Archive for the ‘Trade Policy’ Category

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The High Cost of Trade Deficits

Tuesday, April 9th, 2019 
 
 

Free trade has resulted in enormous trade deficits in goods for the United States for over 40 years. Our last year of a positive trade balance was 1975. At best, free trade has benefited large, multinational global corporations that have manufacturing facilities located in other countries. At its worst, it is the primary source of our trade deficit and loss of good paying manufacturing jobs.

Even with the tremendous resources we have, what was once the world’s largest manufacturer of products has accumulated $14.379 trillion worth of deficits in goods for all countries since 1991.

A fact sheet generated by the Coalition for a Prosperous America for 2018 show ten countries account for 97% of our trade deficit: China, Mexico, Japan, Germany, Ireland, Vietnam, Italy, India, South Korea, and Malaysia. Our trade deficit with China alone was $419 billion, representing 47.9% of our trade deficit.  Since 1991, we have accumulated over $9.144 trillion worth of trade deficits with just the top four countries. If we had fair trade, we would not have these constant trade deficits.  The drastic effect China has had on our trade deficit is demonstrated by the fact that in 2001 when China joined the World Trade Organization, we had a total $412 billion deficit in goods, but in 2018, we had a $879 billion deficit in goods. 

 

For every $1 billion of trade deficits in goods, it’s been estimated that 6,000 – 7,000 jobs are lost, at about $80,000/job. This means that 8 – 10 million more Americans willing to work could have a comfortable middle-class job in America. Instead, we lost 5.8 million manufacturing jobs from the year 2000 to 2010. 

 

In terms of purchasing power, workers’ wages in the U.S. have been stagnant since the 1970s. The significant collapse in the income of average Americans can be attributed to the vast decline of jobs in the U.S. manufacturing sector. This is the reason average U.S. wages have fallen over time, especially since 2001. From 2001 – 2013, the average U.S. wages fell by 3.5%. In contrast, as Chinese workers flocked to cities for manufacturing jobs, wages have grown substantially, averaging an 11 percent increase per year from 2001 to 2015. 

 

According to the Pew Research Center, 61% of American households were part of the middle class in 1971, but by 2015, only 50% of Americans were part of the middle class. “In 2002, China’s middle class was only four percent of its population. A decade later, this number had climbed to 31 percent, constituting over 420 million people. In contrast, in 1999, only 2% of the Chinese population was a part of the middle class, but by 2013, 39% of the Chinese population was in the middle class.

 

Since China joined the World Trade Organization, the bi-partisan, 12 member U. S.-China Economic and Security Review Commission (USCC) has been required to submit annual reports to Congress. These reports document China’s non-compliance with the WTO and the effect it has on the U. S. economy.

For example, the 2007 report included a case study of the local impact of trade with China on North Carolina. The USCC report stated “the accelerating decline in North Carolina’s manufacturing employment is due in large measure to increasing competition from imports mostly from China . . . The combination of China’s 2001 admission to the World Trade Organization (WTO), which gave it quota-free access to U.S. markets for its textile and clothing exports, and the subsequent U.S. grant of Most-Favored (Trading) Nation status that lowered most tariffs on Chinese imports, battered North Carolina’s textile and apparel industries, and they never recovered.”

Because a greater proportion of North Carolina’s workforce had manufacturing jobs than any other state, North Carolina’s workforce was more vulnerable to competition from imports than the workforces of other states. North Carolina’s manufacturing economy was made even more vulnerable by its concentration in the import-sensitive sectors of textiles, apparel, and furniture. North Carolina is one of the southeast states that had a large number of textile companies, and as a result, North Carolina has been the most impacted state in the nation by layoffs due to trade. Between 2004 and 2006, almost 39,000 North Carolina workers were certified by the Trade Adjustment Assistance program as having lost jobs to trade, more than 10 percent of the U.S. total of 387,755. 

According to the Social Science Research Institute (SSRI) of Duke University in North Carolina, there were 2,153 textile and apparel plants in North Carolina employing 233,715 people in 1996. By 2006, the apparel industry had experienced a 70% decline in jobs and 55% loss of plants. The textile industry by comparison had only lost 63% of jobs and 32% of plants from 1996 to 2006. 

The loss of these well-paid manufacturing jobs in North Carolina’s textile industry may have resulted in families losing their homes and/or being forced to relocate to other areas of the country to find jobs. Taking lower paying jobs in their own communities may have resulted in families no longer being in the middle-class income range. And, those who have not been able to find any work or only part-time work may have even dropped down to the poverty level.  It is not just people losing jobs and not being able to find other employment that pays as well as their former jobs, “hundreds of small towns throughout North Carolina impacted by plant closures are dying.”

Remember that it takes taxes paid by three to four working Americans to pay for the unemployment benefits of a non-working American. The cheaper China price of goods that we import instead of producing here in the U. S. results in a cost to society as a whole. We need to ask ourselves:  Is the China price worth the cost to society?  I say a resounding NO! We need to stop shooting ourselves in the feet. We need to stop benefitting the one percent of large multinational corporations to the detriment of the 99% percent of smaller American companies.

China, Germany, Japan, and many other countries have built their currency value around making certain all of their countrymen have a good job, even if that destroys America’s work force. As a result, these countries have maintained constant trade surpluses with the U. S. for many years, which would not have happened if we had fair trade.

 

It is impossible for the U.S.to remain competitive if our currency is not fairly valued. In order to move manufacturing jobs back to the U.S., we need to move our currency value down by at least 27% because the currency of Germany and Japan are undervalued by about that same amount.  China has rigged its currency between 15%-40% below its fair value since joining the WTO, and this gives a subsidy to their imports to the U.S. and imposes a direct cost on U.S. exports to China.

Devaluing our currency would allow many more products that we import from overseas to be made here. Unfair trade practices of currency manipulation, government subsidies, product dumping, and state-owned enterprises have allowed China to buy our raw materials and our low-cost energy to become the largest producer in the world of paper, aluminum, and steel even though labor costs are small compared to the cost of raw materials, energy, and transportation.

We need to focus on eliminating our trade deficits and achieving balanced, reciprocal trade in all future trade agreements. The last thing we need is to increase our trade deficit more than it already is.

 

In addition, we need to continue on the path of returning more manufacturing to America by reforming our tax policies and making regulations less onerous to manufacturers, without compromising our commitment to protect our environment. This is the only way that we will be able to simultaneously reduce our trade deficit and the national debt.

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Tariffs Benefit the American Manufacturing Industry

Wednesday, February 13th, 2019

Most people are unaware that for over 150 years, the American government protected the development and growth of its manufacturing industry with high tariffs, ranging from a low of 5% to as high as 50% in some cases. The first tariffs were imposed by the Tariff Act of 1789, whose purpose was to raise money for the new federal government, slash Revolutionary War debt and protect early-stage American industries from foreign imports.

Prior to achieving its independence, Americans were dependent on goods imported from England, France, and Holland, so it was critical to develop their own manufacturing base to maintain independence as a country in the event of future wars.

These protectionist policies enabled its fledgling manufacturing industries to grow until the United States became the preeminent industrial nation in the 20th century.  American manufacturing dominated the globe for over 70 years.

After World War II, the U.S. switched from protectionism to free trade in order to rebuild the economies of Europe and Japan through the Marshall Plan and bind the economies of the non-Communist world to the United States for geopolitical reasons.

To accomplish these objectives, the General Agreement on Tariffs and Trade (GATT) was negotiated during the UN Conference on Trade and Employment, reflecting the failure of negotiating governments to create a proposed International Trade Organization. Originally signed by 23 countries at Geneva in 1947, GATT became the most effective instrument in the massive expansion of world trade in the second half of the 20th Century.

GATT’s most important principle was trade without discrimination, in which member nations opened their markets equally to one another. Once a country and one of its trading partners agreed to reduce a tariff, that tariff cut was automatically extended to all GATT members. GATT also established uniform customs regulations and sought to eliminate import quotas.

By the 1970s, Japan’s economy was flourishing to the point that Japan became a major exporter to the U. S. for consumer electronic goods such as cameras, stereos, radios, and TVs. During the 1980s, Japan further expanded its U. S. market share with automobiles and machine tools for the manufacturing industry, such as mills, lathes, and turret presses.

Germany focused on high-end products in all of the same markets as the Japanese, so that American products faced stiff competition at the low end and high end.

Manufacturing employment in the U. S. reached a peak of 19.5 million in 1979, and slid down to 17.3 million by 1993 from the effects of job losses from increased imports from Japan, Germany, and other countries because of free trade policies and lower tariffs.

By 1995, when the World Trade Organization replaced GATT, 125 nations had signed its agreements, governing 90 percent of world trade.

Another major blow to the American manufacturing industry took place when the North American Free Trade Agreement (NAFTA) was negotiated under President Bill Clinton and went into effect in January 1994. The agreement was supposed to reduce market barriers to trade between the United States, Canada, and Mexico to reduce the cost of goods, increase our surplus trade balance with Mexico, reduce our trade deficit with Canada, and create 170,000 jobs a year. Twenty years later, the fallacy of these supposed benefits is well documented.

According to the report “NAFTA at 20” released in 2014 by Public Citizen’s Global Trade Watch, “More than 845,000 specific U.S. workers have been certified for Trade Adjustment Assistance (TAA) as having lost their jobs due to imports from Canada and Mexico or the relocation of factories to those countries.”

In 1994, GATT was updated to include new obligations upon its signatories. One of the most significant changes was the creation of the World Trade Organization (WTO.) The 75 existing GATT members and the European Community became the founding members of the WTO on January 1, 1995. The other 52 GATT members rejoined the WTO in the following two years, the last being Congo in 1997. Since the founding of the WTO, a number of non-GATT members have joined, and there are now 157 members.

The loss of jobs accelerated after President Clinton granted Most Favored Nation status to China in the year 2000, and China was able to join the WTO. As a result, the U. S. lost 5.9 million manufacturing jobs from 2000 to 2010, and manufacturing employment dropped from 17.3 million down to 11.4 million in depth of recession in February 2010. In addition, an estimated 57,000 manufacturing firms closed.

On January 31, 2017, the Economic Policy Institute released a report, “Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs,” written by Robert Scott.

Scott stated, “Due to the trade deficit with China, 3.4 million jobs were lost between 2001 and 2015, including 1.3 million jobs lost since the first year of the Great Recession in 2008. Nearly three-fourths (74.3 percent) of the jobs lost between 2001 and 2015 were in manufacturing (2.6 million manufacturing jobs displaced).”

Why were so many jobs lost? A large percentage of the people who lost jobs were in industries decimated by Chinese product dumping and below market pricing; i.e., textiles, furniture, tires, sporting goods, and garments. In addition, American manufacturers chose to outsource manufacturing offshore as the U.S. Department of Commerce data shows that “U.S. multinational corporations… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”

Thankfully, manufacturing employment increased to 12.8 million by December 2018 as shown by the chart below. This was the result of a very slowly improving economy, reshoring (returning manufacturing to America), and increased Foreign Direct Investment (foreign manufacturers setting up plants in the U.S.) Notice that it took six years to increase by 904,000 under the Obama Administration, and it’s only taken two years to increase by another 441,000 jobs under the Trump Administration. While an increase of 1.4 million jobs is good news, at this rate, it would take about 30 years to recoup the 5.8 million jobs we lost from 2000 to 2010.

 

We need to accelerate the growth of manufacturing jobs, and that is what the tariffs imposed by President Trump are designed to do.  In the only few short months since the tariffs went into effect, I’ve seen the following headlines about job growth in the past week:

“U.S. Steel Corp. Restarts Texas Plant That Closed in 2016,”  IndustryWeek, February 5, 2019

“Tariffs Helping US Manufacturers Add Jobs, Says Group,” IndustryWeek, February 7, 2019

“US Steel Resumes Construction on Idled Facility,” IEN, February 11, 2019

On December 04, 2018, the article “Contrary to popular belief, Trump’s tariffs are working” by Jeff Ferry, Research Director for the Coalition for a Prosperous America (CPA), stated,  “The tariffs have contributed to this growth directly and indirectly. Directly, we’ve catalogued some 11,000 US jobs that are being created by companies in the four tariffed industries, and that’s not including any of the Section 301 industries. Since that 11,000 tally in August, more investments and jobs have been announced, like the massive $1.5 billion steel plant to be built by Steel Dynamics, which will create some 600 new jobs in the southwest. Solar Power World lists a dozen solar companies now investing in US production of solar modules.”

“At CPA, we built an economic model looking at the effects of the tariffs on the US economy from 2018 through 2021. We found that the tariffs boosted US economic growth, adding $9 billion to GDP this year. Further, our growing economy leads to growing US imports each year. In other words, by boosting our own economic growth, we buy more goods from our trading partners, not less.”

If we want to protect our national security and maintain our national leadership in the 21st Century, we cannot continue down the path of increasing trade deficits and increasing national debt by allowing countries with predatory trade policies to destroy the American manufacturing industry.  I support the new path the Trump Administration is forging by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth, and strong domestic supply chains.

 

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Navarro Warns of Fragility of U.S. Manufacturing and Defense Industrial Base

Tuesday, December 4th, 2018

If you don’t watch CSpan, you missed an important speech by Dr. Peter Navarro, White House National Trade Council and Office of Trade and Manufacturing Policy Director, on November 9th at the Center for Strategic and International Studies in Washington, D. C.

Dr. Navarro spoke about the manufacturing and defense industrial base and how U.S. economic strength is an element of national security and how it fits with the Trump strategy in dealing with the broader economic and defense issues. Dr. Navarro said that in December 2017, as part of formulating a national security strategy, President Trump introduced the maxim that “economic security is national security.”

He explained that everything that the Trump administration has done is part of this strategy, such as tax cuts, deregulation to reduce the onerous regulations put in place by the Obama Administration, ending the war on coal, and the steel and aluminum tariffs. These are all part of supply side economics to help companies be more competitive and grow in a non-inflationary way.

He commented that instead of the “doom and gloom” of economists, there has been “a flood of new investment and capital expenditures” by steel and aluminum companies, and “the waivers granted by the Department of Transportation have gone down from a flood to a trickle.”

He said, “In my estimation, we have the finest U. S. Trade Representative in U. S. history.  Doing the Section 301 investigation was a power that lay dormant for decades. This is the way we are able to now protect our technology from Chinese predation.  It has been tremendously successful in doing that.”

He outlined how Trump’s tough trade policy, backed up by tough action, has led to the renegotiation of two out of the three main trade deals – NAFTA, the Korea deal, and the WTO.  With regard to NAFTA, now called the USMCA, he said, “The whole essence is a provision to bring domestic content back onshore and share the fruits of the assembly and supply chain with our neighbors to the south and to the north. This is a deal which will strengthen all three countries and strengthen the defense industrial base.”

He commented that President Trump is a man who thinks every day about how to put more American men and women back to work, particularly those who work with their hands. He discussed how during his time on President Trump’s campaign trail, a report came out stating that one out of four people were out of the workforce, the so-called “discouraged workers” – men and women who had given up looking for work. He said, “We were told that the jobs for people who work with their hands were never coming back. Now, we have historically low unemployment., and rising employment among Blacks, Hispanics, and woman. Over a million people are back in the workforce through a fundamental restructuring of the manufacturing and industrial base.  It isn’t just the quantity of jobs; it’s the quality of jobs.”

He said, “I was blessed to be part of a large team that restructured the sale of arms to our allies and partners.  From an economic security point of view, it means more jobs here, good jobs with higher wages.  When you reactivate a supply chain, you activate 400 suppliers in that supply chain in 41 states. It helps expand production lines. If you are able to sell arms to allies and partners, it makes that country stronger.”

He then turned his attention to the findings of the “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States Report” that was prepared by the Interagency Task Force in Fulfillment of President Trump’s Executive Order 13806.

He said that an Interagency Task Force, led by DoD, created sixteen working groups with over 300 subject matter experts from across the federal government. Nine working groups focused on traditional industrial sectors, and seven working groups assessed enabling cross-cutting capabilities, such as machine tools. The report revealed that there are almost 300 gaps and vulnerabilities in America’s manufacturing and defense industrial base.  The Executive Summary states, “Currently, the industrial base faces an unprecedented set of challenges: sequestration and uncertainty of government spending; the decline of critical markets and suppliers; unintended consequences of U.S. Government acquisition behavior; aggressive industrial policies of competitor nations; and the loss of vital skills in the domestic workforce.”

Dr. Navarro asked the rhetorical questions, “How did we get to the place where the greatest military power in the world faces serious gaps, close to 300 gaps, in the defense industrial base?…What happens when you randomly cut off dollars from the defense department?

He explained, “There are five macro forces that bear down on the defense industrial base:

  1. Budgets and sequestration
  2. Decline of American manufacturing capability and capacity
  3. S. government procurement practices
  4. Industrial policies of competitor nations
  5. Decline of U.S. STEM and trade skills

He commented that the decline of the manufacturing base itself was due to the forces of globalization as well as the industrial policies and unfair trade practices of our economic competitors, our so-called allies, and our strategic rivals, particularly China.  He said, “This report called out China for its policies of economic aggression…China is engaged in unfair trade practices and currency manipulation.  From 2003 to 2014, it was documented that China was the worse currency manipulator in the world…so that we are running up annual trade deficits of half a billion dollars.”

He showed a chart, titled “China’s Categories of Economic Aggression.”  He said, “This chart is founded on the underlying assumption that China is a non-market economy, a state-directed economy. They use international rules when they benefit them and violate them when it’s to their benefit.”  He outlined` six economic strategies that China uses:

  • Protect their home markets from competition and imports
  • Protect China’s share of global markets
  • Secure and control core natural resources globally
  • Dominate traditional manufacturing industries
  • Acquire key technologies and Intellectual Property from other countries and the U. S.
  • Capture emerging industries of the future that will drive future growth and advancement in defense industries.

He said, “There are over 50 ways that China engages in these acts, policies and practices s to achieve these strategies…, if you could negotiate to eliminate 25 of these tactics, you would still have 25 that would hurt us.”

This point is very relevant to the preliminary agreement that President Trump negotiated with Chinese President Xi Xinping at the G20 this past weekend. The agreement included a 90-day delay to the planned January increase in US Section 301 tariffs—which were set to rise from 10 percent to 25 percent on $200B of Chinese imports.

Judging from past history of negotiations with China, it is unlikely that China will keep their part of the bargain of this latest agreement. It will probably unravel before the 90 days are up. Dr. Navarro alluded to the problem of negotiating with China when he said, “The biggest problem is the trust issues. One of the things about working in the White House is that you can ask for stuff. I asked them to give me all the instances where China has agreed to something and then not kept their promise. I got back like five pages of stuff going back 30 years. It’s frightening…”

Space does not permit me to cover his discussion of the tactics China uses. Through research, I discovered that Dr, Navarro had used this same chart when he spoke to the Hudson Institute on Thursday, June 28, 2018, an image of which can be viewed at this link..  It looks to me that he created the chart to be a visual summary of key points made in his report, “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World,” which he submitted to President Trump in June 2018.

His comments included mention that the globalization of the supply chain has resulted in having only a single source for some critical product or components. For example, he mentioned that there is only one company that can make turrets for tanks. He said, “The F-34 has a seven-tier supply chain, and you need to make sure that production lines for parts can continue and expand if there is a surge of demand…If you have foreign sources for products and components, that is a big problem, especially if China is the source.”

He also briefly commented on the problem of the decline of U. S. STEM and trade skills saying that if you have labor shortages because you don’t have enough skilled labor, that is a problem.

He concluded by saying, “The day that Pat Shanahan turned in the report, DoD and other agencies of government were already moving forward to fill these gaps and vulnerabilities. The day that the report was handed in, we signed two Defense Protection Act Title III orders that would help a couple of small companies in that fragile supply chain…We have initiatives for the national defense stock pile program to help with critical material issues. There is an effort to modernize the organic industrial base…This administration is working tirelessly, tirelessly, to fix those gaps and vulnerabilities. This effort really is the purest expression of the principle of economic security is national security.  We will strengthen America’s manufacturing and defense industrial base, and in the process, we will create jobs and build factories and better protect our homeland…”

I’ve made the point repeatedly that we can’t protect our national security or even defend our country without a strong manufacturing base. After writing about how and why we needed to save and now rebuild our manufacturing industry by writing three books and over 300 articles since 2009, it is gratifying to me that action is finally being taken to address this situation the Trump Administration.

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How tariffs Could Rebalance U.S. trade relations with China

Tuesday, November 27th, 2018

President Trump has been accused by many of starting a trade war. Are we really in a trade war and did the U. S. start it?  Economist Ian Fletcher recently stated “I define trade war as a cycle of tariff and retaliation where the retaliations are driven not by rational desire to balance trade or achieve the benefits of a tariff-protected economy, but simply by one-upping the other side’s last cycle of retaliation…I believe it is absolutely crucial to make the distinction between trade war, and the ongoing trade conflicts which have always been going on even under nominally free-trade circumstances, clear to the public.  If China imposing tariffs on us for years hasn’t been “trade war,” why is it suddenly “trade war” now that we’re doing the exact same thing?”

Michael Stumo, CEO of the Coalition for a Prosperous America, recently stated, “China started the trade war in 1994 with currency devaluation and state-directed capitalism. Then they got better at it.”

Mr. Stumo is right because for the past 24 years, the U. S. has experienced an ever-increasing trade deficit with China, transferring America’s wealth to China and losing nearly six million manufacturing jobs. In 1994, our trade deficit with China was $29.5 billion, and by 2004, it had doubled to $162.3 billion. After a slight dip in 2009 during the depths of the Great Recession, the trade deficit grew to $375 billion in 2017.

Previous administrations did nothing to fight against the trade war that China started.  In fact, they aided China’s efforts to win the trade war starting when China was granted “Most Favored Nation” status by Present Clinton in 2000.

The January 31, 2017 report, “Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs,” written by Robert Scott, Director of Trade and Manufacturing Research at the Economic Policy Institute, states that when China entered into the World Trade Organization (WTO) in 2001, “it was supposed to bring it into compliance with an enforceable, rules-based regime that would require China to open its markets to imports from the United States and other nations by reducing Chinese tariffs and addressing nontariff barriers to trade.”

However, Scott wrote, “China both subsidizes and dumps massive quantities of exports. Specifically, it blocks imports, pirates software and technology from foreign producers, manipulates its currency, invests in massive amounts of excess production capacity in a range of basic industries, often through state owned enterprises (SOEs) …China has also engaged in extensive and sustained currency manipulation over the past two decades, resulting in persistent currency misalignments.”

Robert D. Atkinson, President of the Information Technology and Innovation Foundation (ITIF) expanded on Chinese mercantilist policies in his report, “Enough is Enough:  Confronting Chinese Innovation Mercantilism (February 2012). He wrote, “China’s strategy is to win in virtually all industries, especially advanced technology products and services… China’s policies represent a departure from traditional competition and international trade norms. Autarky [a policy of national self-sufficiency], not trade, defines China’s goal. As such China’s economic strategy consists of two main objectives: 1) develop and support all industries that can expand exports, especially higher value-added ones, and reduce imports; 2) and do this in a way that ensures that Chinese-owned firms win.”

In a speech to the Hudson Institute on October 4, 2018, Vice President Mike Pence stated, “Over the past 17 years, China’s GDP has grown 9-fold…And the Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies doled out like candy, to name a few. These policies have built Beijing’s manufacturing base, at the expense of its competitors – especially America.

He commented, “Yet previous administrations all but ignored China’s actions – and in many cases, they abetted them. But those days are over. Under President Trump’s leadership, the United States of America has been defending our interests with renewed American strength…we’re also implementing tariffs on $250 billion in Chinese goods, with the highest tariffs specifically targeting the advanced industries that Beijing is trying to capture and control. And the President has also made clear that we’ll levy even more tariffs, with the possibility of substantially more than doubling that number, unless a fair and reciprocal deal is made.”

Most people are unaware that America staunchly protected its domestic industries with tariffs on imports until the end of WWII.  On August 16, 2018, MarketWatch published an article by Jeffrey Bartash, in which he stated, “One of the very first bills new President George Washington signed, for instance, was the Tariff Act of 1789. He inked the bill on July 4 of that year. The tariff of 1789 was designed to raise money for the new federal government, slash Revolutionary War debt and protect early-stage American industries from foreign competition.

Most goods entering the U.S. were subjected to a 5% tariff, though in a few cases the rates ranged as high as 50%. It was the first of many tariffs that Congress passed over a century and a half. They generated the vast majority of federal revenue until the U.S. adopted an income tax in 1913. In some years tariffs funded as much as 95% of the government’s annual budget.”

Why did we allow the Chinese to win the trade war for so long?  Because our economic “experts” and advisers to past administrations naively thought that free trade and free markets would have a transformative effect on China’s totalitarian form of government, gradually democratizing it.

The question is whether or not the tariffs will help rebalance U. S. trade with China.  In the article posted on the trade blog of the Coalition for a Prosperous America (CPA) on July 30, 2018, CPA Research Director Jeff Ferry examines “China’s heavy dependence on – or overexposure to – the US for their trade surplus and their exports. He wrote, “But the fundamental message of all the data is that the US is not only the world’s number one consumer and importer, but China’s number one customer. That makes China more dependent on us than we are on them.”

In other words, China would be hurt more by the tariffs reducing their imports to the U. S. than the U. S. would be hurt by having to pay more for imports. Over time, the tariffs would rebalance our trade with China as imports of Chinese goods are reduced, which would reduce our deficit with China.

In contrast to numerous articles projecting job losses from the tariffs, the Coalition for a Prosperous America (CPA) published a press release on August 17, 2018, that provided “details of its new ‘Tariff Job Creation Tracker’ that tallied US manufacturing jobs gained in the wake of recent tariff actions. CPA found 11,100 jobs announced or planned in four major sectors affected by tariffs. These results have now prompted a corresponding study of job losses related to the tariffs. To date, CPA has identified only 514 jobs lost specifically due to tariffs—which means that job gains exceed job losses by a 20:1 ratio.”

On November 27, 2018, CPA released a press release: “Steel Tariffs Creating Jobs, Boosting GDP” which stated:  “This ground-breaking economics study by the CPA Economics team shows that the steel tariffs are benefiting the US economy,” said CPA Chairman Dan DiMicco. “The same is true for other tariffs implemented this year. If we continue to follow rational trade policies, the benefits will be felt by every worker, farmer, and shareholder in the US.”

CPA Research Director Jeff Ferry said, “The performance of the US economy since the steel tariff was implemented in March has been outstanding, with over a million more jobs in the US economy today than in March, and GDP growth roughly half a point higher than economists had predicted.”

Already the tariffs are resulting in an expansion of U. S. steels jobs and investment by U. S. steel companies in their facilities. On August 17, 2018  Manufacturing News & Insight featured this article “US Steel to Invest $750M in Gary  Works Plant in Indiana” stating, ”U.S. Steel plans to spend at least $750 million to upgrade a century-old steel mill along northwestern Indiana’s Lake Michigan shoreline…Company and government officials said Thursday that the project will help preserve Gary Works’ nearly 3,900 steelworker jobs, and could help ensure the 112-year-old mill lasts another century. The investment accounts for more than a third of U.S. Steel’s $2 billion asset revitalization program…”

Manufacturing is the foundation of the U.S. economy and our country’s large middle class. Losing the critical mass of our manufacturing base would result in the loss of the large portion of our middle class that depends on manufacturing jobs. American manufacturers supply the military with essentials including tanks, fighter jets, submarines, and other high-tech equipment. We can’t manufacture these goods without domestic steel and aluminum.  If we lose the domestic capacity to produce steel and aluminum, our national defense would be in danger, and it would be impossible to maintain our country’s position as the superpower of the free world. Let’s give them time to work to rebuild our U. S. steel and aluminum industries.  Hopefully, the tariffs will inspire China to open up their markets to U. S. goods to create to a freer, more open trade relationship between our two countries.

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CPA’s Fair Trade Message Finds Favor in Capitol Hill Meetings

Thursday, May 31st, 2018

The week of March 12th, I was one of over 60 members of the Coalition for a Prosperous America (CPA) who attended our annual conference/fly-in.  In a two-day blitz, members visited more than 120 House and Senate offices in Washington, D. C. to sound the alarm: “America’s massive, growing trade deficit is killing jobs, harming communities, and stifling economic growth.”

Our conference began Monday afternoon with remarks by CPA Chairman Dan DiMicco touting Present Trump’s announcement of imposing Section 232 tariffs on steel and aluminum as a long-overdue measure to safeguard our domestic steel and aluminum mills.  He emphasized that CPA also supports all allowable trade enforcement remedies, such as the Section 201 Tariffs on imported solar panels and clothes washers and the Section 301 Investigation into Chinese intellectual property theft.

CEO Michel Stumo highlighted the new flyers covering issues that we were to discuss with Congressional Representatives and their staff.  Research Director Jeff Ferry introduced the new Job Quality Index he has created, which will differentiate high-paying jobs from low-paying jobs in the monthly job data.

We urged Representatives to support legislation that would eliminate the nation’s trade deficit, address an overvalued dollar, provide stronger trade enforcement, and tackle troubling trade issues with China.

In our meetings, we provided Representatives and their staffs with legislative solutions aimed at eliminating America’s trade deficit, which grew to $566 billion last year. A fact sheet produced by CPA highlighted that no other country has run 42 years of consecutive trade deficits, which has been an average 2.99% drag on our Gross Domestic Product. The flyer offered key reasons why “free” and “fair” trade can result in balanced trade—instead of the job loss that has plagued America’s productive sectors for the past 15 years.

Another fact sheet, showed that ten countries account for 97% of our trade deficit, namely China, Mexico, Japan, Germany, Ireland, Vietnam, Italy, India, South Korea, and Malaysia. Our deficit with China alone jumped from a $337 billion deficit or 38% in 2016 to a $375 billion deficit or 47% in 2017.

We discussed how the he Tax Cuts for Jobs Act narrowed, but did not eliminate, the tax benefit for moving operations overseas, and presented information on how the tax system could be improved with Sales Factor Apportionment, based, which is “a destination of sales system used by many states that would tax corporate income in proportion to a companies’ sales in the U.S. regardless of either domicile or location of operations.”  For example, a multinational corporation that still does 40% of its business in the U.S. would be taxed on the profits of that 40% of its worldwide sales.

The North American Free Trade Agreement (NAFTA) was also another topic of discussion during our visits. CPA supports “mending it or ending it” as CPA has long argued that NAFTA has hurt U.S. manufacturing, cost jobs, and incentivized investment in Mexico rather than the U.S. We explained the provisions that must be included in a renegotiated NAFTA to help America’s manufacturers, such as reinstating country of original labeling for beef and pork, tightening country of origin rules to require higher North American content, requiring periodic reviews, and a mechanism for countries to withdraw, if necessary.

During our Hill meetings, we emphasized the importance to our national security of a vibrant domestic steel and aluminum industry. I mentioned that we outproduced Germany and Japan in World War II, but we would not be able to do so in future wars if we let our domestic steel and aluminum industries be further decimated. We expressed our support for President Trump’s tariffs on steel and aluminum import, especially since CPA has many members in the steel industry.

In addition, we discussed the problem of the overvalued U. S. dollar. And presented the flyer that showed as of May 2017, the U. S. dollar was overvalued by 25.5%, whereas the currencies of Japan and Germany were undervalued by nearly as much, with South Korea not far behind at about 15% of undervaluation.  I told them that CPA has a new Advisory Board member, Dr. John R. Hansen, who is a 30-year veteran of the World Bank. He has proposed a solution to address this problem that “pushes American wages down, increases the trade deficit, disrupts capital markets, and hooks consumers on debt.” He proposed that “Congress should provide the Federal Reserve the responsibility to maintain the dollar at a current account balancing equilibrium price. New legislation should provide the Fed with a new tool to moderate the dollar exchange rate called a market access charge (MAC).” He projects that the MAC would balance trade in five years and that balance would be maintained in the future.

In addition to our congressional visits, CPA hosted a bipartisan group of Representatives to meet with our members, including Rep. Tom Reed (R-NY-23), Rep. Dan Lipinski (D-IL-23), Rep. Mo Brooks (R-AL-05), and Rep. Robert Pittinger (R-NC-09). Last fall, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long: “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

Rep. Pittinger is co-sponsor of HR 4311, the Foreign Investment Risk Review Modernization Act of 2017, which would expand and update the review by the Committee on Foreign Investment in the U.S. (CFIUS) to meet new national security risks. As we distributed this flyer to Congressional Members, we expressed our support for the order President Trump signed to prohibit the acquisition of Qualcomm by Broadcom.  When I met with Congressman Duncan Hunter, he said he had sent a letter to President Trump urging him to stop the takeover of Qualcomm by Broadcom.

As the publisher of my newest book, Rebuild Manufacturing – the Key to American Prosperity, CPA provided books for me to present at my 15 appointments with Congressional Members and/or staff, and I also had the pleasure of presenting a copy of my book to Rep. Mo Brooks and Rep. Robert Pittinger.

On March 16, CPA released a press release about the success of the annual conference fly-in. highlighting the following:

“The 2018 CPA fly-in was our best yet,” said Dan DiMicco, CPA Chairman. “The presentations and panels were very well received and by far the most informative yet, with great speakers and panelists. Without a doubt we made a strong impact on those we visited on the Hill. Our congressional speakers clearly showed us that our messaging is having an impact.”

Michael Stumo, CEO of the CPA said, “We came to Capitol Hill with a united message from our members that Main Street America urgently needs action on trade. We were encouraged to find that our elected officials are becoming more receptive to calls for greater trade enforcement. Our next step is to remind them that voters are watching, and that the time for action is now.”

CPA chair Dan DiMicco said, “In 2016, voters spoke very clearly at the ballot box. They are frustrated and tired with the business-as-usual approach in Washington. We came to Capitol Hill this week to remind our elected officials that the American people are waiting for action, and that reducing our mammoth trade deficit must be a top priority.”

“The Coalition for a Prosperous America trade conference was very useful and successful in educating our members and legislators about the dangers of continuing our country’s obsession with free trade,” said Roger Simmermaker, author of How to Buy American and a CPA member. “Several times, it was evident that many members of Congress and their staff experienced what I would call “light bulb moments” as we laid out our ideas and strategies for a better and fairer trade policy that will benefit our national economy.”

“When real workers, manufacturers, and agriculturalists converge on Washington, theory is tested against reality, and good things begin happening in America,” said Bill Bullard, CEO of R-CALF and a CPA board member. “There is no question that CPA had a positive impact on U.S. trade policy this week.”

The steel and aluminum tariff discussions proved particularly wide-ranging. And as Greg Owens, CEO of Sherill Manufacturing and a CPA member, noted, “Trade and our decades-long deficits are a critical and complex issue. While I applaud the recent move to levy tariffs on steel and aluminum, the comprehensive answer must go beyond that. The overvalued dollar and tax policies are major contributors to the problem that must be addressed. CPA has detailed concrete solutions to these and other issues that I fully support. It was a privilege and an honor to help CPA introduce and develop these solutions on Capitol Hill this week.”

I am proud to be one of the 4.1 million members in the manufacturing, labor, and agricultural sectors who are “united in their view that a continuing trade deficit hampers jobs and productivity nationwide. CPA will continue to urge action on America’s troubling trade deficit, and we look forward to expanding its relationship with Members of Congress who have pledged to fight for America’s manufacturers, farmers, and their workers.”

Chairman Dan DiMicco and CEO Michael Stumo will be in southern California April 18 – 20th speaking to members of Metal Service Center and NTMA, as well as speaking at the San Marcos Manufacturing Summit to be held at the San Marcos Community Center on Friday, April 20th.  As Chair of CPA’s California chapter, I invite you to register to attend.

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Posted in Currency Misalignment/Munipulation, Economy, Legislation, Manufacturing, National security, Taxes/Regulations, Trade Policy | No Comments »

Steel and Aluminum Tariffs Will Help Rebuild American Manufacturing

Tuesday, May 22nd, 2018

There has been quite a furor in financial and political circles since President Trump announced the that he would impose tariffs on steel and aluminum imports from all countries.  There has been an outcry that it would raise consumer prices, end “free trade”, and start a trade war.  The fact is that we have been in a trade war with China for nearly 20 years — from when China was granted Most Favored Nation status (PNTR) in the year 2000 under President Bill Clinton. We have been losing this trade war, and it’s about time that we stood up and fought back.

China has been cheating on what they agreed to do to attain their PNTR status within the World Trade Organization.  They have dumped products in the U. S. at below market prices to destroy American competition. The Chinese government has subsidized their steel, aluminum, and other industries. They have manipulated their currency to make it undervalued compared to the U. S. dollar.  They have stolen the Intellectual Property of American companies.  They have forced American companies to transfer technology to Chinese companies in order to establish manufacturing facilities in China.  This hasn’t been free trade or fair trade.

The U. S. trade deficit with China has increased from a small deficit of $6 million in 1985 to $375.2 billion in 2017.  China represented 40% of our total trade deficit in goods of $810 billion in 2017, and our trade deficit has already increased at a record pace for January 2018.

As I pointed out in my December 7, 2017 IndustryWeek column, “How Trade Policies Led to the Decline of American Manufacturing, “As a result of the escalated trade deficits from 2001 to 2010, the U.S. lost 5.8 million manufacturing jobs and 57,000 manufacturing firms closed… our domestic supply chain has weakened…We even lost whole industries…” This number of jobs lost represents about 30% of the manufacturing workforce we once had.  Actually, “the number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979, according to data published by the Bureau of Labor Statistics.

In the past three days, I’ve listened to conservative radio talk show hosts lambast President Trump’s National Trade Director, Peter Navarro.  I’m personally acquainted with him because of residing in San Diego where he resided for many years. I even remember when he ran for mayor of San Diego in 1992.  What these talk show hosts and their guests fail to mention is that he was a professor of Economics at the University of California, San Diego for many years, and was professor of Economics at the University of California, Irvine prior to becoming part of the Trump administration.  He knows what he is talking about.

Navarro was one of the first authors to point out the threat that China is to the U.S. I’ve read two of his three books:  The Coming China Wars, published in 2008, which I read when I was writing my own book, Can American Manufacturing be Saved?  Why we should and how we can.” Then I read the second book that he co-authored with Greg Autry, Death by China, in 2011. Greg Autry has spoken at several of the manufacturing summits I participated in producing in southern California on behalf of the Coalition for a Prosperous America.  Greg Autry and I also served together on the board of directors for the American Jobs Alliance from 2011 – 2016.

Navarro and Autry outline the eight ways China cheats in trade in cleverly worded phrases:

  1. The Export Subsidies’ Dagger to the Heart.
  2. The New “Great Game”: Chinese Currency Manipulation
  3. They Think It’s Not Stealing if They Don’t Get Caught.
  4. Trashing China’s Environment for a Few Pieces of Silver
  5. Maiming and Killing Chinese Laborers for No Fun but Lots of Profits
  6. The Neutron Bomb of Export Restrictions
  7. Predatory Pricing, Dumping and the Dragon’s Rare Earth Cartel
  8. Goodness Gracious, Great Walls of Protectionism

If you haven’t read either of these books, I can highly recommend them, and they are still available on Amazon.

The tariffs on steel and aluminum are long overdue and constitute only a single step in balancing our trade deficit.  I’m delighted that President Trump is keeping his campaign promise of imposing tariffs on steel and aluminum.  I was happy when he withdrew the U. S. from the Trans Pacific Partnership Agreement as I had written more than a dozen articles about the dangers of that agreement to the U. S.  It would have been the “nail” in the coffin of American manufacturing.

There are many more policies we need to put in place to eliminate the trade deficit and restore manufacturing jobs to create prosperity.  I have made recommendations in the last chapter of my new book, Rebuild Manufacturing – the Key to American Prosperity, based on the research I have done for the articles I have written in the past six years as a columnist for IndustryWeek, along with many recommendations that have been made by the board of directors of the Coalition for a Prosperous America, of which I have been a member since 2011. Check out these issue papers on their website.

We can win this trade war if we have the same kind of courage and insight we had when we won World War II and the Cold War with the Soviet Union with the help of our allies. Remember, China has a written plan to become the Super Power of the 21st Century. If we lose this war, we may lose our country.

 

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Posted in Manufacturing, Trade Policy | No Comments »

How could we stop Chinese Investors from Buying U. S. Companies?

Wednesday, April 11th, 2018

After my article, “Should We Allow the Chinese to Buy Any U.S. Company They Want?” was published January 9th, I was made aware that AXIOS published an article by Steve LeVine on January 10th that provided data from MacroPolo showing that the amount of Chinese investment in the U.S is far greater and more dangerous that I thought.

He wrote, “Chinese investors and firms own a majority of almost 2,400 American companies employing 114,000 people, about the same number as the combined U.S. staffs of Google, Facebook and Tesla…”

On their website, MacroPolo is described as “an initiative of the in-house think tank of the Paulson Institute at the University of Chicago,” which “has a dedicated team of experienced observers and seasoned analysts” whose “aim is to decode China’s economic arrival …across multiple dimensions.”

The article featured MacroPolo’s interactive map, which shows the economic impact of Chinese investment in each state by economic contribution, number of firms owned, and total employment of these firms. The map “appears to be the first open-source, county-by-county study of every majority-owned Chinese company in the U.S. — $56 billion worth.”

In 2017, the top three states were:

  • California: $12.3 billion – economic contribution, 19,300 employed, 598 firms
  • Michigan: $7.6 billion economic contribution 15,200 employed, 111 firms
  • New York: $3.1 billion economic contribution, 6,300 employed, 198 firms

Kentucky was the top state in 2016 with the $5.4 billion buyout of GE Appliances in Louisville by Haier.  I was horrified when this happened because I had used GE’s reshoring of a water heater as the headline case study in my reshoring presentations, and I had visited the GE new product design center in Louisville in the fall of 2015. I had been delighted to see one appliance after another being reshored.

The most immediate way that we could reduce Chinese investment in the U. S. would be to pass the legislation I mentioned in my previous article:  The Foreign Investment Risk Review Modernization Act (FIRRMA), introduced on November 8, 2017 by Congressman Pittenger (H.R.4311) and Senator Cornyn (S. 2098).  The key features of these bills are:

  • “Expands CFIUS jurisdiction to include joint ventures, minority position investments, and real estate transactions near military bases and other sensitive national security facilities.
  • Updates CFIUS definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats.
  • Adds new national security factors to the review process.
  • Strengthens the government’s ability to protect American “critical infrastructure” from foreign government disruption.”
  • Representatives Devin Nunes (CA-22), Chris Smith (NJ-04), Denny Heck (WA-10), Dave Loebsack (IA-02), Sam Johnson (TX-03), and John Culberson (TX-07) are co-sponsors of H.R. 4311.

In his press release, Senator Cornyn said, “By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies…This undermines our national security and highlights the imperative of modernizing the CFIUS review process to address 21st century threats. This bill takes a measured approach by providing long overdue reforms to better protect our country, while also working to ensure that beneficial foreign investment is not chilled.”

Senators Burr (R-VA), Feinstein (D-CA), Marco Rubio (R-FL), Amy Klobuchar (D-MN), John Barrasso (R-WY), Gary Peters (D-MI), James Lankford (R-OK), Joe Manchin (D-WV), and Tim Scott (R-SC) are also co-sponsors of S. 2098.

The introduction of FIRRMA may be the outcome of the recommendations of the draft annual report of the U.S.-China Economic and Security Review Commission  “calling for a ban of the commission’s annual Chinese state-owned enterprises’ purchases of U.S. companies…The Commission recommends Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies…” as reported by Ali Meyer on October 27, 2016 in the Washington Free Beacon.

The first independent review of these 79-page bills was published December 21, 2017 in the Latham & Watkins Client Alert White Paper titled, “CFIUS Reconstructed: The Foreign Investment Risk Review Modernization Act of 2017.” The White Paper states, in part:

“The proposed Foreign Investment Risk Review Modernization Act would bring substantial changes to CFIUS review. Key Points are:

  • FIRRMA could speed review of certain transactions
  • It would provide for increased scrutiny of transactions from countries of concern.
  • It would expand the scope of activities subject to CFIUS review

FIRRMA would also lengthen the CFIUS review process, extending the initial review period from 30 to 45 days, and allowing CFIUS to extend a national security investigation for 30 days beyond the existing 45-day period where “extraordinary circumstances” require. Thus, the post-notice CFIUS clock would expand from 75 days currently to either 90 or 120 days from the time of filing to the end of the national security investigation.

…But FIRRMA would also increase the resources CFIUS would have to undertake its expanded responsibilities.… In a number of important ways FIRRMA would clarify, alter, or expand current CFIUS practices. And yet, the 79-page bill leaves open certain questions, and raises still others.”

The White paper also stated that “an alternative bill was introduced into the Senate, the “United States Foreign Investment Review Act of 2017 (S.1983),” also with bipartisan sponsorship (Sens. Sherrod Brown (D-Ohio) and Charles Grassley(R-Iowa). That said, FIRRMA’s bicameral introduction and bipartisan support, which includes Senator Diane Feinstein (D-California), as well as reports that some of FIRRMA’s sponsors worked with the Administration on the bill before it was introduced, all provide some reason to expect a version of FIRRMA to move during upcoming months.”

On December 11, 2017, Alexandra Kilroy wrote a guest blog for Adam Segal on the Council on Foreign Relations website. Alexandra is an intern in the Digital and Cyberspace Policy program at the Council on Foreign Relations. She wrote, “As Chinese firms pour funds into promising Silicon Valley start-ups, many national security experts are concerned that China may soon surpass the United States as a technological power, in part though investing in U.S. firms and acquiring cutting-edge technology.”

She commented that “the Foreign Investment Risk Review Modernization Act (FIRMMA), … appears to be motivated in part by an unreleased Pentagon report of the military applications of Chinese investments in the United States. Under the new legislation, CFIUS oversight would be expanded to include foreign investments near military facilities, minor-share investments in critical technology and infrastructure sectors, and transfers of dual-use technology to foreign entities. Acquisitions of critical technologies by “countries of special concern” would also be subject to CFIUS oversight.”

She commented that “Chinese state-led capitalism makes it difficult to distinguish between private and state-owned businesses, and many private firms have strong ties to the Chinese government. In addition, China has been historically disinclined to allow private foreign investment in many critical parts of the economy…it has traditionally maintained strict limits on foreign investment in its energy, transportation, and technology industries. Chinese firms, many with connections to the state, can invest billions in U.S. technology, but U.S. companies are often barred from doing the same.”

As a director on the board of the San Diego Inventors Forum, it greatly concerns me that Chinese investors are buying startup companies whose new technologies may be critical to the future of American technological advances.  Under the current law, Chinese investors could be buying small emerging companies that have advanced technologies that are down at the Tier 3 and 4 levels in the supply chain and never get brought up for a CIFIUS review of the acquisition.

In this regard, there are two possible scenarios that frighten me: (1) Chinese investors buying an advanced technology company and shutting it down to keep the U. S. from benefitting from the technology, and (2) having Chinese engineers insert “backdoor” technology into the product to make it not work properly or quit working when triggered remotely. The latter is already a problem with counterfeit Chinese parts in the defense and military supply chain.

On January 22, 2018, Daniel DiMicco, Chairman, and Michael Stumo, CEO, of the Coalition for a Prosperous America sent letters to Congressman Robert Pittenger and Senator John Cornyn, which said, in part:

“The Coalition for a Prosperous America (CPA) board of directors has voted to support the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) which you introduced on November 8, 2017 with bipartisan support.

We appreciate your recognition that foreign investment should be more tightly monitored to address new security threats posed by an evolving global landscape. Your bill appropriately expands CFIUS’s authority to review certain transactions that pose national security concerns, expands the list of factors to be considered by CFIUS and mandates disclosures by state-owned enterprises.

We agree with your reasons, and those of your cosponsors, for advancing this bill. We would additionally point out that trade is part of China’s multidisciplinary strategy to surpass the US on the global stage. China engineers persistent trade surpluses. Our corresponding deficits require us to be a net importer of capital. We sell our assets to balance the books as they sell more goods than they buy. Thus, the greater the US trade deficit, the more we sell our assets and the more we must monitor and restrict which assets are sold.

CPA believes your bill could be improved by adding economic security as a basis for rejecting investment. As an example, Canadian laws restricting investment go beyond national to economic security, i.e. net gain to the domestic economy, when buyers are state-influenced companies.”

The expansion of CIFIUS by FIRRMA may not be enough to stop the dangerous level of Chinese investment in the U.S.  Another solution would be to require reciprocity between China and the U.S. with regard to investment.  Currently, U. S. companies are not allowed to buy 100% of any Chinese company.

On January 17, 2018, CPA’s Trade Blog included an excerpt from Jenny Leonard’s article on Inside US Trade, which stated, “The White House is considering the creation of a reciprocal investment regime with China following a Section 301 [Trade act of 1974] investigation into Chinese technology and intellectual property policies…The sources said the administration, if it went that route, would apply the 1977 International Emergency Economic Powers Act, which gives the president broad authority to regulate commerce “to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.”

The article describes how it could be done: “Trump, they said, would sign an executive order declaring a national emergency and, as required under the statute, “immediately” transmit a report to Congress specifying the rationale behind the emergency and actions, and naming “any foreign countries with respect to which such actions are to be taken and why such actions are to be taken with respect to those countries.”

The result “would be to restrict Chinese foreign investment in the U.S. to the extent that Beijing restricts U.S. foreign investment in its market, which could effectively lead to sectoral investment bans. Chinese investors under the new regime would have to demonstrate that China allows U.S. investment in a specific sector. For example, one source said, if Chinese investors wanted to buy a U.S. bank, they would be able to acquire no more than a 49 percent stake — in line with Chinese rules on foreign ownership of banks in China.”

Personally, I like this latter solution the best as there is still too much possibility that a Chinese acquisition may escape the expanded CIFIUS “radar screen” for a review. It’s not just our national security that is being threatened, it’s our economic security as well.

 

Posted in Inellectual Property, Legislation, Manufacturing, National security, Trade Policy | No Comments »

Should We Allow the Chinese to Buy Any U.S. Company They Want?

Wednesday, April 11th, 2018

We Americans blithely ignore the long-term effects of allowing foreign corporations to purchase the assets of our country in the form of companies, land, and resources. We are selling off our ability to produce wealth by allowing many American corporations to be purchased by foreign corporations. It is not just foreign companies buying our assets that is the problem ? it is the state-owned and massively subsidized companies of China that are the dangerous because China uses its state-owned enterprises as a strategic tool of the state. By pretending they are private companies abiding by free-market rules makes us the biggest chumps on the planet.

How many Americans paid attention to the news that the world’s largest pork producer, American company Smithfield Foods, was acquired by a Chinese corporation in 2013? Shareholders approved the sale of the company to Shuanghui International Holdings Limited, the biggest meat processor in China.

Very few paid any attention to one of the earliest acquisitions by a Chinese corporation — when the Hoover brand was sold to Hong Kong, China-based firm Techtronic Industries in 2006 after Maytag that owned Hoover was acquired by Whirlpool.

In January 2014, Motorola Mobility was sold by Google to Chinese computer corporation, Lenovo, which means that the nation that invented smart phones is just about entirely out of the business of producing smart phones in America. This acquisition will give one of China’s most prominent technology companies a broader foothold in the U. S. Lenovo is the same company that bought IBM’s line of personal computers in 2004.

Through strategic purchases, China is positioning itself to be our energy supplier as well. Since 2009, Chinese companies have invested billions of dollars acquiring significant percentages of shares of energy companies, such as The AES Corporation, Chesapeake Energy, and Oil & Gas Assets. In 2010, China Communications Construction Company bought 100% of Friede Goldman United, and in 2012, A-Tech Wind Power (Jiangxi) bought 100% of Cirrus Wind Energy.

In a Fortune article titled  “The Biggest American Companies Now Owned by the Chinese” Stephen Gandel provides the following list of American companies acquired by Chinese investors in 2016:

  • Starwood Hotels acquired by Anbang Insurance, a Chinese insurance company that is rapidly buying up U.S. hotels…It is the latest hotel acquisition by the Chinese insurer, which last year bought the company that owns New York’s Waldorf-Astoria. “Starwood would add 1,300 hotels around the world to Anbang’s portfolio.”
  • Ingram Micro, which is No. 62 on the Fortune 500, was bought by Tianjin Tianhai Investement Development Co., “a Chinese firm that specializes in aviation and logistics.”
  • General Electric Appliance Business was bought by Qingdao Haier Co.
  • Terex Corporation, an 83-year-old Connecticut-based company that “makes machinery for construction, agricultural, and industrial purposes,” was bought by Zoomlion Heavy Industry Science.
  • Legendary Entertainment Group, which has co-financed a number of major movies like Jurassic Park, Godzilla, and Pacific Rim, was bought by Dalian Wanda
  • Dalian Wanda also bought AMC Entertainment Holdings, the U.S.’s second largest movie chain at the time of purchase, but now #1.

The acquisition of American companies by foreign corporations isn’t something new. Many prominent companies founded in America were bought by corporations from the United Kingdom, France, Germany, Italy, and other European countries in the latter half of the 20th Century. Most Americans don’t realize that such iconic American companies as BF Goodrich and RCA are now owned by French corporations, and that Carnation and Gerber are now owned by Swiss corporations.

Many foreign countries don’t allow 100% foreign ownership of their businesses, but sadly, the United States does not exercise the same prudence. We allow sales of U. S. companies to foreign companies unless there are national security issues, and they almost never sell theirs to us. The Chinese government limits foreign ownership to very few selected industry sectors, that can change annually, and requires joint ventures with Chinese corporations for most industry sectors.

What is enabling Chinese companies to go on a buying spree of American assets? Trade deficits – our ever-increasing trade deficit with China over the past 20 years is transferring America’s wealth to China and making millionaires out of many Chinese. In 1994, our trade deficit with China was $29.5 billion, and it grew to $83.8 by 2001 when China was granted “Most Favored Nation” status and admitted to the World Trade Organization. By 2004, it had doubled to $162.3 billion. After a slight dip in 2009 during the depths of the Great Recession, the trade deficit grew to $347 billion in 2016. If you add the annual trade deficits with China alone for the past 20 years, it totals $4.22 trillion. China now has over one billion serious savers and more than a million millionaires whose assets when combined provide billions to spend to buy our assets.

In theory, we have the means to protect ourselves from this. CFIUS, the Committee on Foreign Investment in the United States, has the power to regulate, approve and deny these purchases. Unfortunately, it has been rare for CFIUS to block deals that don’t directly pose a threat to our national security.

The last time CFIUS reviews were expanded was July 26, 2007 when the President signed H.R. 556, Foreign Investment and National Security Act of 2007 (FINSA) “after the Dubai Ports World transaction passed through CFIUS without a formal investigation, leaving a surprised and angry Congress determined to avoid a repetition of that scenario.”

However, this new Act didn’t stop recommendations for expanding the scope of CFIUS reviews. Diane Francis, author of “Merger of the Century: Why Canada and America Should Become One Country, wrote  expressed her opinion of why CFIUS reviews should be expanded in an article in the December 15, 2013, New York Post: “Currently, American authorities only evaluate foreign takeovers on the basis of national-security issues or shareholder rights and securities laws. But these criteria are inadequate. A fairer test in the case of Smithfield, and future buyout attempts by China, should also require reciprocity: Only corporations from countries that allow Americans to buy large companies should be allowed to buy large American companies. That is why Washington must impose new foreign ownership restrictions based on the principle of reciprocity. The rule must be that foreigners can only buy companies if Americans can make similar buyouts in their countries.”

The dangers of these foreign acquisitions were also mentioned in the 2013 Annual Report to Congress by the U.S.-China Economic and Security Review Commission, which states, “China presents new challenges for CFIUS, because investment by SOEs can blur the line between national security and economic security. The possibility of government intent or coordinated strategy behind Chinese investments raises national security concerns. For example, Chinese companies’ attempts to acquire technology track closely the government’s plan to move up the value-added chain. There is also an inherent tension among state and federal agencies in the United States regarding FDI from China. The federal government tends to be concerned with maintaining national security and protecting a rules-based, nondiscriminatory investment regime. The state governments are more concerned with local economic benefits, such as an expanded tax base and increased local employment, rather than a national strategic issue, especially as job growth has stagnated.”

This report, continues, “China has amassed the world’s largest trove of dollar-denominated assets. Although the true composition of China’s foreign exchange reserves, valued at $3.66 trillion, is a state secret, outside observers estimate that about 70 percent is in dollars. In recent years, China has become less risk averse and more willing to invest directly in U.S. land, factories, and businesses.”

On January 26, 2017, Robert D. Atkinson, President of the Information Technology and Innovation Foundation, testified at a hearing on “Chinese Investment in the United States: Impacts and Issues for Policymakers” before the U.S.-China Economic and Security Review Commission.  He testified: “For many years, China has recycled the earnings from its large and sustained trade deficit with the United States into U.S. Treasury bills. But the last few years have seen a marked increase in the amount of inward foreign direct investment (FDI) from China to the United States, across a range of industries. While the underlying motivation for some of this investment is commercial, at least one-third is from Chinese state-owned enterprises, and it is likely that considerably more is guided and supported by the Chinese government, specifically targeting sectors that are strategically important for U.S. national security or economic leadership.“

After ten years, there is finally action on expanding the scope of CFIUS reviews. On November 8, 2017, Congressman Robert Pittenger (R-NC) and Senate Majority Whip John Cornyn (R-TX) “introduced bipartisan, bicameral legislation to modernize the national security review of potential foreign investments in the United States, Foreign Investment Risk Review Modernization Act (“FIRRMA).”

The Press Release stated, “Chinese investment in the United States increased more than 900 percent between 2010 and 2016.  Much of this investment was part of a strategic, coordinated, Chinese government effort to target critical American infrastructure…China is buying American companies at a breathtaking pace.  While some are legitimate business investments, many others are part of a backdoor effort to compromise U.S. national security,” said Congressman Pittenger.  “For example, China recently attempted to purchase a U.S. missile defense supplier using a shell company to evade detection.  The global economy presents new security risks, and so our bipartisan legislation provides Washington the necessary tools to better track and evaluate Chinese investment…”

In a letter to Senator Cornyn, Attorney General Jeff Sessions wrote, “I am particularly supportive of the goals of several aspects of your proposed legislation, including but not limited to (1) the expansion of CFIUS’s authority to review certain transactions that may pose national security concerns; (2) an expanded list of national security factors that CFIUS should consider; and (3) mandatory disclosures of certain investments by state-owned enterprises.”

Earlier this year, the Coalition for a Prosperous America (CPA) published an issue flyer titled “America Must Modernize its Foreign Investment Rules.” It states:

“A wave of strategic foreign acquisitions of U.S. companies threatens our security and future prosperity. The U.S. liberalized rules on incoming foreign investment believing others would follow our lead. That belief was wrong. freely invest here while severely restricting U.S. investment there. America’s trade deficits result in a tsunami of incoming foreign investment, a change from when the US was the world’s sole superpower. The Committee on Foreign Investment in the U.S. (CFIUS) can block incoming investment based upon national security concerns, but not for economic strategy reasons as other countries do.”

The Coalition proposed the follow remedies:

  • Expand consideration beyond national security to include economic security
  • Allow longer review periods, beyond 30 days, for CFIUS to review proposed investments
  • Include a “net benefit” test to encompass American economic interests where proposed
  • Acquisitions of companies important to future U.S. technology and employment, both civilian and defense related
  • Gauge systemic threats to U.S. interests in addition to individual cases
  • Require country by country reciprocity to allow foreign investment in U.S. companies and technology only to the extent they allow incoming US investment there
  • Prescribe heightened scrutiny of investments by state-influenced enterprises

CPA CEO Michael Stumo stated, “We must ensure that foreign greenfield investments in the US and acquisitions of existing US companies provide a clear ‘net benefit’ to the US with special scrutiny in cases of state influenced foreign entities.”

My question is:  Did we let the USSR buy our companies during the Cold War? No, we didn’t! We realized that we would be helping our enemy. This was pretty simple, common sense, but we don’t seem to have this same common sense when dealing with China.

It is time to wake up to the real dangers of our relationship with China. The Communist Chinese government is not our friend. China a geopolitical rival that has a written plan to become the Super Power of the 21st Century. Letting Chinese corporations acquire American companies, especially energy or technology-based companies is the biggest threat to rebuilding American manufacturing. With regard to China’s military buildup, the U.S.-China Commission report states, “PLA modernization is altering the security balance in the Asia Pacific, challenging decades of U.S. military preeminence in the region…The PLA is rapidly expanding and diversifying its ability to strike U.S. bases, ships, and aircraft throughout the Asia Pacific region, including those that it previously could not reach, such as U.S. military facilities on Guam.” We must not allow this policy to continue if we want to maintain our national sovereignty.

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How Trade Policies Led to the Decline of American Manufacturing

Wednesday, January 24th, 2018

Many people think that the decline in American manufacturing started with American manufacturers sourcing manufacturing offshore in order to achieve lower labor costs, avoid regulations, and pay lower taxes. While the decline accelerated after China was granted the status of Permanent Normal Trade Relations (PNTR) and was allowed to join the World Trade Organization, it actually began decades earlier.

PNTR is a legal designation in the U. S. for free trade with a foreign nation and was called Most-Favored-Nation (MFN) until the name was changed in 1998. Thefreedictionary.com defines it as “A method of establishing equality of trading opportunity among states by guaranteeing that if one country is given better trade terms by another, then all other states must get the same terms.”

Thus, it is a method to prevent discriminatory treatment among members of an international trading organization. It provides trade equality among trading partners by ensuring that an importing country will not discriminate against another country’s goods in favor of those from a third. Once a country grants any type of concession to a third-party country, this concession must be given to all other countries.

At the end of World War II, the United States was the dominant manufacturing country of the world.  The American manufacturing base had enabled the U. S. to win the war with Germany and Japan by outproducing these two countries in implements of war from ships to tanks to weapons.

Over the next 20 years, American manufacturing became synonymous with quality and inventiveness.  Companies like Ford, General Motors, General Electric, Hewlett Packard, and Levi Straus became household names.

One of the main reasons why the United States became the dominant manufacturing country in the world was that for over 150 years, our government protected and fostered the growth of American industry through tariffs. The first tariff law passed by the Congress, was the Tariff of 1789.  The purpose was to generate revenue to fund the federal government, pay down the debt of the government, and also act as a protective barrier for domestic industries from imports from England and France in particular.

Tariffs played a key role in our country’s foreign trade policy and were the main source of revenue for the federal government from 1789 to 1914, the year after income taxes went into effect in 1913.  During this long period of time, tariffs averaged about 20% on foreign imports, and at times, tariff revenue approached 95% of federal revenue.

During the Truman Administration (1945-52), foreign trade policies began to focus on liberalizing trade through moving from protective tariffs to free trade. The instructions given from Congress to the U. S. Trade Representative were:  Remove barriers to trade. A key concept of the liberalization of trade was reciprocal tariffs and low tariff rates. Two of the main reasons for this change in trade policy were to help Europe and Japan rebuild after the war and engender closer relations with the U. S. as a deterrent to the spread of communism. This ended the use of tariffs as a significant source of Federal revenue and began the increase of corporate and personal income taxes.

In 1948, the General Agreement on Tariffs and Trade (GATT) treaty “was signed by 23 nations in Geneva on October 30, 1947, and took effect on January 1, 1948. It remained in effect until the signature by 123 nations in Marrakesh on April 14, 1994, of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995. The WTO is in some ways a successor to GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. GATT, and its successor WTO, have successfully reduced tariffs. The average tariff levels for the major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round in 1999.”

GATT requires that exports of all countries that are party to the treaty should be treated alike by other countries that are party to the treaty, and each member is granted Most Favored Nation status. Since GATT was first signed, MFN (now PNTR) status has been granted to about 180 countries. Only a handful of communist countries have been denied MFN status.

For over 20 years, American manufacturers experienced little competition from foreign exports, but in the 1970’s Japanese and German products began to significantly penetrate the U. S. market. Due to the focus on demilitarization and decentralization in the U. S.- directed rebuilding of the Japanese and German economies, producing consumers goods was the focus.

Japan focused on audio/stereo products, cameras, pianos/keyboards, and TVs, as well as low cost automobiles and motorcycles. Companies such as Panasonic, Sony, Sanyo, Yamaha, Toyota, Mitsubishi, and Datsun (now Nissan) became the new household names in America. Mitsubishi had produced aircraft in Japan before and during WWII, including the infamous fighter plane, the Zero. Nakajima was another aircraft manufacturer that was reformed as Fuji Heavy Industries after the war and began to produce the Subaru vehicles.

Germany started focusing on automobiles such as the Volkswagen “Bug” and bus, BMWs, and then Mercedes vehicles.  They expanded into manufacturing equipment, machine tools, and scientific and laboratory instruments and equipment. Volkswagen was instrumental in Germany’s industrial recovery as their plants have escaped damage from bombing. The Volkswagen plant had been offered to England after the war as reparations, but England turned it down. Without Volkswagen being able to start manufacturing autos in 1946 after the war, the reindustrialization of Germany would have been delayed considerably.

It didn’t take long for the increased imports from Japan and Germanys to take their toll on the U. S. trade balance.  As the below chart shows, the last year we had a positive trade balance in goods was 1975:

Source:  Coalition for a Prosperous America

As a developing country, imports from China didn’t become a significant factor until the beginning of the 21st Century. The development and growth of China’s manufacturing industry was essentially funded through American companies setting up manufacturing plants in China starting in the 1990s and transferring manufacturing to Chinese contract manufacturers. Foxconn, Apple’s contract manufacturer for the iPhone and iPad, is the only Chinese manufacturer to become well known in the U.S. While Foxconn has plants in mainland China, it is actually owned by Hon Hai Precision Industry Co., Ltd., a Taiwanese multinational electronics contract manufacturing company headquartered in Tucheng, New Taipei, Taiwan.

“In article titled “The Death of American Manufacturing,” published in the February 2006 Trumpet Print Edition, Robert Morley wrote: “Manufacturing loss is occurring because of globalization and outsourcing. Globalization is the increased mobility of goods, services, labor, technology and capital throughout the world; outsourcing is the performance of a production activity in another country that was previously done by a domestic firm or plant.

At the dawn of globalization, the elimination of trade barriers opened up access to foreign markets for American manufacturers in return for building factories abroad. In due course, more and more manufacturers set up shop overseas, producing goods to be sold to Americans.”

According to Yashen Huang author of Capitalism with Chinese Characteristics, China’s “indigenous private sector is conspicuously small.” The majority of urban companies are still State-Owned Enterprises (SOE’s). Other companies are privately owned, but the owner(s) are government employees, so they are still essentially government controlled.

China had lost its status as MFN through suspension in 1951 after the Communists took over control of the government in 1949. It was “restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the massacre of pro-democracy demonstrators in Tiananmen Square in 1989, the annual renewal of China’s MFN status became a source of considerable debate in the Congress…Congress agreed to permanent normal trade relations (PNTR) status in P.L. 106-286, President Clinton signed into law on October 10, 2000.  PNTR paved the way for China’s accession to the WTO in December 2000…;”

  1. S. trade with China began to be measured in 1985 by the U. S. Census Bureau, and we had only a small deficit of $6 million. The trade deficit grew to $83.8 billion by the year 2000. However, after China was granted PNTR and became a member of the WTO, the trade deficit started to escalate. It doubled to $162.3 in 2002 and doubled again by 2014 to $344.8 billion. The 2016 trade deficit was $347 billion, down from $367 billion in 2015.  In 2016, China represented 38% of our overall trade deficit of $654.5 billion.

As a result of the escalated trade deficits from 2001 to 2010, the U.S. lost 5.8 million manufacturing jobs and 57,000 manufacturing firms closed. Where do all the jobs go?  Well, the U.S. Department of Commerce shows that “U.S. multinational corporations… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” So, we lost about half to offshoring of manufacturing to China and other parts of Asia.

The real story is even worse than this data. In an article by Terence P. Jeffrey published on www.CBSNews.com on May 12, 2015, “The number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979, according to data published by the Bureau of Labor Statistics.

As a result of more and more American manufacturers setting up plants in China, our domestic supply chain was weakened. From 2001 to 2010:  The U. S. textile industry lost 63% of jobs since 2001. Communication equipment industry lost 47% of its jobs. Motor vehicles and parts industry lost 43% of its jobs. U. S. machine tool industry consumption fell 78% in 2008 and another 60% in 2009. U. S. printed circuit board industry has shrunk by 74% since 2000.  We even lost whole industries, such as:  fabless chips, compact fluorescent lighting, LCDs for monitors, TVs and handheld devices like mobile phones displays, Lithium ion, lithium polymer and NiMH batteries, low-end servers, hard-disk drives, and many others.

After over 40 years of trade policies that foster offshoring, it’s time to have a new goal for trade policies.  Instead of “remove barriers to trade,” we need to have a goal of “eliminating the trade deficit.”  The Coalition for a Prosperous America has recommended this goal for years, and on March, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long:  “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

As soon as the tax reform bill is signed by President Trump, Congress needs to pass this Resolution before the end of the year, so we can start 2018 on a new track.

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“Eliminate the Trade Deficit” Resonates in Halls of Congress

Tuesday, March 21st, 2017

 “You were ahead of the curve on trade.” This was the common refrain heard last week by members of the Coalition for a Prosperous America who attended our annual fly-in to Washington, D. C. We had eight teams of members visiting Congressional Representatives and Senators on March 14th and 15th. As Chair of our developing California chapter, it was my fifth year attending the CPA fly-in, and our simple message of eliminating the trade deficit resonated well in the halls of Congress.

No one could deny that we have a huge deficit as shown on the chart below:

 

The annual trade deficit has reduced our U. S. GDP by some 3% to 5.5% each year, and those reductions compound over time.

There is no historical record of any other country in history running 41 years of consecutive trade deficits. Why is this important? Because every billion dollars of net imports costs 4,500 American jobs according to conservative estimates. So last year’s $502 billion deficit equates to 2.25 million jobs lost.

As a result, our Labor Force Participation is in serious decline. The U. S. is the only G7 nation with a DECLINE in LFPR since 1998 for workers ages 15-64. It peaked at 77.4% in 1998 and dropped down five points to 72.6% in 2015, meaning that over 7 million people dropped out of labor force since 1998.

The remedy recommended by the Coalition for a Prosperous America is simple: Congress should establish a national goal to eliminate the trade deficit.

Balanced trade over time is the goal of free trade and of fair trade. Balanced trade will re-industrialize our country, enable massive job creation, grow our wealth and effectively neutralize foreign mercantilism. Trade policy must address true drivers of deficit, these countries and their practices. Many of these countries have export-oriented growth strategies in which they rely upon the US market to consume their exports rather than increasing their internal consumption. China, Germany, Japan and other countries pursue net exports through strategic mercantilism, not free trade. Currency manipulation, value added taxes, state influenced enterprises, and other
tactics are used.

The following top 10 countries account for 90% of America’s 2016 goods trade deficit:

Rank Country 1992 Deficit 2016 Deficit Change 1992-2016
1 China -$18B -$355B -$337B
2 Mexico -$6B -$115B -$121B
3 Japan -$50B -$75B -$25B
4 Germany -$8B -$70B -$62B
5 Canada -$15B -$58B -$53B
6 Ireland +5B -$36B -$37B
7 Vietnam $0B -$34B -$34B
8 South Korea -$2B -$30B -$30B
9 Italy -$4B -$30B -$26B
10 India -$2B -$30B -$28B

Note: These figures are based on U.S. Commerce Dept. data subtracting Imports for Consumption from Domestic Exports which are intended to strip out goods that enter and leave the U.S. simply for re-export, without having any significant value added to them inside the U.S.

Currency manipulation and misalignment are key tactics that the above countries use to gain an advantage in trade. Currency manipulation is trade cheating, because it is both an illegal tariff and a subsidy.

Foreign governments intervene in foreign exchange markets by buying dollars. More than 20 countries have intervened in foreign exchange markets to undervalue their currencies in the past ten years. These countries account for one-third of the world economy and two-thirds of the world’s current account surpluses. Gagnon has calculated that “A country’s current account balance increases between 60 and 100 cents for each dollar spent on intervention.”

“The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.” (Bergsten, 2012) The U. S. economy cannot produce jobs and wealth without addressing this problem. The Coalition for a Prosperous America proposes the following solutions:

• U.S. trade enforcement law should treat currency undervaluation as a countervailable subsidy
• Tariffs should be applied against currency manipulators to neutralize their unearned advantage
• Government policy should pursue a dollar priced at equilibrium rather than accept a persistently overvalued dollar
• Trade agreements should include effective controls on currency manipulation and misalignment

Border Adjustable Consumption Taxes (aka VATs) are a tariff by another name. They are allowed under WTO rules and range from 12% to 24% with the average being 17% globally. This means that virtually all foreign countries tax our exports at this average 17% VAT. They subsidize domestic shipments abroad with rebating the VAT to their manufacturers. The U.S. does not have a VAT to offset this advantage.

Consumption taxes are a tax on consumption as opposed to income, wealth, property, or wages. A Goods and Service Tax (GST) and a Value Added Tax (VAT) are consumption taxes. They are usually a tax only on the “value added” to a product, material, or service. Over 150 countries have such taxes, but the U. S. does not.

The U. S. negotiated tariff reductions or elimination in good faith with our trading partners under NAFTA and the Central America Free Trade Agreement (CAFTA, but Mexico instituted a 15% VAT, and Central America established a 12% VAT.

After 40 years of tariff reduction under various trade agreements, other countries replaced tariffs with VATs, but the U. S. did not. Thus, American exporters face nearly the same border taxes as they did in the early 1970s.

To solve this problem, the Coalition for a Prosperous America proposes that Congress implement a border adjustable consumption tax (VAT) and use the proceeds to credit against the payroll taxes paid by all workers and businesses. The benefits would be:

• Reduce the cost of labor in the U.S.
• Give every worker a raise
• Lower the price of U.S. exports
• Levy a tax on imports

In President Obama’s 2016 budget, Payroll Taxes were projected to be 31% of the revenue or $1.11 trillion. If a 12.9% VAT were set, it would produce approximately $1.45 trillion in tax revenue, completely offsetting the revenue from Payroll Taxes. All Payroll Taxes could be eliminated with a credit. With a 15% VAT, other tax reform or domestic production cost reduction could be funded. European Union countries use their VATs to provide another revenue stream to allow them to reduce their corporate taxes to be more globally competitive.

The benefit of giving a Payroll Tax credit out of VAT funds is that it would offset the regressiveness of a VAT by elimination of the regressive Payroll Tax. There would be no impact on prices of domestic goods and services, but prices of imported goods and services would increase. This would incentivize consumers to buy Made in USA products instead of imports. In addition, it would reduce the cost of production for U. S. producers enabling them to be more competitive in the global marketplace.

Our Coalition members also encouraged Congress to reinstate the Country of Origin Labeling (COOL) that was struck down by an unelected foreign tribunal of the World Trade Organization. Congress caved in to the WTO ruling and passed repeal legislation that exceeded the WTO ruling eliminating COOL for beef and pork, as well as for ground beef and ground pork.

Canada and Mexico want to export their cattle, hogs, beef, and pork to the U. S. without informational labeling that reveals where the cattle and hogs were born, raised, and slaughtered. Right now, meat packers are able to import cattle and hogs and slaughter them to get the USDA stamp. Consumers want to know where cattle and hogs were born and raised, not just slaughtered for reasons of food safety.

Congressional Representatives and Senators need to have the courage to reinstate COOL and vigorously defend our national sovereignty and consumer choice against international interference. COOL legislation enables consumers to Buy American in the grocery store. It prevents consumer deception and empowers consumers to buy food produced under the safety regime of their choosing. It would help to jumpstart America’s ailing rural economy through supporting domestic producers and preventing industry consolidation.

The final message that is critical is that the U. S. must modernize its foreign investment rules to protect American companies that are critical to our national security and economic security. Investors from countries like China, Japan, and South Korea are making strategic acquisitions of U. S. companies and land that threaten our security and future prosperity. These same countries either severely restrict or do not allow 100% acquisition of companies in their country. The Committee on Foreign Investment in the U.S. (CFIUS) can block incoming investment based upon national security concerns, but not for economic strategy reasons as other countries do.

Congress must update the laws governing foreign investment to include economic security and allow longer review periods, beyond 30 days, for CFIUS to review proposed investments. This would allow more time to gauge systemic threats to U. S. interests in addition to individual cases. The legislation should include a “net benefit” test to encompass American economic interests where proposed acquisitions of companies that are important to future U. S. technology and employment are concerned (both civilian and defense related).

The question now is – Will Congress have the courage to take the bold action needed to eliminate the trade deficit, address currency manipulation, reinstate COOL and control foreign investments? Time will tell.

 

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