Posted on 06/22/2018 6:45:31 PM PDT by jfd1776
International trade has always been in the news. Business reporters talk about a trade deficit, politicians wail about jobs being exported overseas, and every so often, the government signs a new free trade agreement or trade promotion agreement (they are different things) with one or two or a hundred faraway countries.
But despite all this, international trade policy has not been at the forefront of the news cycle in a generation; not since the US-Canada Free Trade Agreement was voided 25 years ago, to be replaced by NAFTA, a three-party FTA between Canada, the United States, and Mexico.
Thanks to the election of Donald Trump, and his dogged determination that this country change its approach to trade, the issue is back at the water cooler again, and we can assume it will remain there throughout his presidency.
There are of course many different approaches to international trade. Should we set high tariff barriers to reduce imports, or set low tariffs to offer the broadest cost-effective options to our people? Should import duties be a significant source of revenue for the national government, or an accounting error?
The USA began with an intention that the federal government’s primary sources of funding would be import duties and the sale of land as the nation expanded westward. These approaches were abandoned long ago as our federal government instituted corporate and person income taxes, Social Security and Medicare, and went from selling government land to nationalizing private property. Most other countries, too, today rely far more on VATs, GSTs, income taxes, and other taxes than on duties.
But duties, while minimized in importance, remain in place, all over the world. The USA gradually started a process of reducing our average import duty rates in the 1970s, and today we have among the lowest duties in the world, on most products. Many imports are unconditionally duty-free, or carry low rates of 2 or 3 percent of goods value, or sometimes 5 or 6 percent, although some highly protected products (like certain textiles) carry higher rates of 10 to 20 percent. Across the industrialized world, most of our trading partners set higher average rates than ours, usually two or three times ours, often much higher. Canada’s punitive duty rates doubling or trebling the importation cost of many American dairy products, for example, have recently been in the news.
So when the USA started to engage in the concept of Free Trade Agreements, it was viewed as a great deal for the USA. The basic ideas of FTAs are twofold: set rational standards for legal and labor practices across the partnership to protect intellectual property rights, worker safety and so forth, and encourage more local sourcing and manufacturing by giving duty-free status to goods that deserve it. So if you make a product locally, but with too high a percentage of outside components, it won’t get the duty-free benefits, but if you source a decent percentage of materials from members of the FTA, then your finished product deserves that duty-free status. The devil is in the details, of course, and FTA compliance is incredibly complex.
Most of us “Free Traders” – when the USA entered the world of FTAs in the 1980s – thought of this as a win-win. It would encourage American manufacturers to source more of their raw materials and components domestically, and we would give up less in duties than the partners would, while gaining greater access to their markets. Think about it: the Mexican product that would otherwise get hit with a 3% duty in the USA now gets zero duty… but the USA product that would otherwise get hit with a 6% duty in Mexico now gets zero duty too! FTAs lowered the duties on our exports a lot more than they lowered the duties on our imports. Viewed from this perspective, FTAs are wonderful for American manufacturing.
All that being said, however, a number of cracks have been surfacing in that shiny image over the years of implementation. We have noticed some FTA partners disregard the FTA completely, as with Canada’s aforementioned dairy duties. We have noticed many trading partners establish non-tariff barriers, such as onerous inspection/approval rules and draconian documentation requirements, making it difficult or impossible to export to them, despite the removal of duties.
And perhaps most importantly, we have begun to really think about the difference in how countries tax, in general. For the most part (alcohol and a few other imports are an exception), the USA only assesses duties and less than half a percent in Customs fees on import shipments. We don’t assess a broad VAT or GST on imported goods.
But Europe, Canada, Mexico, and many other countries assess VATs or GSTs of 15, 20, even 25 percent or more on imports, in addition to the duties. So what does that really mean? It means that perhaps we should have been viewing FTAs from a different perspective all along.
If we gave up a 3% duty and Mexico gave up a 6% duty, we thought we were getting the better end of the deal. But when you factor in Mexico’s 16% VAT on that same import, we realize that we gave up 3% and Mexico only gave up 6% out of what had been 22%. So our goods are still severely taxed upon importation abroad, even after an FTA is in place.
It is certainly not fair to attack foreign countries as taking advantage of us if we entered into an agreement with our eyes open, and we just didn’t think about the total picture when we negotiated them (intentional deviations like Canada’s dairy taxes and other non-tariff barriers being the exception of course)… if blame is to be assigned, perhaps we should blame our own negotiators for not seeing the forest for the trees, years ago.
But it certainly is fair, after a generation of participation in FTAs, large and small, to review how our view of trade compares with that of our trading partners. It is fair to say that perhaps – all along – our FTAs should have taken the total import tax burden into account, rather than focusing exclusively on duty rates.
And it is important to remember that our biggest challenges in the trade world are actually countries with whom we do not have FTAs at all. You can’t blame “bad free trade agreements” for our challenges with Mainland China or Europe, since we don’t HAVE free trade agreements with China or Europe!
As this administration pursues its negotiations with other countries, there are several themes it should keep in mind:
The past decision to focus on duties and not other taxes was a shared fault, not theirs alone; we shouldn’t blame other countries for our own negotiators’ too-narrow focus.
The American manufacturing community is on a rebound; sudden imposition of high tariffs hurts us at least as much as it hurts exporting countries.
And the broad original goal of encouraging both domestic manufacturing AND domestic sourcing of raw materials and components was and remains one of the best goals of trade policy; whatever we do, we must never take measures, retaliatory or otherwise, that drive even more of our present manufacturing and material sourcing to foreign shores.
The Republican administration in the White House and the Capitol have done so much over the past year and a half to rebuild the American economy, trade talks are the one subset that could either lock in those improvements or undo them.
There’s no easy answer, and we watch the sudden impositions of 25% tariffs – in both directions – with great concern. Even if manufacturers desperately want to change their sourcing from abroad to domestic, it takes time - four, six, eight months or more - to find and qualify new suppliers, especially when whole industries have been lost to foreign shores for years.
We must never forget that a tariff, after all, is a tax, and new tax burdens on our own people will make such homecomings harder to accomplish, not easier.
Copyright 2018 John F. Di Leo
John F. Di Leo is a Chicagoland-based trade compliance trainer, actor and writer. A former political activist and Spokesman for the Illinois Small Business Men’s Association and Illinois Right to Work Committee, he has now been out of politics for 20 years. His columns are found regularly in Illinois Review.
It’s either Free Trade or Fair Trade - never both.
Free Trade is the market economy without government interference.
Fair Trade is government forced “equality” in the marketplace.
Free trade creates growth and wealth.
Fair trade creates loss and poverty.
“Free Trade is the market economy without government interference.”
Without any Government enforcing rule of law, Intellectual property will be stolen immediately, fraud will be rampant, contracts violated, and competitors like communist China will subsidize their manufacturers to undersell ours and drive ours out of business - as a form of warfare, to destroy our industrial base needed to fight an actual war.
Free trade in my view, is a level playing field, where people can compete based on fair rules, which are enforced by the Government.
You have left gaps in your article that I think need to be addressed. From earlier in your article:
“These approaches were abandoned long ago as our federal government instituted corporate and person income taxes, Social Security and Medicare, and went from selling government land to nationalizing private property.”
This change happened in the early 1900s. The federal budget grew enormously after these income taxes went into effect. It allowed the entire welfare system to grow and grow and justifies why government can never get smaller—we have too much money to not spend it all. Our country was much safer and our government was much smaller before income taxes. We need to head back to that time, but people (like you) keep writing that this is a permanent fact of life, ‘so don’t even go there in thinking we should ever get rid of income taxes.’
“...whatever we do, we must never take measures, retaliatory or otherwise, that drive even more of our present manufacturing and material sourcing to foreign shores.”
This happened over the past 40 years. There really isn’t an equivalent concern today—all the businesses that could take advantage of other countries to reduce costs, did. Consequently, ALL measures taken will most drive companies back into this country, because our economy is where everyone wants to sell. They will be able to sell for less by evading high tariffs through US-based manufacturing. It’s pretty obvious.
Tariffs are taxes, just like income taxes. It is FAR better and healthier to tax foreign good purchases than to tax reportable income earning. Do you want to incentivize buying US-made goods or incentivize not working or of workng in the underground? Those two taxes incentivize in those ways.
You describe that our free trade agreements screwed us over for all of these years. I do not believe you gave any credibility to your argument that we should maintain them, but ‘make them fair, as they should have been.’ The horse left that barn, leaving us in our current situation—having sent all of our jobs elsewhere.
“Free trade” is what screwed our country over, big time (apologies to Trump).
By the way, free trade has never existed. It is an ideal that hurts.
bookmark
And therein lies much of the problem: The gov't has far overstepped its Constitutional duties. Charles Beard's An Economic Interpretation of the Constitution boils the gov't responsibilities to two things: 1) the policing of property rights, 2) the provision of social overhead capital (i.e., those things deemed necessary by society, but not provided by private markets, like the federal highway system). Somehow we went from those duties to giving free cell phones away to deadbeats. Take away spending that's really aimed at getting reelected and you'd slash the budget in half overnight.
The VAT thing is a sort of red herring, because the local firms also have to pay it.
Therefore, an American firm selling to Mexico is not put at a competitive disadvantage by the VAT, since a Mexican competitor will pay exactly the same rate.
(Most countries don’t place a VAT on their exports. But that’s irrelevant to the matter under discussion.)
Intellectual property will be stolen immediately
How?
fraud will be rampant
How? Government is the main perpetrator of fraud in the U.S.
competitors like communist China will subsidize their manufacturers to undersell ours and drive ours out of business
How? Government is the main perpetrator in dulling U.S. competitive edge. Does taxing our own American consumers in the form of tariffs give us a competitive edge?
Again, you again want to mix up free trade with fair trade. Again, free trade is the market economy WITHOUT government interference. "Fair trade" is government-forced "level playing field" which is illusory.
"A society that puts [government-forced] "equality" ahead of freedom will have neither equality nor freedom. But a society that puts freedom ahead of equality will have a great deal of both." - Milton Friedman.
“Intellectual property will be stolen immediately
How?”
Government enforces patents and copyrights - without Government there is no protection, and knock-off products are quick to market. This is obvious. https://www.reuters.com/article/us-usa-trade-pompeo/pompeo-says-china-trade-policies-predatory-idUSKBN1JE2QK
“fraud will be rampant
How? Government is the main perpetrator of fraud in the U.S.”
What prevents someone from mislabeling products, and defrauding customers? Government Law Enforcement. Without Government enforcing the law, criminals are free to sell tablets of plaster dust as antibiotics, or any other type of fraud. Such product adulteration and fraud is widely practiced in China, and many such Chinese products are currently illegally sold to US consumers: https://en.wikipedia.org/wiki/Food_safety_incidents_in_China
“competitors like communist China will subsidize their manufacturers to undersell ours and drive ours out of business
How?”
They have bee doing it wholesale for 25 years. The Government of China subsidizes the industries that they want to take over, so they can sell below cost, and competitors are driven out of business. Recently, manufacturers were able to buy finished copper tube from Chinese suppliers, below the current price of an equal amount of raw copper. China also manipulates their currency, to make all their products cheaper in dollars, to create the same effect across the board, beyond the industries they specifically subsidize. Then they apply high tariffs and non-tariff barriers to US (and other countries) imports, to preserve their domestic market to support their domestic industries. https://www.aei.org/publication/how-china-cheats/
“Government is the main perpetrator in dulling U.S. competitive edge.”
This sounds like just an article of faith on your part. Face it - everybody gets act, and there are a lot of bad actors out there, who will lie cheat and steal. The communist Chinese have made it a main thrust of their organized Government policy for a quarter of a century.
Does taxing our own American consumers in the form of tariffs give us a competitive edge?
Yes, that is why countries do it. It can level the unfair cost advantage of foreign competitors.
What prevents someone from mislabeling products, and defrauding customers?
The voluntary cooperation between buyers and sellers in the free market where demand will drop and soon put whoever is doing this out of business.
Government is the main perpetrator in dulling U.S. competitive edge" is a "article" of FACT not fiction.
The federal government - the main perps of our economic malaise: Imposing suffocating HIGH TAXES, unconstitutional dead-end REGULATIONS, unconstitutional business-and-job-killing FEDERAL MINIMUM WAGE, and engaging in basically unconstitutional SUBSIDES (BRIBES) FOR SPECIAL INTERESTS. They also stupidly DESTABILIZE & DEVALUE THE DOLLAR. Result? Business fleeing our country's anti-business climate and gross economic failure.
And BTW, other counties do a lot of stupid things, almost all of them being Socialist. Since when does America, the leader of the free world, become a stupid follower and shoot itself in the foot because other countries are shooting themselves in the foot?
I expect leftists to ignore/deny these things, but not people on a site called FREE Republic that is supposed to be for freedom and limited government.
Stopped right there. What a lie. The lack of a tariff costs us jobs and charging an import tariff also costs us jobs, so they say. That cannot be . It's either one or the other.
To balance the difference in labor costs between the USA and the 3rd world would not take much. Frankly, most manufacturing is not labor intensive. That's the point of mass production. Maybe 7% of retail prices goes to labor, and that's for domestic union labor.
THIS IS EVIL!!!!! Free Traitors™ aren't just wrong they are doing something I consider evil.
bkmk for later
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