Just in case you missed it in the other Colombia FTA article today, I want to highlight this.

Colombia’s value added tax is 16%.  That tax is charged on all goods coming into the country, including ours.  The Colombia FTA will not reduce or otherwise address that tax.  This is unsupportable.  The so-called free trade agreement will allow Colombia to impose a 16% charge on our goods, and we will have no equivalent charge.

144 foreign countries charge a VAT at the border, an average of 17%.  They charge that tariff-like tax on our goods.  We charge none.  If they charge tariffs, that tariff amount is on top of the VAT.  The U.S. is the only major (or minor) country without a VAT.

That is free trade.  David Ricardo and Adam Smith would not approve. 

The wacko free traders at the NY Times editorial board are journalists.  They have read a bit about economics, just enough to give us really bad advice. Maybe they have not heard.  We have an economic crisis.  We don’t make and grow things anymore because our production is offshored. 

What is their rationale?  Economic growth?  That would be false.  Instead, they want to "send a message."

Rejecting [the Colombia FTA] would send a dismal message to allies the world over that the United States is an unreliable partner and, despite all that it preaches, does not really believe in opening markets to trade.

I send messages all the time.  Through the telephone, the email, and this blog.  I don’t need to help further our economic downturn by pushing another offshoring agreement to "send a message."

Tariffs.  They give a glancing mention to tariffs.

Because of trade preferences granted as part of the war on drugs, most Colombian exports already are exempt from United States tariffs. The new agreement would benefit American companies that now have to pay high tariffs on exports to Colombia.

What companies and what tariffs?  And how much economic activity?  They don’t know.

Perhaps they should consider Colombia’s border tax (value added tax).  A 16% tariff equivalent on all our exports to that country.  Does the Colombia FTA reduce that tax?  No.

When we have all trading partners impose a 17% average tax on our exports to them, and they pay none coming to us, is that free trade?  No, it is a continuation of our policy of unilateral free trade in a world of mercantilists."  It is giving away our economy for vague foreign policy or "sending a message" reasons.  And it is dumb.

Paul Ryan is a Congressman from Wisconsin.  His op-ed appeared in the WSJ today.  The theme is how Republicans can recover from this election.  On paragraph focuses on trade and taxes.  Here it is.

We must also offer bold alternatives to the destructive tax policies that the Democratic majority will work to enact. We must go beyond simply calling for lower taxes. We need a complete overhaul of our tax code. At a time of fierce global competition, the individual and business tax reforms I put forth earlier this year would encourage companies to invest in America, promote jobs here at home, and strengthen the paychecks of American workers.

Trade agreements should serve U.S. trade policy.  Trade
agreements should not BE trade policy.  The current "free trade agreements" are obstructing the
modernization of U.S. trade and economic policy.

Trade policy includes trade agreements, but also the more
numerous U.S. trade laws, and then merges into economic policy. 
We need to decide what our goal is for U.S. prosperity and then pursue
that goal, single-mindedly, in trade negotiations, trade law
amendments, and economic policy.

America has many assets.  We have a smart, flexible workforce; a
solid legal infrastructure; highly productive agriculture; highly
efficent manufacturing; well-developed labor and environmental laws; a
system to protect consumers from unsafe food and shoddy goods.  Of
course we can do better on thos fronts, but it is a pretty good package.

The "free trade" agreements do not serve our strengths.  They cut tariffs.  We have been cutting tariffs since the Bretton Woods conference
in 1945.  Bretton Woods addressed the issues of the day.  Our trade
agreements do not.  Folks still talk about the Smoot-Hawley Act. 
They’re fighting the last war.

True free trade can only occur
with a multi-dimensionally level playing field.  Comparative advantage
only works without labor mobility and with this multi-dimensionally
level playing field.  Tariffs were a way to pursue national interests,
combat the protectionism of others, create a level playing field with
another country with a predatory trade policy, and yes… tariffs were
a way to protectionism.  But like tax regimes, their can be good, bad
or mixed tariff regimes.

Our trade policy does not address the "tariffs" of today.  The foreign country subsidies, the currency misalignment, the lack of environmental standards, the lack of labor standards, the Border Adjustable Taxes,
the shoddy quality issues.  Indeed our trade policy actively
suppresses remedies for these problems.  That is the problem.

It
is bad strategy to continue these trade agreements without retooling
our trade and economic policy to address the modern abuses, and focus
upon a truly level playing field.  This is not old-style protectionism,
it is a necessary attempt to modernize trade policy which is "free" and
"fair".

Those pushing the South Korea, Panama and Colombia Free
Trade Agreements are still fighting the last war.  The patchwork
approach of bilateral agreements without a national strategy not only
fails to make sense, it obstructs moving forward.

 

The Coalition for a Prosperous America is holding the first Issues Forum in a series, targeting the Consumption Tax.

CPA’s core reasons for pushing consideration of this type of tax are laid out in this policy.  

The
Huckabee campaign has pushed a consumption tax called a Fair Tax. 
That plan is immature, but is driving some public attention.  CPA
will try to mature the idea to make the underlying concept more
acceptable regardless of party or ideology.

Letter writers to the Des Moines Register are debating the merits and demerits of the flat tax here and here.  
 

Another article on
the trade problems caused by the consumption tax.  From the
Financial Times.  Authored by two former Bushies.  

The Coalition for a Prosperous America policy on consumption taxes, aka border adjustable taxes, is here.

If
we could craft a way to make the consumption tax revenue neutral and
taxpayer neutral across businesses and demographic groups, we could
have a shot at a switch-over from the income-payroll tax system.

Much is rightly made of the poisonous and dangerous goods coming
from China.  The safety issues are weighty.  But in 10 years,
China is likely to have resolved most of the problems.  Nobody
will buy the lead point toys anymore… or the poison toothpaste… or
the rotten shrimp.  Probably.

The safety concerns are virtually unrelated to the gargantuan deficit trends.  David Barboza points this out in a NYT article.

Our trade deficit will grow… and grow… and grow. 
Unless the cost structure changes.  The cost differential is not
comparative advantage.  It is government created.  If you
talk about "comparative advantage", you are either stupid or intentionally misleading.

China has an ongoing 40% firesale on all goods because they
dropped the yuan’s value relative to the dollar, and pegged it. 
12 years ago.  About the time it took for China to become 1/3 of
our trade deficit, comparable to our energy trade deficit.  This
is called currency manipulation.

China and 140 other countries place double digit tariffs on our
goods sold to them, and double digit subsidies on their goods coming to
us.  They are not called tariffs and subsidies, but are
economically equivalent if you are selling or buying.  They are
taxes placed on our goods, and tax rebate checks given to ALL their
companies which export.  This is because the WTO allows these
shenanigans with value added tax regimes.

These are called, in trade parlance, border adjustable taxes. 

 

True free trade means no trade distortion.  Trade distortion
comes from cheating.  Cheating includes currency manipulation,
border adjustable taxes, government subsidies, government controlled
foreign investment in our company, cheap unsafe goods sales, and many
other tactics.

Henry Paulson is against true free trade.  He favors protecting cheaters.  Here is the core of his messaging.

“There was a concern that given what’s going on in the global
economy and the emerging protectionist sentiment in many parts of the
world,” he said, “how dangerous it is to take a unilateral punitive
action that could lead to a trade war or that would be unsettling to
the markets.”

The context of this quote is to oppose pending bills intended to
neutralize China’s currency manipulation.  Let China’s currency
float free, and we’re ok.  If they take government action to
devalue it for 12 years, we should take government action to neutralize
their government action. 

Our economy cannot survive,
intact, the huge effects of these unfair trade strategies more than a
few years.  The trend lines are striking.  We need some
sanity.

Fact:  China trade produces nearly one-third of our trade deficit. Oil produces another third.

Fact: 
China manipulates currency.  This makes their exports to us about
40% cheaper and our exports to them about 40% more expensive.

Fact: 
China has a value added tax system.  The amount is 17% of the
value of goods. They rebate all tax when exporting, and assess all tax
when importing.  This is a tariff on imports and a subsidy on
exports.

Fact:  All major trading partners have a VAT, and do the same tariff/subsidy thing as China.

Fact:  Comparative advantage is great.  Perhaps we’ll get it someday.

A
House hearing was held this week on China trade.  Currency
manipulation and the VAT were big issues.  The relevant transcript
excerpts are on the next page.  (read more)

Thanks to Lloyd Wood, Director of Membership and Media Outreach, AMTAC for the excerpts. 

 
 
Federal News Service

August 2, 2007 Thursday

PANEL II OF A HEARING OF THE TRADE SUBCOMMITTEE OF THE HOUSE WAYS AND MEANS COMMITTEE;
SUBJECT: TRADE WITH CHINA: CURRENCY, FOOD SAFETY;
CHAIRED BY: REPRESENTATIVE SANDER LEVIN (D-MI);
WITNESSES:
 
DAVID M. SPOONER, ASSISTANT SECRETARY FOR IMPORT ADMINISTRATION, INTERNATIONAL TRADE ADMINISTRATION, DEPARTMENT OF COMMERCE;
 
MARK SOBEL, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL MONETARY AND FINANCIAL POLICY, U.S. DEPARTMENT OF TREASURY;
 
DANIEL BRINZA, ASSISTANT U.S. TRADE REPRESENTATIVE FOR MONITORING AND ENFORCEMENT, OFFICE OF THE U.S. TRADE REPRESENTATIVE;
 
DANIEL BALDWIN, ASSISTANT COMMISSIONER, OFFICE OF INTERNATIONAL TRADE,
U.S. CUSTOMS AND BORDER PROTECTION, DEPARTMENT OF HOMELAND SECURITY;
LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C.

SECTION: CAPITOL HILL HEARING

LENGTH: 9291 words

PANEL II OF A HEARING OF THE TRADE SUBCOMMITTEE OF THE HOUSE WAYS AND
MEANS COMMITTEE SUBJECT: TRADE WITH CHINA: CURRENCY, FOOD SAFETY
CHAIRED BY: REPRESENTATIVE SANDER LEVIN (D-MI) WITNESSES: DAVID M.
SPOONER, ASSISTANT SECRETARY FOR IMPORT ADMINISTRATION, INTERNATIONAL
TRADE ADMINISTRATION, DEPARTMENT OF COMMERCE; MARK SOBEL, DEPUTY
ASSISTANT SECRETARY FOR INTERNATIONAL MONETARY AND FINANCIAL POLICY,
U.S. DEPARTMENT OF TREASURY; DANIEL BRINZA, ASSISTANT U.S. TRADE
REPRESENTATIVE FOR MONITORING AND ENFORCEMENT, OFFICE OF THE U.S. TRADE
REPRESENTATIVE; DANIEL BALDWIN, ASSISTANT COMMISSIONER, OFFICE OF
INTERNATIONAL TRADE, U.S. CUSTOMS AND BORDER PROTECTION, DEPARTMENT OF
HOMELAND SECURITY LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING,
WASHINGTON, D.C. TIME: 10:18 A.M. EDT DATE: THURSDAY, AUGUST 2, 2007

 
(BEGIN EXCERPT)
REP. BILL PASCRELL (D-NJ): Thank you, Mr. Chairman.

Before I get to my points and questions, I would like to just respond to what I’ve just heard if I may.

The words as spoken by the trade representative is more evidence to me,
I think and to others, of how we can play with figures. In your warning
to us, Mr. Spooner, that we should depend more on dialogue rather than
legislation is a essential departure from what’s going on in the
Congress right now.

Under Article I, Section 8, we, the Congress of the United States, this
present Congress, will exert itself on both sides of the aisle, in
cautious fashion perhaps. We are not in any manner, shape or form
relinquishing our responsibilities. We have a responsibility in the
Congress, as well as the administration and the trade representative.
We will exhibit our responsibilities, and we will fulfill our
responsibilities.

The Congress has set sail with a very different compass in the ocean of
trade. It will never be the same. We are able to see clearly, and we
will remove the pirates from the scene.

In addition to addressing trade distorting currency practices I believe
that this committee also must address the disadvantage to U.S.
producers and service providers caused by the imposition in rebating a
foreign border adjusted taxes, mostly in the form of value added taxes.

When identifying the causes of the uneven playing, and its massive U.S.
trade deficit, and manufacturing job losses, border- adjusted tax
schemes stand out as one of the very worst offenders.

In 2005 the imposition in rebating of border-adjusted taxes
disadvantaged U.S. producers and service providers, Mr. Chairman, by an
estimated $379 billion. U.S. trade with China in goods alone accounted
for an estimated $48 billion of that disadvantage.

China levies VAT taxes like many other countries on imports from the
United States, and generally rebates any VAT paid by producers in China
on exports to the United States.

As China’s VAT rate in2005 was 17 percent, these impositions and
rebates have a significant impact on the price of goods and services.
In contrast, the United States which does not have a VAT, but instead
utilizes a direct tax on property, on income, levies no similar taxes
on the border, on Chinese imports, as well as the other hundreds of
countries, 137 countries that we trade with.

So producers in China selling in the United States pay neither the U.S.
income tax, pay neither the payroll tax or their own VAT. As a result
this severely tilts the playing field and places United States domestic
manufacturing at a great competitive disadvantage. And I — my question
to the panel is this: I would like to hear from the panel their views
on the fact that most imports into the United States are subsidized by
foreign VAT rebates, value-added tax rebates, and all U.S. exports are
not.

To what degree do you feel this is unfair? How does it affect America’s
workers? And what solution would you suggest to the Congress of the
United States?

REP. LEVIN: All in one minute. Who wants to try that?

MR. SPOONER: I’ll try to be brief.

First of all, Congressman, I hope and believe I didn’t say that we
should disregard enforcement at the expense of dialogue. We should use
all the tools in the toolbox, including enforcement. And for that
reason we just reversed 23 years of precedent and applied our anti-
subsidy law to China, which opens a tremendous avenue for U.S.
manufacturers to address unfair trade in China.

Also we have 27 percent of our dumping orders affect Chinese exports, a higher percentage than any other country.

Under our international obligations, in order for us to countervail of
that rebate or any other subsidy, we have to show that there was a
financial contribution by the government that conferred a benefit and
that was specific. There are also separate VAT rebate provisions in the
WTO which perhaps USTR can speak to a little better to than I.

But we wouldn’t hesitate to countervail of that program or any other
program as long as we received a petition that jumps over the legal
hurdles and meets our international and domestic requirements for our
countervailing subsidy.

REP. LEVIN: I think to follow our rules, I’ll cut this off, and maybe
we can come back to it in another hearing. I want to be fair to all of
our colleagues. We have a wonderful array of the subcommittee here.

REP. PASCRELL: Mr. Chairman?

REP. LEVIN: Yes.

REP. PASCRELL: Mr. Chairman, I’ve introduced the legislation, border
tax equity, which has bipartisan support, HR 2600, that would stop the
charade and force countries including China to abandon these
distortions.

China is not the problem; we’re the problem. And unless we face up to
this — the problems that you’ve heard on both sides of that desk
today, unless we address those problems, these are not going to go away.

So I’m not throwing caution to the wind. What I am saying is, we will
live up to our responsibilities, and that’s all I’m asking.

Thank you, Mr. Chairman.

REP. LEVIN: And thank you.

(END EXCERPT)

 

 

Federal News Service

August 2, 2007 Thursday

PANEL III OF A HEARING OF THE TRADE SUBCOMMITTEE OF THE HOUSE WAYS AND MEANS COMMITTEE;

SUBJECT: TRADE WITH CHINA: CURRENCY, FOOD SAFETY;

CHAIRED BY: REPRESENTATIVE SANDER LEVIN (D-MI);

WITNESSES:

JOHN WILLIAMS, EXECUTIVE DIRECTOR OF THE SOUTHERN SHRIMP ALLIANCE, TARPON SPRINGS, FLA.;

SKIP HARTQUIST, PARTNER AT KELLEY DRYE AND WARREN LLP, REPRESENTING THE CHINA CURRENCY COALITION;

LEWIS LEIBOWITZ, PARTNER AT HOGAN & HARTSON LLP, REPRESENTING THE CONSUMING INDUSTRIES TRADE ACTION COALITION;

ROBERT LIGHTHIZER, PARTNER AT SKADDEN, ARPS, SLATE, MEAGHER AND FLOM LLP;

LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C.

SECTION: CAPITOL HILL HEARING

LENGTH: 6785 words

PANEL III OF A HEARING OF THE TRADE SUBCOMMITTEE OF THE HOUSE WAYS AND
MEANS COMMITTEE SUBJECT: TRADE WITH CHINA: CURRENCY, FOOD SAFETY
CHAIRED BY: REPRESENTATIVE SANDER LEVIN (D-MI) WITNESSES: JOHN
WILLIAMS, EXECUTIVE DIRECTOR OF THE SOUTHERN SHRIMP ALLIANCE, TARPON
SPRINGS, FLA.; SKIP HARTQUIST, PARTNER AT KELLEY DRYE AND WARREN LLP,
REPRESENTING THE CHINA CURRENCY COALITION; LEWIS LEIBOWITZ, PARTNER AT
HOGAN & HARTSON LLP, REPRESENTING THE CONSUMING INDUSTRIES TRADE
ACTION COALITION; ROBERT LIGHTHIZER, PARTNER AT SKADDEN, ARPS, SLATE,
MEAGHER AND FLOM LLP LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING,
WASHINGTON, D.C. TIME: 11:52 A.M. EDT DATE: THURSDAY, AUGUST 2, 2007

 

(BEGIN EXCERPT)

REP. WELLER: Thank you, Mr. Liebowitz.

Mr. Lighthizer, in your testimony you discuss the issue of essentially
border adjustability, that particularly our European competition is
able to take advantage of, allowing them to adjust their VAT taxes at
the border, meaning they can rebate the taxes and then impose the VAT
on imports. And of course that’s a frustration for a lot of us, because
under our income tax system there appears to be a bias in the WTO.

Can you elaborate further on what you discussed in your testimony, but
also elaborate further on not only the consequences, but what we should
be doing to address that issue so that we’re treated fairly in
comparison with our competition?

MR. LIGHTHIZER: Thank you, Congressman. Be happy to do that.

When you called on me, I was hoping you were asking for an alternate view on the issue of zeroing. But I’ll wait.

REP. WELLER: I’m limited on time. Answer my -

(Cross talk.)

MR. LIGHTHIZER: Am I also limited on to my — sorry -

REP. WELLER: Then you can go to that if you’d like.

MR. LIGHTHIZER: If you asked me, I -

REP. WELLER: (Laughs.)

MR. LIGHTHIZER: First of all, I’m a — I’m a hawk on the trade deficit.
I’m Republican, I’m a hawk on the trade deficit, that’s — everybody
knows. If you said, what are the two most important things to me to get
us on track — that have nothing to do with protectionism, the first
thing would be: you’ve got to do something about currency. And by far,
the most important — second most important thing, is this value added
tax system. We have allowed a system to develop which makes absolutely
no sense. It never made any sense. It’s something that, while I was in
the Reagan administration, I fought about and we’ve been fighting about
it ever since.

Most of the world funds their government through a value added tax.
And, as a result of just a happenstance of history, we’ve allowed those
people to rebate that tax whenever they export and to put it on imports
- essentially, to have it as a barrier to imports and a subsidy for
exports. And then we take the United States — we, because — for a
variety of reasons we’ve decided income tax is the fair, better way to
tax. And I think you can make a good case that it is. Because we made
that judgment as a society, we have put ourselves in a position where
we now are letting everybody bring in their products, essentially tax
free, and we’re exporting all of our products with a double tax. It is
just the stupidest thing that can imagine.

Let me say this — because I’m already over your time so I apologize
for that — but I would say this. The Congress of the United States has
passed fast-track legislation six or seven times. Every single time you
passed it, you’ve said "Deal with this issue. This is a critical
issue." We have an economist from MIT that said it’s more than $140
billion a year on our trade deficit — this one little issue. This guy,
Jerry Hausman, he’s this great economist, this is his calculation.
Every time, you said that. And I’ll bet you that my answer to your
question — the amount of time that I’ve spent talking about this is
more than every administration has spent talking about this issue with
our trading partners in the entire seven (rounds?).

REP. WELLER: Ambassador, specifically — and if you’ll humor me, Mr.
Chairman — specifically, what should we do to address this issue?

MR. LIGHTHIZER: Well, that’s a great question. Ultimately, what I tell
people they should do is they should say, "Here’s what we’re going to
do: In the next 18 months, if this inequity — which has no economic
justification at all, isn’t corrected by an agreement, then we are
going to start countervailing against people who rebate their taxes
when they ship to the United States." That’s what I would do.

Now some other people have said, take that money and subsidize exports.
All of this is creating a crisis. I think we have to create a crisis.
People — the rest of the world has sort of had it their way for more
than 40 years. And at the beginning it really didn’t matter because we
- you know, if you look at the chart I put in there, we were basically
doing okay in trade and it was a small part of everything — but when
you get to an $800 billion trade deficit, all this stuff matters. So I
think what you have to do is precipitate a crisis. I think you have to
pass a law that says, "Administration, in 18 months we’re going to
start countervailing against these people that unfairly subsidize by
rebating their taxes."

REP. WELLER: All right. Thank you.

MR. LIGHTHIZER: I’m sorry.

REP. WELLER: Thank you, Mr. Chairman for being generous with my time.

REP. LEVIN: No, not at all.

 

(END EXCERPT)

 
Lloyd Wood
Director of Membership and Media Outreach
American Manufacturing Trade Action Coalition (AMTAC)
910 16th ST NW
STE 760
Washington, DC  20006

(202) 452-0866
(202) 452-0739 — fax

[email protected]
www.amtacdc.org

 

Revere Copper
is the oldest manufacturing company in the United States.  Paul
Revere started it in 1801.  Its plant in New Bedford, MA closed
this year.(Revere Copper has its main plant in Rome, New York, which is still open and productive).

The Boston Globe featured the plant closure
today.   The cause of the plant closure is unfair trade practices,
not the fact that foreign companies produce copper better or more
inexpensively.  The New Bedford plant was hurt by German value
added tax rebates.  When German companies export, the government
rebates all taxes paid, about 17% of the product value. 

This
is an export subsidy.  But it is WTO legal.  The practice,
and the New Bedford closure, have nothing to do with "comparative
advantage."

The reason I title this entry "Messaging failure" is
that the Boston Globe didn’t get close the main issue of VAT
rebates.  Instead the reporter, Yvonne Abraham, wrote this:

There have been thousands of Revere Coppers all over this country:
once-thriving manufacturers done in by foreign companies that can do
what they do for a fraction of the cost.

The reporter’s point is that American manufacturing shutdowns are
inevitable because foreign companies can do it better and/or
cheaper.  This just is not true.  American productivity is
high, and transportation costs from other countries offset most
advantages they have in cost.  Absent trade distorting practices,
the American economy, the American workforce, and American
manufacturing would be thriving.

We really have to get the word out.  The Boston Globe reporter was not hostile, just uninformed.