America’s $300 Billion Disadvantage in Trade

A TOTALLY UNLEVEL PLAYING FIELD

Uncle Daniel Drew, the legendary 19^th Century Wall Street insider, once said that all he wanted in any deal was “just a little unfair advantage.” Most of America’s trading competitors seem to want the same thing today.

Imagine for a moment what it would mean for the competitiveness of American exports if U.S. companies could instantly cut their price an average of 19 percent in Europe and 17 percent in Asia.

Imagine what it would mean if foreign imports into the United States from those parts of the world were instantly raised by the same amounts.

Every President since Lyndon Johnson has tried to do just that by getting other countries to do away with an old “Cold War” trade concession we gave them to speed up their post World-War II recovery. What we agreed to allow is that they could rebate to their producers any indirect taxes they had paid on goods they exported to us, plus they could impose an equal charge on any U.S. exports into their countries. Those nations recovered from World War II long ago, but they cling to this little unfair advantage. The cost to U.S. producers is $300 billion per year.

In practical terms that means, for instance, that the German manufacturer of a car or any other product exported into the United States gets a rebate from the Government of Germany equal to the amount of indirect taxes paid on that product in Germany -- the Germany Value Added Taxes (VAT). The VAT rate in Germany is 19 percent. So, the German carmaker gets a 19 percent tax rebate on every vehicle exported to the United States. That is a big tax subsidy by any measure.

Conversely, any U.S. carmaker exporting a vehicle into Germany must pay that government a VAT equivalent tax of 19 percent of the price of the car, plus 19 percent on top of the costs of all transport, insurance, docking and duties involved in getting the car into Germany and to the customer. Worse, the American company gets no credit for the corporate taxes it pays in the United States.

This example is neither unique nor isolated. Today, 137 other nations use a VAT tax system that gives them a similar advantage over U.S. producers.

Uncle Daniel Drew would have hated this deal. It not only gives foreign producers a really large and unfair advantage in both their market and in ours, it also creates a perverse incentive for U.S.-based producers to move their facilities and jobs to other nations so they, too, can take advantage of this one-sided tax break.

Unfortunately, literally thousands of U.S. producers have already shifted their production overseas to get this tax break, and more stand ready to follow. Even companies that do not want to leave America have little choice but to go when their competitors shift their operations and cut their prices. Moreover, most banks are now reluctant to lend money to companies that refuse to move offshore, particularly to China. The banks understand what is happening and they do not want to take a risk on a company facing such strong disadvantages.

The movement of these factories and jobs, of course, is devastating towns, counties and states all across America. It is also denying the federal government revenues it would otherwise get and badly needs to balance the budget.

This problem has not gone unnoticed by the U.S. Congress. In 1974, Congress authorized the Nixon Administration to participate in what became the Tokyo Round of trade talks. As part of that authorization, Congress instructed the Administration to negotiate away this unfair VAT advantage. Other nations, however, ignored the U.S. demand and refused to deal with the issue. The same thing happened in subsequent trade negotiations that were initiated in 1988 and 2002. Even today, foreign governments refuse to even talk about the issue.

Congress modified the U.S. tax system in 1971, 1984, 2000 and 2004 to provide some redress to this great imbalance. But the European Union filed a case against the United States at the World Trade Organization in the early days of this Administration and got our legislation ruled WTO-illegal. Our laws were enacted democratically and they were Constitutional, but Congress decided it was better to repeal them than risk starting a trade war.

The big question, of course, is what can the United States do now to offset a massive economic disadvantage that now costs our producers almost $300 billion per year?

One idea that is being seriously considered by several Members of the House and Senate is for the United States to enact legislation that would allow the government to impose a fee on imports from other nations that is exactly equal to the VAT subsidy given them in their home country, plus also give U.S. producers a rebate on their exports exactly equal to the VAT charge imposed on them by the importing country. This would instantly balance the trade playing field.

The goal of such legislation would be to get equal treatment for American producers both in this and in foreign markets. The old term for this is reciprocity, which long ago was considered the “golden rule” of trade.

I think Uncle Daniel Drew would approve of doing away with our competitors’ big unfair advantage.