Trump’s economic advisers Wilbur Ross and Peter Navarro explain the trade problem:
Here is the key unequal tax treatment issue:
While the US operates primarily on an income tax system, all of America’s major trading partners depend heavily on a “value-added tax” or VAT system.
Under current rules, the WTO allows
America’s trading partners to effectively create backdoor tariffs to block American exports and backdoor subsidies to penetrate US markets.
Here’s how this exploitation works:
VAT rates are typically between 15% and 25%. For example, the VAT rate is 25% in Denmark, 19% in Germany, 17% in China and 16% in Mexico.
Under WTO rules, any foreign company that
manufactures domestically and exports goods to America
(or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy.
At the same time, the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay.
Thus, under the WTO system, American corporations suffer a “triple whammy”: foreign exports into the US market get VAT relief, US exports into foreign markets must pay the
VAT, and US exporters get no relief on any US income taxes paid.
The practical effect of the WTO’s unequal treatment
of America’s income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions.
(While in principle, exchange rates should adjust over time to offset border adjustment, in the near term, exchange rate manipulation leads to major effects on trade flows)
It is thus not surprising that US corporations want to move their factories offshore and then export their products back to the US and to the rest of the world.
An American subsidiary located overseas gets the VAT benefits on its exports back to the US. Of course, such exports to America from the offshored production facility add to the US
trade deficit. Such offshoring of capital investment
also subtracts from GDP growth.
I have long been concerned about the prospects for reforming Obama care and for undertaking reform of our trade relationships. I was in the process of writing a vanity on the subject but here goes a more half-baked version.
If Trump pushes a tax cut, he rewards about everybody and will improve his standing with the electorate. If he cuts regulations he will generally reward a majority of businesses and only marginally distress some large businesses which want the barriers to entry erected by regulations, so Trump will improve his standing with the electorate. If Trump pushes the expansion of the energy sector, he brings down the price of gasoline to consumers and energy to manufacturers and he will improve his standing with the electorate.
However, when Trump monkeys with the trade balances he will do what I have been insisting is inevitable since the primary debates on this issue-he will inevitably favor one sector of the economy over another sector of the economy and he is likely to very materially burden consumers. There are negatives associated with trade policy reform, as necessary as that reform might be in order to preserve our manufacturing base. Even threatening to break rice bowls by reforming trade agreements, will certainly engender blowback.
Similarly, repeal of Obama care sounds great but there are many who enjoy subsidies and supplements from the government who will lose them in a straightforward repeal. If the repeal is accompanied by a replace, all of the problems of Obama care are reintroduced: who is covered and who is not, who pays and who does not etc.
I have toyed with the idea that perhaps Trump should stall on reforming Obama care and not move to save it but let it crash and blame the Democrats and leave the field wide open for an intelligent reform which will be difficult for Democrats to oppose because we will be in a crisis.
In any event, I think Trump should delay action on these two areas until after he takes all the low hanging fruit and enhances his standing with the electorate.
