Thursday, October 20, 2011

Import Certificates: Another Problem and its Solution

Previously, we discussed problems with trade certificates and their use as a solution to the European debt crisis. Another problem with import certificates is that a country may require the importation of certain goods. It would not want to deprive itself of these goods by failing to issue certificates allowing their import. This might happen say, if Country A imported oil from Country B, but Country B didn’t import so much of the production of Country A. Country A would not want Country B to have to scramble around looking for import certificates so it could export to Country A a good Country A found necessary. Why should Country B bother? The issue is how to incentivize Country B to export to Country A the good Country A found critical.

The main incentive here of course is prices. The idea is that the money Country A gives to Country B for goods from Country B Country B can spend on Country A’s production. If Country B does this, spends this money, on Country A's production, trade is balanced. The problem is if Country B doesn’t want to spend Country A’s money. If Country B wishes to trade the Country A’s money with Country C for Country C’s production, and Country C then spend Country A‘s money on Country A’s production, all well and good. Trade is balanced. It’s when Country A’s money is hoarded that a problem arises. Indeed, Country A’s cumulative balance of payments is proportional to the quantity of its money that is hoarded by other countries, (minus the quantity of other countries’ money Country A hoards.) So the problem for Country A is to discourage the hoarding of its money. (Of course, Country A also wants to discourage the buying up of its assets.) Having its ‘trade’ money expire is one solution. This would motivate its quick expenditure. But Country A can’t just have ‘trade’ money, or money in foreign countries only, expire. All its money has to expire. But now we’re talking about inflation, the slow expiration of all its money. If Country A allows modest (moderate?) inflation, Country B is motivated to spend whatever of Country A’s money it has with reasonable speed, unless country A borrows it back at positive real interest, in which case Country B is again motivated to run up a surplus with Country A.

A balance must be maintained. Too fast inflation will discourage imports, ie cause a nation to be charged higher prices by one’s partners. Too slow will encourage hoarding of its money.

We note in the Greek problem, Greece is unable to inflate its currency, which would force other countries to buy from it, but is stuck with the common currency, the euro which, no matter how it inflates, will not encourage others to buy from Greece in particular.

Also, this seems to be an intrinsic problem with a country’s having its currency as the reserve currency, as other countries are naturally going to want to hoard that currency, thus, maintain a trade surplus with that country. Thus, that country will naturally tend to a trade deficit, and the economic ills attendant on that deficit.

Barring inflation, and returning to import certificates, another possible solution would be for some goods to be exempted. Exempted goods would generally be basic commodities, since exempting value added goods, unless they were capital goods, would not result in net real benefit to the importing country. This is an important point, which we will discuss eventually.

The importing country’s eventual goal of course, would be not to require the import of so great a quantity of critical goods, or at least to manage the exchange of export for import so the quantity of goods exempted would gradually be reduced, and eventually eliminated. This would result in a certain sort of self-sufficiency.

One could argue that a country requires all the goods it imports, or it wouldn’t be importing them, but for most value added goods there exists, internationally, a surplus of production, and therefore competition for that country’s markets. Indeed, there may be a surplus of factors in that country itself, idled by trade. There will, in fact, always exist a surplus of supply, because labor produces a surplus, which is not distributed down the labor chain, to the unemployed, who have no demand, (having no money) but only up.

The consumer of exempted goods would have to issue certificates at a less than 1-1 ratio, export to import, to other countries, or more specifically, for all non-exempted goods, if it were to balance its trade. Thus, if exempted goods constituted 10% of imports, its other certificates would have to be in the ratio 1 to .9, export to allowed imports, in order for that country to balance trade. Thus, it would face its other trading partners with a mercantilist appearance, unless it could assure these other countries trade with its suppliers of exempted goods. That is, it could give to these other countries the rights, the certificates, it earned from importing the exempted goods. Country A, importing oil from country B, gives to country C rights to export to country B, along with rights to its own market. Country B gives rights, certificates, because it has no desire to be exploited either. These rights, together with Country A’s own rights, would combine to a one to one ratio to Country C. Country A would experience a deficit with Country B, a surplus with Country C. Country C would experience a deficit with Country A, and a surplus with Country B. Country B would experience a deficit with Country C, and a surplus with Country A. But each country’s total trade would balance.

For a country such as the US, balancing its trade in just other than exempted goods, ie oil, would be an improvement. However, the certificates it issues can be phased in independently of the exchanges of certificates from the importation of exempted goods.

Each country, then would be in the position of merely exempting any goods it found critical. It would scale back exchange rates in other goods to a less than 1 to 1 ratio, and fill in the difference with the certificates it had earned in importing the exempted good.

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