Favoring China

by Former U.S. Senator Ernest F. Hollings

After the dismal job report last week President Obama tried to put the best light on it by stating: “We have created 4.4. million jobs in the last 28 months.”  The Princeton Economist Alan Blinder estimated in 2006 that the U.S. would offshore 30-40 million jobs over the next ten years.   According to Blinder we could be losing more jobs than we are creating.  We keep bailing the economy boat with stimulation and ignore the offshore hole in the bottom.

In globalization, David Ricardo’s Free Trade Doctrine of Comparative Advantage has been taken over by the controlled trade Doctrine of “Government Advantage.”   Depending upon a country’s industrial policy, everything can be produced everywhere.  Globalization is nothing more than a trade war with production looking for a country cheaper to produce.  At the end of World War II, Japan’s government started controlled capitalism by closing its market, subsidizing its manufacture, selling its manufacture, at or near cost and making up the profit in the closed market.  U.S. Presidents wanted to make sure Japan went democratic, so they turned a blind eye to enforcement of trade laws (textiles sacrificed).  Today, we have the skills in South Carolina to make the “ultimate driving machine” for BMW and Boeing’s Globemaster but having lost our textile industry we still suffer 9.1 % unemployment.  Now China has the supermodel of government controlled capitalism.  If you want to sell in China you must produce in China.  If you want to produce in China you must surrender your technology.  In order to get China’s favor Corporate America offshores not only its production and technology but its research and innovation.

No economy can survive in globalization without an industrial policy to build and protect its economy.  The founding fathers instituted an industrial policy for the U.S. with the Tariff Act of 1787 – two years before the Constitution of the United States.  And our founding father George Washington in his first message to Congress stated: “A free people …should promote such manufactories, as tend to render them independent on others for essentials, particularly for military supplies.”  We still have the makings of an industrial policy with our trade laws.  But President Obama refuses to enforce them.  If President Obama enforced the Defense Production Act of 1950 like President John F. Kennedy in 1961 we wouldn’t be begging Russia for helicopters for Afghanistan.   If President Obama would enforce the law to protect us from devastating deficits in the balance of trade, like President Nixon in 1971, we wouldn’t have had to bailout Detroit.  If President Obama would protect the production of steel, motor vehicles, computers and machine tools like President Reagan in 1984, the U.S. would have 5% unemployment rather than 8.2%.   Tax cuts and federal aid for policemen, firemen, and teachers don’t build an economy.  It takes private capital.  Industry will invest when the nation has an industrial policy that promotes and protects its investment.

Fundamental to an industrial policy is a Value Added Tax that’s rebated on exports.  The Corporate Tax is not.  The “value added” is measured by the difference in the cost of parts and materials and the sale of the finished product, be it wholesale or retail.   A 6% VAT would be 6% of the difference between cost and sale.   150 nations compete in globalization with a VAT and don’t find it complicated, regressive or a money machine.  In the U.S. someone can start production, be making a profit; be paying the 35% Corporate Tax and the 17% VAT when his exports reach China and before long he will be facing tax free production from China that will put him out of business.  The VAT is killing manufacture in the United States.

The Corporate Tax is riddled with loopholes for the multinationals.  General Electric paid no tax in 2010 but small business pays through the nose – 35%.  Everyone in Congress is for tax reform to close the loopholes.  I have been through three tax reforms and we always end up with less revenues.  Rather than waste time with hearings and end up with less revenues, Congress could eliminate all the loopholes in the Corporate Tax by replacing the 35% corporate tax with a 6% VAT.  This would help small business and release trillions in offshore profits for Corporate America to create jobs in the United States.  Now we have instant tax reform.  The VAT promotes exports and since it’s self-enforcing, we can cut the size of government (IRS).  Last year the Corporate Tax produced $181.1 billion in revenues.  A 2011 6% VAT would have produced $728 billion.  The VAT tax cut produces billions to pay down the debt and creates millions of jobs.

Wall Street, the big banks, and Corporate America want to keep the China profits flowing.  They are the biggest contributors to the President and Congress’s reelection.  So the President and Congress do everything to favor China’s industrial policy.   They not only offshore our economy but the President and Congress refuse to compete in globalization; refuse to develop an industrial policy for the U.S.; refuse to enforce our trade laws; do nothing about China’s devaluing its currency; do nothing about China’s trade violations; do nothing about human rights in China; do nothing about China’s stealing our trade secrets, inventions and patents and do everything to favor China, even exempting China from the oil sanctions against Iran.

To favor China and keep the contributions flowing, the President and Congress even refuse to cut taxes that would help small business, that would promote exports, slow the offshoring of jobs, cut the size of government, give instant tax reform, produce billions to pay down the debt and release trillions in offshore profits for Corporate America to invest and create millions of jobs to jumpstart the economy.   If we can get the President and Congress to favor the United States like they favor China we could head the country in the right direction.