Free Trade - Worshipping A False God

The World According to Me

For close to three decades we have been told about the coming of the post-industrial age in the U.S. and of the many benefits of moving beyond the age of factories and industrial production to the glorious world of intellectual and creative power that will follow.

Those of us who live in the world of reality have been skeptical, but the policy wonks, talking heads and pundits drank the cool aid in huge gulps and worship at the alter of the false god of "free trade." Barriers to trade have dropped like flies, unless you want to export, and off shore manufacturers have stuffed our stores with their goods and our manufacturing base has dried up. How did we let this happen? Who is responsible for this? The short answer to the last question is that we are all responsible. We have stood idly bye lapping up cheap goods made by subsidized factories that pollute on a massive level, use raw materials that endanger their workers, and sometimes users, e.g. melamine in pet food, or lead paint on toys, steal intellectual property as a matter of course and still play the part of innocents when cited for their abuses. Isn't it ironic that people have shopped at Wal-Mart for years buying exactly the things that will put their own employers out of business and cost them their jobs?

I wonder why other countries strive to increase their manufacturing bases and stress industrial development while the United States has allowed them to do so by transferring our manufacturing base to theirs. Are we so much smarter? Do we know something about economic reality that they don't? Frankly, we are not smarter, nor do we know something they don't. Our policy makers from the Nixon Administration to the Obama Administration have been cheerfully manipulated by those governments and large corporations who stand to benefit most from the freedom to kill our manufacturing base. GE is currently running heart-warming ads about creating jobs in the U.S. That's all good until we look at the context, which is that for every job GE creates in this country, it creates two or more overseas. GE and its compatriots are not the answer, they are part of the problem.

Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush and Barack Obama have repeated the litany that we want free trade as long as we get a level playing field and then they have told us that whatever free trade agreement they were trying to pass through a clueless Congress addresses the issues that tilt the playing field. Hogwash! China, India, Pakistan and the rest have no interest in a level playing field. They want and will insist upon keeping the playing field tilted to them. The only country in the world that actually develops trade policy based upon the naive belief that there will ever be a level playing field is the United States. At the recent Second Annual Conference on the Renaissance of American Manufacturing, at which I was a panelist (applause here), Dr. Ralph Gomory, a research fellow at NYU, highlighted this issue and explained that our trading competitors, we have no partners, particularly China, are simply pursuing that age old policy of mercantilism. Their goal is to have raw materials and technology flow to their factories and markets to be open to the manufactured goods those factories make. They use all manner of economic enticement to lure companies into playing the roles they want them to play, and large companies, having the flexibility and resources to move, do so.

What can we do about it? First and foremost, we can stop being the only industrialized country without a national manufacturing policy. For the first time in decades there seems to be a bi-partisan consensus that the country has to do something to spur industrial renewal in this country, so we need to avoid political side shows. At the conference I mentioned in the last paragraph, I spoke with other small and mid-sized manufacturers in attendance and I asked them two questions: 1) have you ever made a decision about operating your business in which taxes were the key issue. The unanimous response was "no." Big companies can move because they have the resources, but small and mid-sized companies can't, so taxes are something that are one factor, but we can't control them, so you just operate in world as it exists. 2) What is the single item of cost and effort you would like to have removed from your business life? The unanimous response was health insurance. They, we, want to have our people insured if only because effective health care means lower absenteeism, but we really don't want to pay for it or have to worry about its operation. The solution unanimously preferred is Medicare for all. Everyone gets covered, everyone pays in, and businesses can focus on business.

Those who argue the tax issue are either missing the point or lying. A couple of weeks ago, Japan dropped its corporate tax rate and the U.S. became the highest taxed country in the world, or did it? Unlike other countries, we don't have a Value Added Tax (VAT). If you add Japan's corporate tax to the VAT, their rate is right up there with ours, and some countries are higher. What difference does it make? When a company in a VAT country exports, it gets a rebate of its VAT payments for its exports. So if the VAT is 15%, the price at which a product is sold off shore is immediately decreased by 15% increasing the competitive price of the product in the foreign market. If both countries are VAT countries, it sort of cancels out. But the U.S. is not a VAT country, so when our companies export, the full cost of the tax remains attached to the product, and then the receiving country's VAT is added as if it were made there. The swing could be 30% or more! Now add to that subsidies and currency manipulation, and you have a condition in which the American exporter cannot compete there and can't compete here either.

Why don't we have a VAT? There are historical, political and operational reasons. After World War II, France asked the United States to allow a 2% VAT to help its products compete and foster rebuilding a nation devastated by the war. The Eisenhower Administration agreed as part of the nation's policy of helping Europe rebuild quickly in the face of Soviet expansionism. Part of that agreement was a prohibition against the U.S. doing the same thing. Over the years, the VAT carve out spread with the prohibition attached. The VAT has frequently been called a national sales tax because it operates as regressively as a sales tax, even though it is not a sales tax. Generally the U.S. has resisted the concept of regressive taxation. The theoretical trade off for the VAT is a reduction in income tax rates, such as Japan has just done. There is justifiable skepticism about whether or not our government would enact a significant income tax reduction. In our current hyper political atmosphere, even though a VAT is not on the table, exactly how rates should change is a point of contention regarding current tax law, with the Republicans supporting rate cuts at the higher end of the income scale and Democrats supporting increases at the higher end of the income scale.

We must stop nipping around the edges trade policy, accept the reality of our current situation, and refuse to let the playing field tilt toward any country but ours. Stop whining that it's not fair. "Fair" doesn't enter into the equation, just ask China. Our market is still the main target of the mercantilist countries. We need to press that advantage to rebuild and reinvigorate our manufacturing base. Thus far, one of the only things about which Democrats and Republicans agree is the export of our manufacturing base. Progressives or Tea Party members, we must make sure that those who would govern our nation will care more about us than about jobs created in China by U.S. multi-nationals.

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Comments » 1

philsco writes:

good article Mr. Berkley

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