In a previous post SNL makes fun of the residents of Squanderville, I had excerpted Warren Buffet’s story about Squanderville vs. Thriftsville, a story that in 2003 showed the dangers of having years of trade deficit with other countries.
This problem is further exacerbated by the fact that for all the stuff that we buy from other countries, because of the trade deficit, we are paying for these commodities with assets from our country. Further, into the article, Warren Buffet goes on to describe his solution to this problem of a growing US trade deficit using an instrument called Import Certificates (ICs). Basically, other countries would have to buy (import) an equal amount in dollar terms before they would be able to sell (export) to us. I am not sure if Warren Buffet has changed his thoughts on how to fix the problem, but using an instrument that is nothing more than a trade tariff seems to be calling for trouble.
For one, using ICs seems to make the assumption that we will have stuff to sell to the rest of the world, that the rest of the world wants. This eventually might be possible, but in the short run – I am not sure how we will get over the fact that we currently have a trade deficit of $57.2 billion and that is being caused by the fact that we need to buy from other nations not just clothes, toys, electronic (consumer goods), but also industrial supplies and raw materials, foods, feeds all an important input for a lot of our industries. Another issue I have trouble figuring out is what about smaller, 3rd world countries like those in Africa. These nations might have important low cost materials to sell to us, but they might not have the money to buy from us; in such a case, we would have to stop trading with such a nation. Now one might say that there might be surplus ICs in the world, but I highly doubt that, because nations like China and India definitely would have more than enough stuff to export that the ICs would become an extremely important commodity to them. Another issue might be that some nations might have to export to us first, before they can begin importing from us – in which case how do we break the impasse? We would have to allow for a mechanism where-by the other nation would first be allowed to export to us and then we would have to trust that they will have the money in the future to import from us (clearly this can be a problem in times of world-wide economic recession, like we are seeing today). Finally, also note that in some cases – other nations might have to export to us for many years before we might come into a position where we can begin selling them something. A good example would be a car manufacturing plant – that needs building and raw materials from other countries to build the plant in the first place. Only once the plant is built (which can take from 2 to 5 years, not including design time for the car itself), will we have a car to sell to other nations to close the trade gap.
Well, I don't have an economics degree – so what do I know when it comes to stuff thought up by the oracle of Omaha? But to me it just seems that the right way to fix the trade deficit (a real, present and clear danger) would be to figure out how to bring back the competitive edge back to the U.S. This economic crisis seems to me to be the ideal cauldron which can allow the country to cook up what it needs to make it a positive trader of goods that in general the world wants more off.
So given my lack of an economics background – is there something that I am missing in this proposed solution by Warren Buffet? Or do you have a link to some new information from the WB?