Trade policies, stimulus, and tax cuts
Both parties promise ‘economic growth’ in this debate as the way out of our troubles for unemployment and federal deficits. Left out of the discussion currently is the way to actually accomplish this growth in a way that delivers more specifically to voters other than some vague notion of trickle down from a ‘global free market’.
Andrea Hayley writes: Chinese State-Controlled Market Policies Increasingly Unfavorable to the U.S. in The Epoch Times
Deeply concerned about an unsustainable trade deficit with China, the chair and commissioner of the U.S.-China Economic and Security Review Commission (USCC) say that in order to compete with China’s state-controlled economic policies, the U.S. government needs to significantly shift its current market-based approach.
“A lot of our major competitors have game plans. The United States doesn’t have a game plan, and our people are suffering,” said Patrick A. Mulloy last Friday at the Center for National Policy.
Mulloy, a USCC commissioner, and Daniel Slane, chairman of the commission, were keynote speakers of a talk, “Competing with China: How the U.S. Can Create Jobs in the 21st Century.”The commissioners both said the U.S. free market system is at a disadvantage in our trading relationship with China, and that the government needs to take action to protect American interests at home and abroad.
Over the last nine years since China ascended to the World Trade Organization (WTO), it has amassed a $1.76 trillion trade surplus with the United States. The most common reason cited for the imbalance is China’s undervaluation of their currency, the RMB (yuan).
The House acted this September to pass a resolution raising the threat of import tariffs should China fail to raise the value of its currency to an appropriate level.
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While the currency issue is important, Mulloy said he doesn’t think it is the silver bullet. “I think the problem is a little deeper than that,” he said.Mulloy is more concerned about the cumulative result of Chinese policies that require U.S. companies to exchange technology and know-how in exchange for access to their markets.
China’s industrial policies lure foreign companies to outsource production with offers of incentives, subsidies, and lower labor costs, and in order to take advantage of these lucrative offers, U.S. companies are required to transfer technology and know-how to the Chinese. This has been going on for years.
But recently, China has started asserting its economic muscle, and its companies are increasingly directly competing with U.S. companies, with China’s government policies granting domestic manufacturers the upper hand.
For example, China has started manufacturing commercial airplanes.
“China is going to make its own aircraft, and China is going to buy its own aircraft,” said Mulloy.
Recently, China’s indigenous policy has changed the playing field. Referred to in the USCC report as a “profound change,” the policy explicitly favors domestic companies over foreign firms for government procurement contracts.
One of the positive effects of China’s ascendance to the WTO, the ability of U.S. companies to make profits selling to China’s rising middle class, is not likely to pan out.
Slane sees current U.S. trade policy as a recipe for disaster. He recommends changes, such as replacing corporate income tax with a value added tax (VAT), an increase in research and development funding, and stronger patent protections with the goal of supporting U.S. manufacturing to balance the trade deficit.
Slane acknowledges that such changes would be “deeply disruptive to global commerce,” and lead to higher costs on goods purchased in the United States, but maintains it is a price Americans should be willing to pay.
“If we want to bring back manufacturing our government must acknowledge it is a new day in which other governments are practicing state-controlled capitalism, while we practice free market capitalism. It should be obvious that this is not a level playing field,” said Slane.
(hat tip Stormy)
Hi Stormy:
China is the issue of the present. More insidious than currency manipulation and the US failing to take the WTO trade contracts seriously is the financial sector’s growth, the skewing of productivity gains away from Labor, and the nation’s GDP becoming more dependent upon growth in areas not involving Labor. China is only 1/2 of the issue
China per se isn’t the issue here. It is the total lack in the USA of constructive industrial and wages policies and planning (as per James K Galbraith in Predator State).
You could argue that since 1980 we have had a national industrial and wages policy. It is liquidate everything for the benefit of transnational capital. That’s always the way to the quickest buck for economic elites. It should be pretty clear now it is a recipe for national decline and ultimate failure. But it makes a lucky few who grease the wheels of national decline fabulously rich.
Until we the people regain control of our government with a clear mind of what needs to be done, it will continue, and it’s an uphill struggle against concentrated economic tyranny.
This is ridiculous. Do you know what the per capita GDP in china is? A: $6,700, 130th in the world, behind El Salvador and Algeria, and just ahead of Turkmenistan and Namibia. The US is $46,000 (#11) https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html 6 times higher. And you want to emulate them???????
I’ll take free markets over state industrial policy every time, and twice on Sunday. No one talks about how wonderous Japan’s MITI is anymore now do they? And if you needed any more: 0bama’s industrial policy focuses on “green jobs.”
Just cut corporate taxes, and get out of the way.
Charles:
Pretty way of saying what I have said in a different vein and of a similar venue. “regain control of our government with a clear mind of what needs to be done” = corporcracy.
Sammy:
In light of the cuts in capital taxes, income taxes, and coporate taxes; we still have a faltering La bor Intensive Economy. Why?
“Just cut coporporate taxes, and get out of the way.” How many times have we heard this before? How much longer are we willing to drink the cool aid? How many times must someone repeat the words or Einstein that continuing to do the same thing over and over again that fails is what insanity is all about. Sammy, about time to check your numbers carefully. You are living in a dream world.
Why?
Let’s see. In the US we have 1) One of the highest corporate tax rates in the world 2) unions, 3) EPA 4) OSHA 5) generous tort system 6) plant closing laws 7) EEOC 8) Obamacare 9) etc. And you wonder why companies choose to locate overseas?
Look, there are some good things in there, but there is a lot of overkill. You have to choose what is important.
Run,
Why?
Let’s see. In the US we have 1) One of the highest corporate tax rates in the world 2) unions, 3) EPA 4) OSHA 5) generous tort system 6) plant closing laws 7) EEOC 8) Obamacare 9) Cap and Tax……. shall I go on? And you wonder why companies choose to locate overseas?
You have to choose what is important.
I think the issue is acutally a distorted taxation system. As a small business owner, I felt the small-medium businesses faces multiple conflicting, triplication of regulations, rules, fees, taxes. But the bigger you get, the less hurdle you face, the regulation gets tailored to your needs (special legislation preferences-courtesy of political contributions- pork,pork, pork), too big to fail. (F.Y.I. Just google a small company in El Monte California that makes autoparts, employed about one hundred people, that kept being fined by the city. They have managed to meet state, federal environmental standards, but the city have its own idea- using fines as a revenue source. The company, family owned in the area for over fifty years practically begged to city on what to do.., they wanted to reinvest, upgrade to modern level manufacturing, better cleaner machines but simply cannot resolve conflicting regulations… In the end, they move out the state, that particular state was willing to iron out the issues… Most recent news from El Monte, California -the city council now is fighting loss of revenue, manufacturing jobs, and the debate is centered on if WalMart is allowed to move in to generate new jobs for the city. Is this the future of america. Replacing highly skilled labor with retail jobs? (The local environmentalists whom never worked in the city, who endlessly hounded the autoparts plant, is now opposed to the WalMart…They worry about the amount of vehicle traffic will “pollute” the city!)
Once you get to a certain level, you stopped paying taxes… Ever heard of tax amnesty? Payroll Holiday? This favorate sons/daughter approach have really killed the little guys that are the innovators in the american economy. From the left, insane entitlement and wrongly directed anti-business/wealth sentiment, from the right big businesses that pays little to none taxes.
In the end politicians kept getting elected with no regards to actual well being of the country.
when the majority of “chinese exports”
derive from not chinese but transnational
firms
i’d say there’s a unit of analysis question
or as marty hart-landsberg put it:
Most importantly, foreign capital now plays a leading role in the Chinese economy, especially in manufacturing.7 Its activity has transformed China into an export-driven economy: the ratio of exports to GDP climbed from 16 percent in 1990 to over 40 percent in 2006, with the share of foreign produced exports growing from 2 percent in 1985 to 58 percent in 2005 (and 88 percent for high-tech exports).8 Equally noteworthy, the share of total exports being produced by 100 percent foreign-owned firms has also soared.9 …
This restructuring cannot be understood simply through a nation-state lens. Rather, as China’s reforms proceeded over the 1990s, Chinese accumulation dynamics became increasingly dependent on transnational corporate investment and export activity. As a consequence, the Chinese economy became more and more enmeshed in a broader process of East Asian restructuring—one that was driven by the establishment and intensification of transnational, corporate controlled, cross-border production networks, which linked and collectively reshaped all the economies involved. In other words, the Chinese experience, and in particular, its export drive, can only be understood in the context of broader capitalist dynamics.
[ Chinese exports are really Chinese only in the sense that they were assembled in China. This point is reinforced by the fact that China’s increased share of the U.S. deficit was matched by a decline in the share accounted for by the rest of East Asia.]
it is not so much a question of the u.s. v china but govts in dependent partnerships with no-longer-national capital — which ultimately boils down to labor v capital and which must control or be the state.
given decades of class war from above, it is at least slightly more obvious what must be done.
http://www.monthlyreview.org/100201hart-landsberg.php
” And you want to emulate them???????”
Everything and the laws you cite is and are what makes the standard of living better in the US as compared to the countries you mentioned. Companies untethered have no or little interest in the concerns of employees the same as capital has little interest in Labor intensive business when it can make more otherwise or in capital appreciation on Wall Street.
Ever walk in Manila and see the poverty? Tianjin or Beijing in Winter and smell the air? The streets of Bangkok and give Baht to the beggars and nuns (I got a receipt for 50 Baht one time from a nun or ~$1. She ran after me to give it). The per capita earnings you profoundly proclaim as proof of our standard of living did not solely come from corporations as they would not have given it freely of their own without the very laws and unions of the past and even today.
Companies do not get sued for no reason and neither does medical. One big advantage of having universal healthcare is the mistakes made by both are ultimately covered when it comes to physical injury. While there is no limit on medical cost law suit there are limits on the more trivial and attorneys will not take such suits. The indiviual in the US can not easily afford a lawsuit against a company because of the fees involved and attorneys rarely do contingent. Ask my friend Bev the next time or Linda Beale.
Corporate taxes? We could drive a truck through the loopholes in it and not even the AMT has much bearing anymore while it still has implications for individuals. “Avoiding taxes is nothing new for General Electric. In 2008 its effective tax rate was 5.3%; in 2007 it was 15%. The marginal U.S. corporate rate is 35%. ” http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html
What Regulations? Pax, you have to be more definitive than this. As a Vice Chair for a Township Planning Commission we did not arbitrarily apply ordinance or laws as we would be sued.
Good stuff. juan. Your comment reminded me of the work of Brenda Rosser, she was making a commendable effort to sort out some of the ‘platform’ complications.
This article though is naive to a degree. This paragraph for example:
“China’s industrial policies lure foreign companies to outsource production with offers of incentives, subsidies, and lower labor costs, and in order to take advantage of these lucrative offers, U.S. companies are required to transfer technology and know-how to the Chinese. This has been going on for years.”
The US subsidizes ag goods and that has a manipulative effect on labor values and on trade schemes. What a government might do that is more manipulative than that is beyond me? And “incentives”… has the author here no knowledge of how Wal-Mart plays local government agencies against each-other to cut its costs with “incentives”. And what about ‘right to work states’ using cheap labor to create “incentives” to attract industries across state lines? Free land and infrastructure and tax breaks are not “incentives”? Hypocrisy galore. As if the US Government does nothing to aid the private sector.
And what is wrong with sharing technology? Are we supposed to pretend that only Americans invented every useful thing and so we have some right to be stingy? The Chinese now having the wherewithal to build aircraft isn’t a problem, it is capitalism finding the efficiency that it is meant to find. It is more than just a little childish to force a system on the ROW and then complain when the efficiency of that system leaves a lazy and spoiled nation not much more than rents to rely on. It was the US after-all that used military force to shape the global economy to suit its own design. And now we are whining because the Chinese have the technological necessities to meet the needs of people who actually have needs. As in the: United Stingy Americans, is that who we have become?
Then too, the real problem is that the demand for cross-border capital turned out to be far less than expected. Why would nations allow other nations to profit endlessly from foreign investment flows when endogenous capital… can be created on a keyboard so as to keep the profits in country? Who in fact created this mess, anyway? Delusional plutocrats and their lackey technocrats, that’s who, and not the ones in China.
I think quantitative easing can only work on the global level if it is replacing bond sales overseas, IE, as a way to force trade balance rather than as a stimulus for increasing US consumption (and hence increasing US trade imbalances).
Also , I think QE, unless the proceeds are being distributed bottom up, are probably working in the opposite direction of solving the problems of the US malaise, which is driven by a disparity between wages accumulated over a period of many years, and asset prices. The way federal reserve funds are injected – through the banking system – more or less guarantees that their first order impact on the economy is through asset prices. The intention to support home prices, but those remain far too high based on median wage structure. So asset and commodity prices will go up, meaning real wages will fall. Perhaps that is an intended consequence – get the labor markets, which are sticky, to clear by keeping nominal wages the same while real wages fall.
A VAT, I agree, is probably necessary, if for no other reason than that the rest of the world applies VAT taxes to their imports and exempts their exports from VAT. If we do otherwise, we’ve started with a trade imbalance. And our current malaise is that the US is overconsuming relative to our pay scale, with much of that going to fund capital building elsewhere in the world where savings rates are much higher. I think a reasonable swap would be a cut in payroll taxes offset by establishing a VAT tax. We’re also 6% of GDP short of simply covering our current general fund obligations, perhaps that falls to 4% of GDP if the US starts growing at something approaching the 100 year average GDP growth rate. So perhaps start the VAT with a deal; keep the lower bracket income tax rates at the levels set in Bush’s temporary tax cuts, while letting the highest bracket income taxes rise. Logic being that VAT is a regressive tax, and those in the $250K plus income bracket will not pay in at anything approaching the rate of those at the median and below. So perhaps start VAT at a 5% rate, cut the payroll tax rate by 2% and increase the $250K plus bracket fixed at the rate established by the Bush administration for next year.
Just an example, as a formerly manufacturing based city, now have residential area. Fined for noise, fined for traffic going in and out of the manufacturing plant. They have move around the operating hours, changed shift schedule so workers don’t have to congest the road.
But the city had other ideas, they wanted retail instead of manufacturing. Once they made up there mind, no matter the proposal, nothing was accepted or shelved.
How can you survive if the city decided that you are not welcomed anymore?
It was kind of sad or funny when you have cops sitting outside waiting to write tickets when workers are going home.
Pax:
There is such a thing as selective enforcement. Not that this will help the company in question now. Townships, the same as employers, must apply ordinances in a fair and consistent manner. I went to one zoning commission meeting on behalf of one owner who was under a special use permit which did not detail the uses the same as it did for others.
I understand the predicament.
Terry & Nolan, how long before it sinks in that Dem economic policies, especially the most recent stimulus, are less effective than republicans. At least when we need to get out of recessions.
In the new “tax compromise” we now have a more typical republican approach for stimulating us out of a recssion. Many economists predict for 2011 we will see ~2.5M new jobs and ~1% higher gain in the GDP. I think it will it will be higher. Much higher.
Oh, and the republicans can and will take credit.
sammy urges us to look at the level of average income, ignoring the pace of change. The notion of looking at rates of change is pretty elementary. China is growing fast. China’s capital/labor ratio is growing fast. We are growing slowly, and have been throughout a period of low income and corporate taxes. sammy does the usual thing – arguing that if he got everything he wants, then everything would be OK. That isn’t a policy. That isn’t even a discussion. It’s a wish list.
We’ve done the test of low tax rates. China’s growth rate is not really germaine in that discussion. Tax rates in the range imposed in the US don’t matter much to growth. The record, as Kimel has shown, is that higher marginal rates are associated with more rapid growth. Cheerleaders for the low-tax argument can complain all they want, but one thing is clear – even if lower rates do boost growh, they matter so little that they can easily overwhelmed by other factors. Given that, we should probably look to those other factors for growth and look to taxes to achieve fiscal balance and equity. Taxes are just not an efficient tool for generating growth (unless perhaps we raise rates to boost growth), but they are efficient at raising revenue and have some impact on the distribution of after tax income and wealth.
Back to the issue at hand – China and US industrial policy. China is a poor country against which to compare the US (sorry, couldn’t help myself). We need to look to countries with similar capital/labor ratios, similar levels of income, similar resource bases – OK, I’ getting carried away. Too many similarities and we end up with nobody to compare with. Still rich countries with lots of capital are a better place to look for remedies for what ails us. Europe had far less labor market disruption than the US, so maybe we should look at European labor market rules.
We didn’t need slower economic growth and flatlined wages.
Yes, but they want to sell to Americans. We should give them a choice. Make it in China, sell it in China. Make it in the US, sell it in the US. Until someone actually demonstrates that free trade works to most people’s advantage, and they haven’t, that seems like a pretty sane approach.