How to balance trade in a hurry yet avoid a trade war

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Fair trade implies that a country does not face a major trade deficit with another country. Presently some fear that steps being taken by US to end the trade deficit with China may lead to trade wars. In any case, it is leading to a lot of waste of time, stress, negotiations and worries for lot of humans across the spectrum of trade and governance. Trade wars take place when a country imposes tariffs on some goods and in response the other country imposes tariffs on other goods.

There is however a very simple way to fix trade deficit that avoids trade wars or minimizes possibilities of one. It has been mentioned in this blog earlier but seems it was not heeded. An even simpler version of the method is now repeated. Any country A that wishes to balance trade with another country B may adopt the following rule of tariffs

In any financial year if A or B has a trade deficit in the previous financial year, then the country in deficit shall impose a tariff of X percent on all goods (not select goods) from the other country, where X is the rounded percentage trade deficit measured from average volume of trade between the two countries. The financial year may be the calendar year or measured from another date.

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Example:

Let us say in 2017 country A exported 300 billion dollars worth of goods to B but imported 500 billion dollars worth from that country.

Then average trade volume is (300 +500)/2 = 400 billion dollars

Deficit = 500-300 = 200 billion dollars
Percentage Tariff during 2018 = (200/400) x 100 = 50%
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Such a Tariff should balance the trade during 2018 so that in 2019 the tariff would revert to zero. If not, whatever the calculation suggests shall be the tariff. If A country has a trade surplus it shall not impose any tariff but the other country might similarly. In the long run, it shall balance trade by a method called bang-bang control in economics that I learned from Professor Subrahmanyam Swami as a student at IIT Delhi in 1970 (as applied to other areas, not trade as here) who did research in this method of control in economics at Harvard

Since this tariff is not selective of different goods and since any increase of deficit will lead to further increases of tariff it is not likely to lead to a trade war. Such a rule may not be applied to countries with small trade volumes since it does not affect the overall trade picture much.

The present method of trade tariff has precisely the same effect as country B revaluing its currency by a similar amount. However country A need not wait for it, since it can take care of the imbalance at its own end.

Modified Methods:

While the idea has been presented in its simplest form here, modified versions of it may be developed,  for example in which the tariff is the percentage deficit as described here multiplied by a factor, that could even be on a sliding scale. The tariff so collected can also be used to subsidize certain select industries adversely impacted by it, if felt desirable.

One difficulty that may be encountered with present methods is sudden changes from year to year. These can be smoothed out by basing tariff in any year not just on previous year's deficit but on the average deficit of past three years.

It is possible such a rule violates WTO rules but then so do selective tariffs. Any rule that is not fair to any one party is violative of natural justice and needs change.

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