For years, the U.S. has fretted about its large trade deficit — the excess of goods imports over exports — an imbalance of roughly half a trillion dollars in 2009. The mirror image of that deficit is that America has become the world’s largest debtor. You can’t buy more than you sell year after year without either running down past assets or borrowing, and the U.S. has done it mainly by borrowing. So we have also fretted about the unsustainability of continued unprecedented international borrowing.
About 45 percent of our trade deficit is with China. So when we fret, China is inevitably the target. From time to time, the U.S. indicates that it would like the Chinese to allow their currency to appreciate against the dollar sufficiently to eliminate the imbalance. Sometimes the Chinese respond — but only a little. Sometimes they bluster. At the moment, Congress is threatening the Chinese with tariffs if they do not fix the exchange rate problem. But the Obama administration fears a confrontation with China at a time when we need that country’s cooperation in dealing with North Korea, Iran, and other world problems. It also fears a trade war in which the Chinese impose retaliatory tariffs for any that we might put in place.
So what to do? Surprisingly, Warren Buffett — the famed financier — told us what could be done 23 years ago in an op ed in the Washington Post. It appeared under the title “How to Solve Our Trade Mess Without Ruining Our Economy.” His suggestion, written well before China became the prominent economic and political power that it is today, had three virtues. First, it addressed the problem of the trade imbalance. Second, and equally important, it didn’t single out any country as the sole target. The third virtue is that after economists instinctively yell protection, they will do the math. And they will then realize that the Buffett plan is the rough equivalent of what would happen if in fact China and other countries that maintain artificially cheap currencies ceased to do so.
What was the solution Buffett proposed?