Warren Buffett, the Trade Deficit and the Dollar

Did you ever read a story in which the headline grabs you but the rest of the story didn’t seem to, well, meet expectations? As a blogger, I’m sure I’m guilty of that offense too. Yet every article that doesn’t turn out to be what you expected, offers some lesson or piece of insight. I tend to spend quite a bit of time on the blog site, Seeking Alpha. Somewhere in there I lost myself and managed to stumble on a reference to an interesting solution to manage the trade deficit as proposed by Warren Buffett (I can’t seem to find the original article that linked to that piece, my apologies). The piece, however sure is easy to find on the Berkshire Hathaway site. It’s the Fortune Magazine article in the right hand column.

Now whether or not you are a Warren Buffett fan makes no difference, his suggested proposal as to how to fix our trade deficit as well as shore up the value of the dollar made for the most interesting reading for me in the last two weeks. He wrote his proposal in conjunction with Carol Loomis, business editor-at-large for Fortune Magazine. I highly recommend reading the article.

What are the tenets of his proposal? Essentially, he would issue an IC (import certificate) to any exporter in the dollar amount of their export. If your container load of engine parts was worth $200,000, then you would receive an IC worth $200,000. This IC can then be re-sold to a foreign exporter or to a US importer. According to Buffett, the knock-on effect would mean that the exporter receives some extra margin support (like China’s VAT rebate) for exporting. Buffett chooses a great example, aluminum. Back in 2003, when he wrote his article, he used $.66/lb as the domestic price for the light metal (ironically, that was the precise closing price on the LME this past Monday). How does the benefit accrue you ask? Assuming the exporter sells the IC’s (there will be a market price established) he/she can use the proceeds of the IC sale to in effect, lower the price of the exported goods to become even more competitive.

Obviously, US importers would suffer under this regime as would overseas exporters. The idea behind the plan, to reduce our trade deficit and reclaim US assets now held in the hands of other countries (e.g. China) would also create negative consequences for US buyers, particularly in the form of higher prices. However, his plan does not penalize any particular product or industry (unlike how the current system works with all its anti-dumping cases, export subsidies, quotas, and punitive tariffs etc). Could it spark trade wars? Well, I suppose so but after all, we happily accepted low cost Chinese-made goods when it’s government fiddled with the currency. As an ardent free-trader and also a saver by nature, Buffett’s argument makes for compelling reading and thought provoking public policy. We’ll postulate in a follow-up post what a proposal like this means for the China Super-Cycle, the oil industry and free trade.

–Lisa Reisman


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