Categorized | Tax

Germany uses VAT for export competitiveness. We don’t.

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInShare on RedditDigg thisShare on StumbleUponBuffer this pagePin on PinterestShare on TumblrEmail this to someone

The debate over potential U.S. consumption taxes is still immature.  Its a high vs. low tax debate.  Its a regressive vs. progressive debate.  Those are important points, but have long been resolved in the 150+ other countries that include a VAT in their tax mix.  The proper use of a VAT does not mean a net tax hike, does mean a net progressivity change, BUT does allow very positive trade competitiveness results.

Germany is an EU country with a progressive tax system.  They rely heavily on the VAT in their tax mix.  Germany is the biggest net exporter in the world in relation to its GDP.

They consistently raise the VAT.  Why?  To gain export competitiveness.

Germany raised its standard VAT rate in 2007 to 19%, with is now over 2% below the EU average VAT rate. This rise was used to finance a cut in employer taxes and help Germany gain export competitiveness.  Since then, many other EU countries have followed suite, including the UK, Italy and Spain.  France recently announced similar plans, although its planed VAT rise was only from 19.6% to 20%.

An increased VAT does several things.

* imports are part of the tax base, i.e. imports fund the domestic government;

* exports receive VAT refunds, so they are cheaper;

* allows reduction of other taxes, which is why other countries’ corporate tax rates, for example, are lower than the in the U.S.

Twenty one percent of China’s national government revenue is from border taxes.  When imports pay over one-fifth of the taxes, the reduces the burden on domestic citizens and businesses, and enables them to subsidize exports in several ways including VAT rebates and other means.

The bottom line is that a VAT is a powerful tool to use for trade competitiveness.  It is a tool the U.S. has thus far chosen not to use, because we think too simply about trade.  We need to think strategically.  Other countries have a strategy… we don’t because we’re dominated by free trade utopians as well as the elementary school high vs. low tax debate.

41 Responses to “Germany uses VAT for export competitiveness. We don’t.”

  1. W. Raymond Mills says:

    A value added tax is a good idea. However, it is not the best idea. A value added taX IS A TAx. The word is a powerful barrier to Republican support. Second, Germany and Japan already have an economy specializing in manufacturing (16% of GDP compared with 12% for the U.S.) The higher the share of GDP in manufacturing the larger the revenue from a value added tax. Third, a value added tax supports current exporters but does not help potential exporters.

    A better solution is to use the size and power of the U.S. consumer market. Work first to reduce imports. Tariffs on all products manufactured in Germany, Japan and China that are imported into the U.S. By including only 3 countries we say we approve of imports coming from all other nations that have a near balanced trade with the U.S. This is a beginning. It explicitly rejects free trade. And it implies rejection of all agreements that this law violates or supersedes. It is based on the principle that balanced trade should be pursued by all nations. It sidesteps trying to match Germany, China and other nations by subsidies to exports. We don’t have the official reserves of other nations that would enable us to compete by matching subsidies. Focus on our unique assets.

    The traditional objections to tariffs are negated by applying the tariffs to all products imported thereby removing the opportunity for politically powerful industries in the U.S. to use tariffs to benefit only themselves. Limiting the number of nations impacted makes counter-actions less likely. The three nations combined accept only 15% of U.S. exports. We will continue to trade with other nations no matter what these three nations do. Also, tariffs lend themselves to gradually tightening the noose. Begin with low tariff rates, but include in the legislation gradual increase in the size of the tariffs. This allows all firms selling into the U.S. time to adjust the production location to the new reality.

    Because of competition from other locations, producers located in those three nations will find it difficult to pass on to U.S. consumers all the tariffs they pay. Our national Treasurer will increase by much more than any increase in consumer expenditures.

    The 19% value added tax rebated to exporters located in Germany implies Germans paying more for goods produced in Germany than consumers in other countries. Why add an unnecessary burden to U.S. consumers?

    • Ali says:

      Raymond, you do realize that 12% of US GDP ($15 trillion) is way bigger than 16% for Japan ($5 Trillion) or Germany ($3.5 Trillion) so we actually have a bigger manufacturing base. We’re probably the biggest manufacturer in the world but we don’t use VAT as we should. I totally agree with slapping tariffs on the 3 countries to send a message to every country in the world that we won’t tolerate these tricks.

      Our problem is that as soon as we do anything to protect our market and the Europeans or Chinese cry protectionism we cower and back-off.

  2. Nicolaas says:

    A VAT in the United States is long overdue!!!

  3. Tom T. says:

    Let us not sugar coat any of this. China and Germany have policies that encourage job creation. We have policies that create job destruction. “Free” markets in the sense used by globalists, is not free at all. It costs jobs and reduces demand for labor in the United States. It is good for global companies and good for companies seeking to reduce labor costs both here and abroad.

    When policy makers point their finger over job creation at the other major political party, they have four fingers pointing at themselves and their other hand in their pocket accepting part of the benefits flowing to the new world order which they have set up.

  4. Joe Brooks says:

    W. Raymond Mills, a good synopsis of the steps to take, but I think you may run into pretty severe cries of discrimination/protectionism or even racism by limiting import tariffs to just 3 countries, no matter how blatant their protections.

    Of course Red China is obvious to nearly everyone, now. Possibly the step approach could work, there.

    You may gain more traction by applying import tariffs to the top ten, or even the top 15, trade deficit nations.

    Top Ten Countries with which the U.S. has a Trade Deficit
    For the month of November 2012

    Year To Date
    Deficit in Deficit in
    Millions Millions
    Country Name of U.S. $ of U.S. $

    China -28,953.78 -290,600.45
    Germany -6,237.44 -54,315.66
    Japan -6,190.10 -70,592.12
    Mexico -4,864.03 -57,417.48
    Canada -3,001.41 -28,880.90
    Saudi Arabia -2,614.92 -35,803.94
    Ireland -2,296.48 -24,435.73
    Italy -2,086.03 -19,306.79
    Venezuela -1,980.87 -19,788.03
    Korea, South -1,789.30 -15,426.18

    We are just beginning to see the effects of the South Korean “free trade” agreement. Certainly any reasonable person would look at these figures and know something is fantastically wrong with US trade policies.

    http://www.census.gov/foreign-trade/top/dst/2012/11/deficit.html

    • W. Raymond Mills says:

      Mr. Brooks – I appreciate your response. Everything I propose is open to discussion. I prefer to limit the tariffs to just 3 countries so as to start small. The shift from free trade to restricting imports is a very, very big move. By starting small we can find out if there are any problems not anticipated. The fewer countries included, the more countries to help us resist whatever the three big guys try in the way of counterpunch.

      I really do not understand how the restriction to the 3 worst offenders can be called “discrimination-protectionism”. Could you explain? I just took the 3 worst offenders. Why not stop at three?

      • Joe Brooks says:

        W. Ray, the free traders have used this false accusation of bias for decades, regarding free trade for the US, protectionism for nearly everyone else.

        I heard this argument [racism] from one of the WSU Economics Professors at the showing of Death By China, on campus in late 2012. She defended the Chinese protections as promoting an emerging economy, but discounted any suggestion we should be allowed the same policies.

        If you missed my review of the film, it was quite an experience. I will repost it, if you want to see it.

        “Xenophobia and Politics”—the headline got my attention. And the subhead convinced me I would get honorable mention: “Why Protectionism is a Lot Like Racism.”

        http://www.theamericanconservative.com/articles/is-protectionism-racism/

    • W. Raymond Mills says:

      For those of you not familiar with the numbers provided by Brooks, the first number is for the month of November. The second number is the year to date.

      My original proposal, years ago, included Canada and Mexico. I back off of them because neither nation’s government is as aggressive in creating a trade surplus with the U.S. as is my three. Also, Canada and Mexico have a negative Current Balance with the rest of the world. If my scheme works with three nations, the Congress can select next steps based on experience and the current reality a few years down the road.

  5. Frank Shannon says:

    The concept of improving competitiveness by shifting taxes off of producers (tax collectors) to the consumer (tax payers) works for any economy whether federal, state or city.

  6. Mo says:

    The VAT is actually not a subsidy. When countries export vehicles to the US they get rebated back taxes they paid because the US does not have a VAT. A VAT tax it has to be rememberd is a tax imposed on the purchase of all inputs that go into making a product. The US does not have a VAT tax, so countries that export to the US rebate the taxes exporters paid in their home countries to produce the good. This puts exporters on a level playing field with the US because with the VAT taxes rebated, the sale of products is only subject to sales taxes just like US made goods.

    It’s important to note that the VAT tax is ultimately paid for by the final consumer at the retail level which means it equates to a sales tax. The reason countries impose the VAT tax is because it allows governments to raise tax money faster then receiving funds from a sales tax. To see how the VAT is not a subsidy and works like a sales tax, the following examples are provided below:

    Example 1 – A car produced in Europe and sold in Europe

    All inputs that go into making the car in Europe get taxed the VAT. However, all VAT taxes paid are reclaimable except at the consumer retail level. So when a dealer purchases the car it pays a VAT tax but then when it sells the car to a consumer it also receives VAT tax. So if for example the dealer paid $4 in VAT tax and received $5 in VAT tax from the sale, it only owes $1 in VAT tax to the government. The only one who couldn’t reclaim the VAT tax is the consumer.

    Example 2- A car produced in Europe and sold in USA

    Once again all inputs are first taxed in Europe to produce the car. But when the car is exported to US, VAT taxes that were paid become reclaimable by the exporters because the US has no VAT tax to produce goods. There is only sales tax that gets imposed on sale of imported car to consumer. So exporters are only getting back tax money they paid to produce the car in Europe because once again US does not have the VAT. This allows exporters to be put on a level playing field with producers in the US not subject to the VAT.

    Example 3 – A car produced in the US and sold in Europe

    For the car produced in the US, there are no VAT taxes imposed on inputs that go into making car. However, when the US car is exported to Europe, the importer in Europe must pay the VAT tax. This causes the imported car to be placed on the same level playing as domestic producers in Europe who pay the VAT tax on all stages in the production process. However, when the US car is sold in Europe to a consumer, the consumer pays VAT tax on sale. Once the US car is sold to the consumer all VAT taxes paid to import the car are reclaimable. So for example if there was a VAT tax paid of $5 to import US car and then a $6 VAT tax paid on sale of US car to consumer, only $1 VAT tax is owed to gov’t.

    • Tom T. says:

      Good example and explanation, Mo. If all VAT taxes are as you say, then we have the issue of federal taxes. Most, if not all, sales taxes are state taxes or local taxes. These taxes do not go to the federal government. The federal government is supported by income taxes in various forms and other taxes. If workers in Germany are making cars and selling them in the US, then where do income taxes get paid? Obviously, the German would pay income taxes on his income (if they have such a thing) and not to the U.S. federal government.

      http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

      Given this scenario, it is obvious that the German (I am just using Germany as an example–just use country X) companies manufacturing in Germany do not have to pay federal U.S. taxes. That burden is on the U.S. taxpayer. The same for the corporate taxes. The U.S. also pays for acting as “policeman” of the world, making sure countries have enough stability globally to engage in this trading.

      I don’t think much of this matters if there is not a trade imbalance. Trade imbalances allow country X to with a trade surplus to buy country Y’s assets with the money they earned from trade. There is also the strategic question of supply lines. Strategic supplies to the policeman of the world are as important as anything. Rare earth minerals or our energy shocks should point this lesson out very succinctly.

      When we were looking at the 2009 solutions, China also chimed in with a threat based on the amount of dollars they had captured.

      http://economyincrisis.org/content/china-threatens-cripple-us-economy

      http://www.martinfrost.ws/htmlfiles/aug2007/china_dollar.html

      These are strategic threats to the U.S. economy that have arisen out of years of trade policy neglect.

      The dollar as the world’s reserve currency is being strategically undermined by China, Russia, and others as well.

      While we have a large crowd of free trade globalists (much of it very large corporations wishing to capture profits by arbitraging world economies), we are strategically being undermined by other world powers.

      Tom T.

      • Will Wilkin says:

        Hi Tom, regarding “The federal government is supported by income taxes in various forms and other taxes.” I’m not so sure. That is thinking that was true under the gold standard but since 1971 has not actually been true. For thousands of years, when money was bullion, governments had to tax to get it. But according to Modern Monetary Theory, in post-Bretton Woods USA and in other monetarily sovereign states, that is no longer what is happening. A monetarily sovereign government issues its own money like an aothor issues wors, like a stadium issues points. A check from the US government will never bounce. Taxes now exist to remove aggragate purchasing power from the economy so as to prevent inflation, but taxes are not actually funding the government, nor is there any federal debt crisis, since all federal debts are payable in dollars. A secondary role of taxes in a monetarily soverign economy, according to MMT, is to give the currency value in the sense that taxes must be paid in that currency and therefore the currency must be obtained by taxpayers, preventing some other currency from replacing it.

        That much of MMT makes sense to me, not even as theory but as real description of what is happening. There are other parts of MMT that I do not agree with, such as their contention that trade deficits are to our advantage because they bring us real goods in exchange for currency issued out of thin air. MMT theorists posit that full employment could be had simply by creating government jobs. These 2 ideas seem to me disastrous, because government agency jobs have only a limited real function in society, beyond which they become make-work without much contribution to wealth creation. So too with trade deficits, it seems to me that factories and mines etc are the heart of real wealth creation in most economies, and therefore should be developed within our country to make sustainable prosperity.

        I’ve got to shovel 30 inches of snow now so that’s all I’ll write on MMT at this time. I bring it up because I think it has some valid points to make about the real function of taxes and the possibilities it opens up for much better public spending priorities than we now have (ie, infrastructure, tech development and full employment) if used in smart ways and in conjunction with a Balanced Trade policy of Import Certificates issued in the same value as exports. Combining public spending (on infrastructure and technological development and full employment) with Balanced Trade would serve to make our real economy competitive and sustainable in a way that brings that prosperity to all our people.

      • Mo says:

        Tom the VAT tax in Germany is effectively like a national sales tax because it gets paid to the federal gov’t not local gov’t. It’s effectively a national sales tax because the VAT tax is mostly rebated except at the final consumer retail level. Additionally, Germany also has payroll, income taxes and corporate income taxes. So when exporters in Germany sell goods abroad, the VAT tax they paid is rebated but workers still have to pay income tax on their wages and corporations still have to pay tax on their profits.

        • W. Raymond Mills says:

          Mo – The VAT tax is not rebated when the item is sold in Germany.

          • Mo says:

            Ray when an export is sold in Germany to a final consumer, no VAT tax is rebated. However, any VAT tax the importer paid to import the vehicle before it got sold to the final consumer would be rebated once sold to the final consumer at the retail level.

            What the VAT tax does is raise the price of all goods whether it’s produced in the country or not. It’s effectively a national sales tax because all VAT tax that is paid on inputs gets rebated when the good is sold to the final consumer. The reason some countries prefer the VAT tax to a national sales tax is because it allows the gov’t to collect revenues faster.

            If the VAT tax was imposed in the US, it would cause an increase in prices for all goods because the VAT tax would be passed along to consumers in all stages. Additionally it would increase the cost of doing business for everyone as it would entail more accounting, etc.

            A VAT tax would not be a solution to the trade deficit. Actually a lot of people that live in countries with high VAT taxes complain about the high prices of many consumer goods. A lot of times when people from Europe, Brazil and other countries travel to the US, they tend to buy lots of electronics and other types of consumer goods. Yes the exchange rate has been favorable the last many years for travelers from some of these countries but one buying goods in the US they don’t have the high VAT taxes built into the price which results in the VAT tax being passed along all stages of the production process.

            I recommend that you check out the following article below.

            The VAT tax Subsidy That Does Not Exist
            http://www.lewrockwell.com/boukhonine/boukhonine12.html

          • W. Raymond Mills says:

            Mo – I am not really up on Value Added Taxation. But I am up on logic. The guy you cited says that the taxes paid by sellers at each step of the process get rebated to those sellers. HOW THEN DOES THE GOVERNMENT GAIN TAXES? If universal rebates, no taxes gained. I think your expert is wrong. Somehow, governments wind up with more taxes collected by a 20% value added tax than a 10% sales tax on the value of the final product.

    • W. Raymond Mills says:

      Mo – The only way a vat tax is equivalent to a sales tax is if the rate of taxation is the same for both. The 19% VAT in Germany is a lot more than the 9% sales tax collected in the U.S.

      Rebating 19% of the cost of the car made in Germany that is exported means that car plus sales tax in the U.S. costs the consumer in the U.S. 10% less than the same car sold in Germany.

      The real difference between the two systems is that more tax is collected in a value added system (if the rates for the VAT and the sales tax are different as in my example).

      I say that difference between revenue collected amounts to a subsidy from the German government to aid export sales.

      Mo – I have not read anywhere (except in your letter) that the VAT collected in Germany when an imported car is sold in Germany is reclaimable by the retailer. You may be correct. But I have not heard that from any other source. If it is so, the retailer in Germany can reduce his selling price because he gets back the 19% he sent to the government.

  7. Joe Brooks says:

    Their VAT is massive, Tom T. I did not realize how large a part of their economy it is.

  8. Bob Goldschmidt says:

    The VAT has no redeeming features other than it is somewhat hidden to the public.

    Contrary to popular belief, the VAT gives no competitive advantage. If an American product costs A and a foreign product (less their VAT) costs F, then after applying a VAT tax v, they will cost (1+v)A and (1+v)F respectively in the US. If we refund our VAT on export and ship these products to a country with VAT w, then they will sell there for (1+w)A and (1+w)F.

    Such a tax would be regressive in that it only taxes consumption where the top quintile saves 20% which would not be taxed, the top 2% save 50%. It would reduce the purchasing power of workers and thus demand for goods and services unless the government turned around and increased their spending accordingly.

  9. W. Raymond Mills says:

    Mr. Stumo, in the article that began this discussion, says that the rebate to exporters provided as a part of the VAT system, allows the car produced in Germany to be sold for less in the U.S., thus providing an unfair advantage to Germany. The Wikipedia article discussing VAT disagrees. They assume that the price of the Opel made in Germany and sold in the U.S. is increased by the full amount of the VAT.

    This is a disagreement about how manufacturers price their cars. We know they must collect enough money in Germany on a German made car to cover both the VAT tax and production costs and profit. In the U.S. they do not have to add the cost of VAT to the car because it is rebated to them in proportion of the value they added to the final product.

    We know that the rebate gives exporters the opportunity to sell their cars for less in the U.S. than in Germany and still make the same profit as if the car is sold in Germany. We also know that the cost of a U.S. made car sold in Germany must include the VAT tax. These two realities qualifies as a subsidy in my mind.

    This is an example where Wikipedia is misleading and should be ignored. I also think Mo and Goldschmidt are wrong.

    • W. Raymond Mills says:

      The following is subject to correction. Here is the way I think VAT works.

      The law says that every seller in Germany must collect 20% more than the selling price and send that amount to the government. Each seller also includes a note dividing the sale price between VAT taxes previously paid and those due from the value added by the seller. This includes the seller that sells to the final consumer in Germany.

      The Governmental agency that receives the VAT money sends back to every seller the amount of the tax they sent to the government which was previously paid by the firms that sold the semi-finished goods to the company next up the line. This results in the government retaining 20% of the value added by every seller. The seller gets back 80% of the value added by every seller plus the total amount of VAT paid for the input purchased by each seller.

      When the final consumer is located overseas, the final seller does not add 20% to the sale price. Everybody else in the chain do0es add the 20%. The government sends back to all the sellers in the chain ALL THE VAT COLLECTED FROM EACH SELLER.

      This results in all the suppliers in the chain for an item sold overseas not paying a VAT tax for items sold overseas. The government just does not collect a VAT for items sold overseas.

      A 20% value added tax is collected for each items imported so the imported item will not undersell items made in Germany and sold in Germany.

      I don’t know that this is how it works. I think it is the only way it will work both practically and in terms of a government providing a product for sale overseas at a lesser price than the same item sold at home.

      The comparison with a sales tax is a red herring. Two different ways to collect taxes. One developed when overseas trade was a small part of the U.S. economy and the other developed in nations where trade has long been a big part of the economy.

      The U.S. is now in a global economy. We are a unique part of that economy because our government has not changed ANYTHING to recognize the new reality. Our first action should be to move towards balanced global trade by restraining imports. After that is done, we should move towards VAT.

      • Mo says:

        Ray however you look at the VAT it is technically an artifical cost that goes into producing goods. The VAT effects domestic producers as well as foreign producers that sell in a country with VAT taxes. It would be different if there was no VAT tax on domestic producers but US exports were taxed by tariff 20%. Then this would not be an equal playing field.

        The VAT causes prices for all goods to be higher than in countries without VAT taxes. If countries with VAT taxes were able to import goods cheaper they would. But because VAT taxes are applied to imports it puts imports on equal footing with goods produced domestically. Only if Europeans travel to the US to buy consumer goods like electronics can they avoid the VAT taxes.

  10. Mo says:

    Ray the taxes are paid mostly by consumers at the retail level and sometimes at producer level if the goods they make are not sold. So if for example a dealer buys a car at the wholesale level for $20,000 and pays $4,000 in VAT tax and then later sells the car at retail for $50,000 and receives $5,000 in VAT tax, then it gets to rebate the $4,000 in VAT tax paid so that it only owes $1,000 in VAT tax.

    A 20% value added tax is actually like a 20% sales tax. That is why a 20% VAT tax would bring in more revenues than a 10% sales tax. Also even if goods that are made never get bought at the retail level, the producer still has paid VAT tax that he can’t rebate. So this also explains why more money may be collected under the VAT tax system.

  11. Mo says:

    The VAT tax is not the problem because the VAT puts domestic and foreign producers on a level tax playing field. If you look at a country like China, they have the following other taxes that may be added on top of the VAT for certain imports:

    Import Duties 0-35% (motor vehicles 34.2%)
    VAT 17%
    Consumption Tax 5-10%

    Check out link below to see what taxes are applied on top of the VAT when exporting to many countries.

    Duties and Value Added Taxes
    http://www.uscib.org/index.asp?documentID=1676

  12. Will Wilkin says:

    Once again my comment doesn’t stick, I guess due to multiple links. So after waiting 8 hours for it to appear, here it comes in pieces….

    PART ONE

    I disagree that VAT is a significant factor in Germany’s success as an exporter or in its overall economic competitiveness.

    The USA is not the only economy running a trade deficit. I have made the following comparison of all the countries with negative current account balances, as listed in the table of Economic and Financial Indicators found on page 84 of the Economist magazine, Feb 2, 2013, and the VAT rates of those same countries, as listed in the Wikipedia article “Value Added Tax” accessed today, Feb 10. Note that the Economist table only lists 43 countries, presumably those with the largest GDPs. 22 of the 43 are running trade deficits, and 21 of these have a VAT, which has obviously not functioned to bring balanced trade or trade surpluses to those 21 countries.

    Current account balance as % of GDP in 2012 VAT rate
    USA -3.0 N/A
    Britain -3.6 20%
    Canada -3.5 5% + 0 to 10%
    France -2.1 19.6%
    Greece -2.0 23%
    Italy -1.6 21%
    Spain -2.1 21%
    Czech Rep. -1.6 21%
    Poland -3.1 23%
    Turkey -6.2 18%
    Australia -3.7 10%
    India -4.2 13.5%
    Indonesia -2.6 10%
    Pakistan -1.6 16%
    Thailand -0.1 7%
    Brazil -2.6 12% + 25% + 5%
    Chile -3.8 19%
    Colombia -3.2 16%
    Mexico -0.6 19.6%
    Egypt -2.0 10%
    Israel -0.5 17%
    South Africa -6.3 14%

    • W. Raymond Mills says:

      “22 of the 43 are running trade deficits, and 21 of these have a VAT, which has obviously not functioned to bring balanced trade or trade surpluses to those 21 countries”.

      Will – What would the trade balance have been if they had no VAT? We don’t know. Also we don’t know the details of their VAT. Do they all rebate exports to domestic producers and require imports to be sold in their country with VAT included?

      That said, the number of countries that have a negative Current Account Balance is impressive. Oil imports account for some of that. But the fundamental factor, as Will points out, is the ability of the domestic economy to produce goods that sell on the international market. And that ability depends upon different factors in different countries.

      The U.S. has a large volume of exports. Our problem is inability to control imports so that they are in a near balance with our exports.

  13. Will Wilkin says:

    Well, Part One looked a lot better in the comment box than it posted. The negative number after each country is the current account balance as % of GDP in 2012. The % after that is the VAT rate.

    PART TWO

    Germany’s export success and overall economic competitiveness must thus be attributed to other factors. Let’s start with their well-earned reputation for superior engineering and quality of manufactured goods like automobiles, machinery, chemical products, hardware and electronic devices, metals and pharmaceuticals. These products have a lot of technological expertise behind them. And thus I would point to Germany’s successful public-private cooperation in technology centers geared to commercial production.  German government involvement includes the Max Planck network of 80 institutes of science, and the Raunhofer Society with a network of 60 technology centers, co-financed by the government and businesses. For an overview of that technological base, see:

    http://www.scientificamerican.com/article.cfm?id=us-could-learn-germany-high-tech-manufacturing

    In short, Germany is competitive in real-world qualitative terms rather than manipulated quantitative terms like exchange values or tax rates.

  14. Will Wilkin says:

    PART THREE

    The USA needs to become competitive again in such real-world qualitative terms. That would begin by strengthening our public-private cooperation in developing technology and science. Look back at Bell Labs for an example of how such cooperation spawned countless technologies that made the American economy top of the world in the mid 20th century. The USA also needs to replace our crumbling infrastructure with one that will be competitive in 21st century technologies, particularly green energy and telecommunications. All of these gigantic projects could be implemented on our existing base of world-class universities and the remnants of our high technology industries. The finance is more available than common wisdom would suppose. On this subject I invoke Modern Monetary Theory, which observes that a monetarily sovereign state like the USA has a lot more latitude than a gold-based or other non-monetarily-sovereign state to mobilize labor and resources through public spending. Here are a few introductory primers on MMT:

    http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

  15. Will Wilkin says:

    PART FIVE

    On a parallel but slightly different question, the actual living standards of ordinary Americans, I think a Balanced Trade policy using Import Certificates issued in the same value as our exports would be a lot more direct and effective in ending our trade deficit and re-diverting that consumer spending into a stimulus of American manufacturing, with all the positive effects for employment and and strengthening the larger industrial ecosystem that is a bigger-than-sum-of-parts base for qualitative economic strength. For a good overview of what I mean by “industrial ecosystem,” see this article, which uses instead the term “industrial commons”:

    http://hbswk.hbs.edu/item/6921.html

  16. Joe Brooks says:

    Gentlemen, here is a clear and concise explanation of the VAT subsidy, as used by most nations:

    “The Chinese government has used export VAT rebates to promote strategic industries and industries with high-value added and high labor content to help maintain employment. Since 1994, China’s national value added tax has been set at 17%, with exporters able to recoup up to the full 17% depending on the industry.”

    http://www.prosperousamerica.org/2011/07/15/cpa-white-paper-how-chinas-vat-massively-subsidizes-exports/

    • Mo says:

      Joe the VAT tax is not the main problem when it comes to trade with China. The VAT tax generally gets applied to both domestic and foreign producers in China as was well as to most exporters to China. This puts all these actors on same footing with regards to the VAT. When Chinese exporters are rebated back the VAT, they are getting back tax money they paid because the country where they export to does not have the VAT. If exporters did not get rebated back the VAT tax they paid, then when the exports are sold to the US importer, all exports would be artificially higher by whatever the VAT rate is.

      The problem with trade with China is the high import duties that can be high as 34% that gets imposed on top of the VAT for US imports as well as the consumption tax that can also be added for some goods. Additionally, there are various subsidies the gov’t provides like lines of credit, grants, free land and etc.

      So when a US exporter sells goods to China, the importer has to pay a VAT tax on the import. But when the good is sold to the final consumer, VAT tax is applied again. So any VAT tax paid to import the goods should be reclaimable. It’s only the final consumer that can’t rebate the tax.

      The link below shows what taxes and duties get applied on imports into various countries.

      Duties and Value Added Taxes
      http://www.uscib.org/index.asp?documentID=1676

  17. Joe Brooks says:

    “The problem with trade with China is the high import duties that can be high as 34% that gets imposed on top of the VAT for US imports as well as the consumption tax that can also be added for some goods. Additionally, there are various subsidies the gov’t provides like lines of credit, grants, free land and etc.”

    Hey Mo, I agree the VAT is only part of the problem of US unilateral free trade.

    The answer: The American School of Economics, applied with everything learned since 1789, which is not really all that much.

    • Mo says:

      Joe the policy makers in Washington are not interested in trade. They are interested in globalization which is a scheme where US dollars can be used around the world to pay for real goods and services. As long as trade agreements with other countries lower tariffs, Washington is happy because it allows dollars to buy more goods than when tariffs were higher.

      If it wasn’t for globalization then inflation in the US would have been extremely high by now. Globalization allows the use of dollars to be spread around the globe. This is why other countries today have hundreds of billions and trillions of US dollar assets.

      To Washington deficits doesn’t matter. As long as the US keeps inflating faster then its trade parnters and continues to have lower savings of real resources as compared to its trade partners, the US industrial base will continue to hollow out as capital gets transferred to pay for all the imports.

      Only when the US is in danger of losing it’s reserve currency status will Washington being interested in any type of balance trade. If Washington does become interested in balance trade, it should be done through policies that encourage savings and investment to reduce imports.

      • W. Raymond Mills says:

        I keep disagreeing with Mo. His insistence that the level of savings is a lever that can influence the size of the trade deficit is wrong. The issue is the direction of causation. Savings level is controlled by the level of investment and trade balance. In the equation for GDP, Investment and Trade Balance are controlled by forces outside this equation. No so for Savings. Savings is not known until the level of Investment and Trade Balance have been calculated.

        Will is right that ability to create goods of a quality and price that other nations want to purchase is an important determinant of the trade balance. Also, other factors are at work – such as restrictions of various kinds on imports provided by the Central government. Also cultural biases for goods produced domestically (in Japan and Germany).

        Ignore the level of savings. It is an unimportant statistical artifact. Concentrate on productivity and governmental policy as implemented.

        • Mo says:

          Ray its real savings that matter. Before there can be investment there has to be real savings. Robinson Crusoe on his deserted island cannot spend time to make a hut, raft, fish trap, spears, etc. without saved food. If he doesn’t have saved food he wouldn’t be able to engage in other activities unless he goes hungry.

          In the US resources are being consumed in things for example like weapons that explode. What is more productive for the economy, rare earth metals being used in machines that can make an increasing quantity of consumer goods that fit the economys structure of demand or rare earth metals being used in bombs that explode?

          • W. Raymond Mills says:

            Mo – Money to be used for investment is accumulated overtime in the form of undistributed profits, bank deposits, equity investments and savings. All can be used to pay for investments. The important point is that the U.S. currently has excess of such funds relative to the demand for investment dollars. Additional savings at any one year is not going to result in additional investments.

  18. W. Raymond Mills says:

    “Before there can be investment there has to be real saving”.

    Mo – Investments are paid for with money. Your talk about real savings is irrelevant. Investments are paid for from undistributed profits, bank loans and increasingly, proceeds from bond sales. That is what happens in the real economy. Currently, those funds are greatly in excess of the demand for investment capital. Increased savings in any one year will not result in increased investment when so much money is available.

    • Mo says:

      Ray money is just a veil over the real economy. The function of money is to allow goods to be traded more easily than it is with barter.

      To illustrate how savings of real resources is needed first before there can be investment; lets say the gov’t prints money to build a high speed rail line. It pays unemployed workers to build a rail line. After it was built some people would say hey look the gov’t can be productive in the economy. But if there wasn’t any food, clothing, housing, etc that the workers could spend their money on, then workers would not be able to build the line. They would have to spend time providing these essential goods themselves which would mean they couldn’t work on building the line if they had to gather food. So all the gov’t printing money did was to direct saved resources or capital as it is called to projects they spent money on.

Trackbacks/Pingbacks


Friends Don’t Let Friends Buy Imports

Sign up to receive periodic updates

Frequency