Globalization is a hot topic today. Negative trade balances with loss of jobs caused by companies offshoring operations is the reason a simple model was constructed to determine the impact of negative trade balances. No matter how the variables within the model were manipulated, the results were the same. When companies offshore their operations and lay off workers, not only are there lost wages by newly unemployed, but when those workers return to work, they lower wage rates for all.
In addition, there is a transfer of wealth to a foreign nation even though average prices decline on the imported goods. Lower prices from foreign countries due to lower wage costs can never offset loss of income in the United States after a company moves operations offshore.
A new solution in this white paper called Parity Tax, is proposed to be used in place of any of the previous methods used to try to mitigate negative trade balances. The effect of the proposed Parity Tax is to equalize imports and exports making trade fair for all. Assuming a Parity Tax was successfully implemented under conditions of full employment, the average wage/salary in the United States would go from $59,912 to $62,405, a $2,493 increase per year. If there was considerable unemployment, 5,601.000 unemployed would go to work, a 4.2% increase.
See another white paper titled “Eliminating Trade Deficits and Bringing Jobs back to the United States” for a different proposed solution.
A hot topic today is globalization. Hardly a day goes by when the media reports another US company laying off their employees and moving their operations offshore. When labor cost is a fairly large portion of the total cost of operations, companies, in order to compete more effectively, sometimes offshore operations to obtain lower labor costs. This allows them to sell their products in world markets at lower prices.
A Look at the United States Trade Imbalance Today
Although offshoring operations in search of low cost labor is a major factor causing trade imbalances there can be other causes such as other countries possessing a special mineral not found in the US, tropical fruit not grown here, or specialized technologies. However, the bulk of the trade imbalance is caused by lower cost of labor and operations.
The following tables shows the trade imbalances for the year 2015.
Notice that the United States has a positive trade balance as it relates to services of $262 billion dollars while having a negative trade balance of $762 billion dollars for goods. It is the manufacturing sector where jobs have been lost. Also notice that 5 countries make up 79% of the negative trade balance for goods with China being the largest at 48%.
In order to see the impact on the United States economy the trade imbalance was compared to the total Gross Domestic Product (GDP) of the United States which was determined to be 3%.
Constructing a Simple Model of an Economy
When companies lay off workers and offshore operations, what really happens is the question. A simple model representing an economy of a country was made in order to see the effect. The model consisted of five companies all making widgets. The companies had employees with a corresponding labor cost which represented about 40% of total costs. They all had equal production quantities and selling prices to consumers. The employees were also the consumers, as it is in any real economy
With this basic simple model economy constructed it was assumed that one company laid off its workers and moved their operations offshore. The effect of offshoring was then analyzed.
Two important assumptions that are given about human nature in any economy, and which seem to hold throughout history, were made.
- People Consume to the Extent of Income – For the most part, most people consume close to the total income that they have to spend. Sure, there are a few big savers and the few rich save more than the masses of poor and middle classes. However, for a whole economy spending rates of income are always high.
- Unemployed Workers will Go Back to Work Eventually Even at Lower Wage Rates – For the most part people will eventually go back to work even if it is at lower wage. The reason is simple, they have to eat and find shelter. Pressure builds to go back to work to meet basic needs. When layoffs first happen there is unemployment for a period of time but through lots of hardships and juggling most find their way back to being employed.
Analyzing Results Using the Model Economy
A comparison is made between the model economy when all employees and operations are in the United States vs when one company laid off workers and moved operations offshore. The following are conclusions that can be drawn after manipulating the model economy in a number of different ways before and after one company took their operations offshore.
- Employees at First Lose their Jobs – This result is self-evident.
- The Price of Now Imported Goods go Down – This is because the cost of labor is less in the company that just received the operations from the offshoring company. Companies can now charge lower prices due to lower wage costs.
- The Whole Economy Shrinks – Since there is less income for people to spend (assumes no increase in debt) due to lost wages, fewer goods can be purchased, thereby reducing the total consumption in the economy.
- Laid off Employees will go back to Work Driving all Wages Down – Due to human requirement to eat and have shelter, the laid off workers will eventually find employment but at lower wages. The average wage in the economy will decline.
KEY CONCLUSION – No matter what model simulation was done, wages lost were partially offset by decline in prices. However, the total of lost wages added to the eventual lower wage rates was always greater than the benefit of lower prices. The United States economy always shrinks when a company moves their operations offshore. The loss is always equal to the gain by the country that now hosts the company. In every case America loses.
Past Solutions that have Been Employed
The following is an analysis of solutions used in the past.
- Free Trade – For the most part this is the basic system employed with all sorts of tweaks having been made to it. The result of free trade is to continually transfer operations and jobs to other countries until wage rates rise enough to not justify the move. There are many costs other than wages such as transportation, communications, market intelligence, secrets, etc. that go into other than wage rates than help determine when cost structures equalize between countries. For the most part this is the system we have today.
- Closed Door – Sometimes countries close their door to any trade at all. This was the case for USSR from about 1950 to 1990. The same was the case for China until about 1985. North Korea is still pretty much a closed door trading state except for China. This method always hurts the Closed Door country’s economy. They give up the possibly of exports that help the economy and lower prices from some imports as well as the benefits of technology from other counties.
- Sanctions – Sanctions which come in the form of restricted trading can be employed. They are generally employed not for trade balancing but for other reasons such as nuclear development restrictions, political unrest, or other reasons.
- Tariffs – Tariffs are import taxes on specific goods that one country imposes on another. Of course, what usually happens is that the other country soon imposes their own tariff for goods imported to their country. A trade war breaks out. Usually after some time after the countries have hurt themselves sufficiently, the trade ware ends and trading resumes to a free market system.
- Trade Agreements – Countries and set up certain trade agreements either on a bi-lateral or multi-lateral basis. In theory a country could negotiate a very fair trade agreement but this seldom happens for a whole host of reasons.
- Across Border Tax – Assuming one country creates an across border tax on other countries and other countries don’t reciprocate then that country wins by transferring wealth to itself. If the other countries reciprocate, the transfer is neutral but all imported goods in both countries increase in price making it worse for the general population.
Proposed Solution to Balancing of Trade
None of the past solutions to trade imbalances have been practically successful. A new method, called “Parity Tax”, is proposed.
The purpose of the Parity Tax is to over time create a situation where imports equal exports between countries. It allows for exports to continue, which has a positive impact on jobs and the economy. Yet it restrains imports to the point of being equal to exports, which mitigates the jobs lost and transfer of wealth from the past negative trade imbalances.
Parity Tax works by imposing a tax on all imported goods at a flat rate until imports equal exports. The tax would then be adjusted up or down as necessary to maintain a net trade balance that approximates zero. By the manipulation of the Parity Tax rate imports and exports are kept nearly equal. Any Parity Taxes collected would go into the United States treasury.
The best way to implement the Parity Tax is by entering into a trade agreement with the foreign country before implementation. However, some countries may refuse to enter into such a trade agreement. The United States would then announce their intentions to impose a Parity tax and then implement it.
If the foreign country imposes a tax back on the United States, the United states would simply increase the Parity Tax so there would be a tax differential favorable to the United States. In order to keep exports from declining in the event of a trade war, all proceeds from the Parity Tax would now be paid to exporting companies and not to the United States treasury. This plan is a no win to foreign countries in that they will lose more and more of their exports, creating major problems with their economy. It is expected that eventually the foreign country will comply with the United States Parity Tax.
The Parity Tax therefore allows exports to continue with their positive impact on the economy and imports to be restrained to the point of equaling exports, thereby saving jobs and preventing transfers of wealth.
Modeling the Effect of the Parity Import Tax
The following tables show an approximation what the effect of the Parity Tax would have on the economy and labor.
Assuming Full Employment Exists
Since today the economy is operating at what is considered full employment most of the benefit will go into raising the average wages and salaries in the United States. Therefore, the computations above show that if a Parity Tax was implemented that average wages and salaries would increase from $59,912 to $62,405 per year, a $2,493 per year increase.
Assuming Unemployment is Sufficient to Create New Jobs
Globalization is a hot topic today. Negative trade balances with loss of jobs from companies offshoring operations is the reason. A simple model was constructed to determine the impact of negative trade balances. The result was no matter what happens, when companies offshore their operations and lay off workers there are initially wages lost but as they return to the labor force lowers wage rates for all. In addition, there is a transfer of wealth to foreign nations even though average prices decline. Lower prices can never offset loss on income from offshoring.
A new solution called Parity Tax is proposed to be used in place of any of the previous methods used to try to mitigate negative trade balances. The effect of the proposed Parity Tax is to equalize imports and exports, making trade fair for all. Assuming a Parity Tax was successfully implemented under conditions of full employment, the average wage/salary in the United States would go from $59,912 to $62,405, a $2,493 increase.