The Buffett trade deficit proposal.

Fortune Magazine (October 26, 2003) carries an article by Warren Buffett, the well- known investor and CEO of Berkshire Hathaway, that describes the dangers being created by mounting U.S. trade deficits. He also offers a proposal on how America can balance its trade with the rest of the world.

In this article, Buffett reveals that since the spring of 2002 Berkshire Hathaway, for the first time, has been buying foreign currencies in "significant" quantities. Buffett believes that the value of the dollar will decline. The mounting U.S. trade deficit, he explains, is the reason behind these currencies buys. America is trading away its assets for consumables, which ultimately is unsustainable.

The Buffett proposal would result in increased U.S. exports and probably overall increases in world trade. Most important, it would balance U.S. imports and exports without a large decline in the dollar's value.

Buffett proposes that each exporter from the United States be issued Import Certificates (ICs) in an amount equal to the value of their exports. The exporter would then sell the ICs to U.S. importers or foreign exporters who wished to bring foreign-made goods into the U.S. market. As Buffett explains, "To import $1 million of goods, an importer would need ICs that were the byproduct of $1 million of exports."

Since the United States exports almost $1 trillion annually, huge quantities of ICs would be available. Market competition would determine the price for these ICs. Buffett also envisions each IC would have a life of only six months to discourage speculators from accumulating them.

To illustrate his proposal, Buffett postulates that the ICs would sell for 10 cents on the dollar. Thus, a U.S. producer would have an extra incentive to export their goods. If the value of the export is $10,000, for example, and the IC sells at 10 cents on the dollar, then the total return to the U.S. exporter is $11,000.

The Buffett proposal does not discriminate between imported goods as differential rate tariffs do. The ICs, moreover, would be available to all foreign producers on an equal basis--by nationality and product. As the trade deficit narrows, the value and cost of the IC would lessen.

The proposal would raise prices U.S. consumers paid for foreign goods, though not for domestically produced goods, and would reduce profits of foreign producers. Ultimately, however, those burdens would be less and more equitable distributed than with any of the other solutions to the U.S. trade deficit now being proposed.

The Buffett proposal appears to be one of the least painful and most equitable ways for the U.S to balance its trade accounts. The idea merits serious and immediate attention by U.S. policy makers.