Governor Mark Dayton says anti-tax attitude is killing progress

The free trade policies should never have been considered as the basis for firms to outsource US production. In fact as multinationals began this move, it should have been stopped. The idea of no tarriff policies are simply to ensure we could sell domestically made US goods abroad free from local protectionism and visa versa. At the time of Kennedy, there were little foreign manufactured goods imported and we were basically energy independant.

Firms, both domestic and foreign owned, decided to take advantage of the benefit of cheaper foreign labor and you have what we got now. The flip side was consumers are able to obtain lower cost goods, during the 60s and 70s.

As far as NAFTA goes which I believe you are addressing, there was amble argument against it, primarily from none other than Ross Perot who saw the danger.

In the end, it all comes down to dollars, who is spending them, who is collecting taxes, and whom is making profits. There is no easy solution. We could easily raise tariffs upon all imported goods and what happens? We support local labor and production and raise prices for consumers. That is what laisse faire is all about.

The founding fathers viewed “free trade” as the ability to trade with any nation without being restricted by the national government, not the absence of tariffs and quotas. In fact the federal government was funded almost 100% by high tariffs throughout the 19th century. Not only did high tariffs and quotas fund the national government, they allowed US industry to develop and flourish without being undercut by European producers.

I have worked in the US apparel industry from the 1970’s to the present. Textiles and apparel have been hit hard by the policies put in place by the free trade movement of the early 1990’s. CAFTA and WTO did much more damage to the US apparel industry than NAFTA. In fact the admission of China to the WTO, eliminating quotas and dramatically reducing tariffs while the Chinese pursued mercantilist trade policies, was probably the largest contributing factor to the gutting of the US manufacturing sector.

In opening up our markets, while not realizing 100% reciprocity and not punishing cheating (i.e. currency manipulation, transshipments, intellectual property violations, direct government subsidies of exports and capital to expand production in export industries, and exploitation of human capital) we essentially put our industry into an untenable position. Add to that increasing regulatory burdens on domestic firms, the increasing exploitation of industry by parasitic tort attorneys, and the equity markets shift from financing long term investment to short term speculation and we had the perfect storm to dramatically dismantle in less than 2 decades an industrial infrastructure that had been built over 150 years.

My experience in the apparel business was free trade served initially to boost margins of the domestic companies that shifted from manufacturing in the USA to importing. Companies such as Hanes, Levi, Warnaco, VF, Philips Van Heusen eliminated hundreds of thousands of lower middle class factory jobs by shifting to an contract import model. They did not lower consumer prices. Instead they increased profits and redeployed those profits to consolidate the industry through acquisitions.

The Chinese government collaborated with these companies by financing the construction of factories to supply the importers. Throughout the 1990’s and early 2000’s the Chinese government would fund construction and equipping of textile factories with interest free loans and a 15% rebate paid to the company for goods exported from China. At the same time, low labor costs were sustained by the government supporting peasant migration from rural areas to the cities. With these incentives, investment flowed into the construction of Chinese factories while the US factories were being dismantled. Rural textile towns in the southeastern US went from thriving middle class communities to high unemployment economic wastelands. This in turn resulted in burgeoning social welfare costs which were passed to the taxpayers. The story was similar in many other assembly industries employing relatively unskilled labor.

A century ago the big Wall Street banks invested in hard assets - railroads, ships, factories and buildings. These were long term investments in productive infrastructure which contributed to economic development and growing the national wealth. Today, Wall Street seems to engage in short term financial manipulation, churning stocks in nanoseconds or creating exotic financial instruments for which it is difficult to ascertain real value. A railroad locomotive, a factory, an airplane, or a ship have real tangible value and a productive life of decades yet Wall Street is loath to invest capital in these types of assets within the US. As a result the government has stepped in to provide capital to developing industries, with poor results (Solyndra for example). The dearth of investment capital to finance hard assets for small and medium size companies is a major economic issue which receives almost no recognition in the media or political world, yet solving the problem is essential to restoring America’s industrial might. It has only been 3 years since we were in an environment where a bank would loan a individual with a tenuous job and poor credit history hundreds of thousands of dollars to purchase a house with no money down. That same bank would not finance the purchase of several hundred thousands of dollars worth of equipment for a rapidly growing small business, even with a note secured by the assets and with a substantial down payment.

I would like to see the US exit all of the current tariff agreements and move to a flat % tax rate on all imports (manufacturing, agriculture and energy) equal to the corporate income tax in place. If the corporate tax rate is 35%, we should have a 35% tariff. If it is 15%, we should have a 15% tariff. Consider that a fee for access to the market as well as an appropriate leveling of the playing field for US companies competing with government subsidized factories. Obviously we also need to have regulatory and tort reform as well to restart investment in US manufacturing and domestic energy production.

To “fix” the investment equation, we need to reinstate Glass Steagall, in order to separate speculative investment banking from what should be more conservative retail banking thereby eliminating “too big to fail” taxpayer funded bailouts from the system. We cannot have a healthy economy, with efficient allocation of capital, when the bankers are protected from risk by the government. Finally, we need to return to sound fiscal policies at all levels of government and refocus the Federal Reserve on fighting inflation and preserving a strong dollar.

How we ever agreed for China to fall under the auspices of GATT never ceased to amaze me. A long ago dead person one time told me when I was a lad, we are going to sell rope to our enemies with which they will hang us. I guess your long diatrob underscores his commentary.

I have a problem applying how things worked in the 18th 19th and the very early part of the 20th century to today’s world though. Yes we did fund our government through tarriffs and excise taxes. Yes, tariffs, and quotas, supported US industry. We were a growing nation at that time and pretty much self sufficient. That is not the case today.

I agree we should never have allowed companies to move their production off shore as a consequence of our trade agreements. We did it unfortunately and now the question becomes can we put the genie back in the bottle.

NAFTA was just a hemispherical agreement in furtherance of the road we cut for ourselves.

You also correctly note in that we did nothing to punish cheating like currency manipulations, intellectual theft or out right fraud.

I like you idea of applying a corporate tax rate import fee. It would do two things...raise revenue and decrease imports. Of course consumer costs would go up but I believe the trade off of higher costs verses a lowered trade deficit, support for domestic manufacturing and a lower fiscal deficit far outweigh the costs.

Having been involved in both domestic and offshore manufacturing for over 35 years, in most cases US manufacturing can be competitive with 10% to 20% of Asian costs, if all costs are accurately calculated and the US operation is efficiently managed. Asian quality is difficult to manage and company’s often accept inferior materials or assembly in order to get a better price. Compare apples and apples, plus insist that quality standards will be maintained and the factory will eat the total cost of customer returns and you suddenly improve the cost equation by 5-10%.

Companies often don’t fully allocate actual (not theoretical) transportation costs, administrative overhead costs, and most don’t calculate the higher inventory investment for Asia imports or the real cost of late deliveries. Typically product development costs are also higher due to the need to base PD people in Asia or fly them back and forth. Make sure all of the indirect costs are properly allocated to the imports and the cost equation can improve by another 10%.

Finally, there is the cost to the US taxpayer of supporting imports - the services of customs, the Navy protecting the sea lanes, port construction, harbour dredging, the Coast Guard, as well as maintaining the internal infrastructure used by imports (roads, bridges, airports). If domestic production pays for the use of these services via a 35% corporate tax rate and the Asian factories get a free ride, domestic companies are at a tremendous disadvantage. Assessing a import fee equal to the corporate tax rate would seem to be an equitable way of insuring imports, not the taxpayer, should pay for these very real costs. None of the costs of maintaining the import infrastructure should be born by the taxpayer, they should be covered by the users of the infrastructure and services.

Based on how the import supply chain typically deals with rising raw materials on energy and commodities I estimate if we assess a 35% tax rate on imports about 50% of the increase will be passed to the consumer and the other15% will be absorbed in the supply chain or subsidized by the government of the exporting nation. The real economic benefits to the USA will be higher revenue to the treasury as well as real economic incentives (not direct government subsidies) to make existing US manufacturing more efficient and for Wall Street to make investments in domestic manufacturing.

Finally, the government should take a very aggressive approach with respect to non-tariff barriers and subsidies of exports by foreign governments. If we know the Chinese government is rebating 15% of the value of exports to a factory, the US government should assess an additional 15% tariff on imports of that class of goods. If intellectual property laws are being flagrantly violated, imports of that class of goods should be embargoed until the violations subsist. If other nations apply non tariff fees to US goods coming into the country, say a container fee or customs fees, we should be reciprocal in the assessment of these fees.

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