it preferable to be competitive by raising other nations to the American standard of living, rather than us declining to theirs? That's what Equity of Trade does and Free Trade fails to do.