Comments on the News

In rereading John McCain's June 3 speech in New Orleans, I was struck in particular by one sentence in the prepared text. "Lowering trade barriers to American goods and services," he said, does four things: "creates more and better jobs; keeps inflation under control; keeps interest rates low; and makes more goods affordable to more Americans."

This version of Straight Talk went right over my head. As I see it:

• The first claim is the most defensible. Increased exports would create more and better jobs if the access were real. Lower tariffs are usually touted by "free traders" as the principal gain from "free trade" agreements. But what about the factors that neither the FTAs nor the multilateral rules address: currency misalignment, border tax adjustments, other subsidy practices, unsafe products and processes, etc.? How can the proverbial playing field be said to level if these obstacles to, and distortions of, free trade go uncorrected and even unaddressed? Their impact can be, and often is, far more significant than the barriers that are eliminated. (Border tax adjustments alone create a two-way disadvantage for American producers that averages 15-20 percent. China's undervalued renminbi creates an additional two-way disadvantage that may be as much as double the level of its 17 percent value added tax.) Knowing that I will be branded a protectionist for saying so, the free trade emperor has no clothes. I'm not arguing that free trade is not a worthy goal, only that the much touted FTAs are seriously deficient, sometimes for what they include and in every case for what they ignore.
• Improving market access for US exports does not reduce inflationary pressure in the US. On the contrary, everything else being equal, they increase it. Exports are a "leakage" from the domestic economy that leave more money chasing fewer goods in our market. That's inflationary.
  
• Improving market access for US exports also does not keep interest rates low. Actually, the US has kept its rates low by running trade deficits, shipping dollars abroad to settle our accounts, and then borrowing back what we need to cover the budget deficits of government and households. Massive borrowing from our trading partners in Asia and the Mid East is what accounts for our "success" in this reagrad.
• Improving market access for US exports also does not make more goods affordable to more Americans. On the contrary, they remove goods from the domestic economy, thus making fewer goods available and raising prices, everything else being equal.

What Sen. McCain might have wanted to say, but didn't, was that he seeks to continue the Bush administration's mindless pursuit of FTAs, its dereliction of duty with respect to currency policy, and aiding and abetting of off-shoring. This would be a great issue for the two candidates to hash out with one another in front a national television audience.

Charles Blum

Labels: Presidential Elections, Trade

For all the gnashing of teeth in the Democratic primaries about NAFTA, you’d think that were our number one trade issue. Just “fix” NAFTA, and our record trade imbalance will disappear, right? Wrong!

In fact, the most important impediment to American producers in the global market is our antique tax system. Unlike more than 140 of our trading partners, the United States stubbornly sticks to a system that primarily taxes personal and corporate income. Virtually every major American trading partner large and small (all but the oil exporters) has as a major component if its tax regime some sort of consumption tax. The most common form is a value added tax as in the EU, China and Mexico. Other countries, notably Canada, rely on sales taxes.

Whatever the form, these consumption taxes have one thing in common. Under international trade rules, they are “border adjustable.” That is, they are applied to imports at the same rate as to domestically produced goods, and they may be and usually are rebated on exports. Typically, the border adjustment runs in the range of 15 – 25 percent. Ten percent here, five percent there; pretty soon, you’re talking about real money, as a former senator from Illinois might have put it.

Since the US declines to adjust its tax system, it is by choice a loser in international trade. We have decided not to join ‘em, so they beat us. We seem to insist on doing poorly as a trading nation.

By comparison, most international trade negotiations and most trade disputes involve factors a lot less significant than the disparity in taxes. In fact, our “free trade” agreements are silent on border tax adjustments, leaving our trading partners free to increase their advantage not just while negotiating but even after the agreement is in place.

What’s wrong with Americans? Why is there no sense of outrage at this huge self-inflicted wound? Part of the answer can be found in our “silo” concept of economic policy-making. We have no sense of national purpose or strategy when it comes to economics and trade. Tax people do taxes; trade people do trade. Never the twain shall meet, apparently.

If you think we’ve paid too high a price for too long for silo government, feel free to join in a discussion this Thursday May 8^th with Yale Law Prof. Michael Graetz. He has a plan for a “competitive tax” system that I like a lot. He’ll be addressing the Coalition for a Prosperous America Issues Forum (which I chair) from 10:30 until noon EDT. Contact IAS at iasg@erols.com or 202-393-8600 if you want to be there in person or join or Webinar. You trade people will be glad you did!

Charles Blum

Labels: Tax, Trade

Yesterday in Ohio, John McCain corrected a questioner who termed NAFTA a “bad four letters.” That earned a laugh for the senator, but no one challenged him when he said: “The answer to our problems is not the siren song of protectionism.” If you want to smear a proposal or an opponent these days, all you have to do is deploy that nine letter version of a four letter word. No need to discuss much after that.

Well, wait a minute. I don’t for a minute subscribe to anything that I consider to be “protectionist.” But I’m not running for president, so I think it’s McCain who needs to be pressed to explain what he means. Why doesn’t the traveling press corps ask the senator what he means? Is it “protectionist” to:

• Enforce the nation’s trade laws as each president swears he will?
• Seek redress whenever US rights under WTO and other international agreements are violated?
• Resist mercantilist practices such as persistent currency undervaluation?
• Seek an end to all trade-distorting subsidy practices, perhaps by tabling a proposal for end game of the Doha negotiations?
• Rejecting further special interest provisions that hide under the mantle of “free trade”?

I’m sure voters everywhere would be interested in some “straight talk” on this subject. Instead of just telling us that lost jobs are not coming back, why not spend a little time and effort to inform the citizenry as to the steps that you would take to ensure that their “second chance” at the American Dream will be more promising than their first one?

I’m with Sen. Sherrod Brown who wrote in an op ed in today’s Wall Street Journal: “Let’s stop accusing one another of being protectionist. And let us agree that U.S. trade policy – writing the rules of globalization to protect our national interests and our communities – is worthy of vigorous national debate.”

Charles Blum

Labels: Presidential Elections, Trade