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Suggested Solutions

Solutions that could accomplish the Mission are not so easy to implement. However, these solutions are exactly what will happen in this world after it passes through the current global systemic crisis. Flexible management of the economy, transition to the intellectual activity from physical one, equal (contractual) relations between the state and business, as well as specialization in the proactive production of innovative goods are the realities of nearest future.


The Mission cannot be accomplished with “simple”, obvious approaches. On the other hand, the new approaches cannot be quickly introduced. But we need to start working on their implementation today because tomorrow it might be too late. 


What is the main difficulty in introducing the new approaches? They will meet resistance of those who benefit from the Mission being unaccomplished. Those who are pulled out of their "comfort zone" will resist, too. Therefore, the development of these approaches should be entrusted to those for who lose a lot because the Mission in not accomplished. Those who suffer the most from the fact that the country is losing its leadership and gradually sinks into the welfare lifestyle. While developing the approaches, we should run a broad propaganda campaign on unacceptability of the Mission being unaccomplished.


Flexible customs tariffs


What does “development” of approaches mean? Take, for example, the “flexible customs tariffs” approach. In order to properly run this process, we need to learn how to calculate the “motivating” value of the tariff: too high a tariff does not motivate to do anything, and too low one does not motivate to start production. We need to learn how to calculate the size of tariffs that do not allow us to completely strangle the competitiveness of imports. At the same time, it is necessary to provide the efficient intellectual support to domestic manufacturers in improvement and cost reduction. As a result, the domestic manufacturers will be forced to make efforts to increase the competitiveness of their products. As soon as domestic manufacturers cope with this “simplified” task, tariffs should be reduced in order to again create motivation for further improvement of domestic products.


Consider, for example, how “flexible customs tariffs” can work in the automotive industry.


Suppose imported cars arrive in the United States at a price of $20,000 (with a profit of $ 2,000 for their manufacturers). American cars are produced with a cost of $20,000 and worse quality. Therefore, they can only be sold if their price is $ 2,000 lower than imported. American car companies are dreaming of a profit of $3,000 from a car. What should be the customs tariffs so that American cars can compete with imported ones?


The calculation is simple: American cars should be sold at a price of $23,000, and imported cars, respectively, at a price of $25,000 (we don’t take into account the markup of dealers, we assume it is the same for all cars). The customs tariff should be $5,000 (25%).


If such tariffs are set, the American automotive companies will act in the same way as they did in 2005: they will simply raise prices for their cars, after the rise in prices for imported cars. Who will lose from introduction of such tariffs? Only American consumers: they will pay the difference in prices.


How to organize dynamic tariffs? For this purpose, one needs to determine what level of profit could motivate domestic companies to fight for cost reduction and quality improvement. Let's assume that this is $1,000. Then American cars should be sold at a price of $21,000 and imported ones for $23,000. The tariff should be $3,000 (15%). At the same time, American companies are subject to the condition: “You have a year to lower the cost by $500 and raise the quality so that your cars are sold at a price difference of $1,500 rather than $2,000. If you don’t have enough time for that, it's your problem. In a year, tariffs will change. ”


What should happen in a year? American cars, with the same “motivating” profit of $1,000, should cost $19,500 and should be sold for $20,500. For imported cars, the price should be $22,000. Then, the tariffs could be set at $2,000 (10%).


In another year, at the same pace of forcing the domestic producer to upgrade, it would be possible to reduce tariffs by another $1,000, down to 5%, and in a year more they should be completely removed. As a result, tariffs last for 4 years with a constant decrease, while American automotive companies pick up a certain momentum in reducing the costs and improving the quality. Whoever fails to maintain this imposed momentum should step aside. The state does not “rescue” automakers at the expense of taxpayers, as Obama did in 2009 saving them from bankruptcy.


Only in this way the government could returned manufacturing to America and at the same time make domestic businesses competitive.


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Capitalism takes pride in the fact that competition is forcing manufacturers to constantly reduce the price of goods and improve them, and thereby increase the purchasing power of the population. However, this mechanism works only when competitors play by the same rules and do not try to blackmail the market. If some competitors gain the support of the state without any obligations on their part, they behave as a monopoly who constantly raises prices and does not improv anything. This is why such a “one-way game” represents a danger for society. The state, if it wants to accomplish the Mission, should establish new rules for interaction with the domestic producer: not only provide support from the state, but also assume reciprocal obligations from the producer.

Non-Obvious Opportunities to Accomplish the Mission | Financial and Systemic Crises | How High Tariffs Could Lead to Financial Crisis?

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