Trade and Jobs Are Not Simple

By Stormy

Trade is never simple; never straightforward. Countries use whatever means they can to keep critical commodities for themselves and they use whatever means they can to build export platforms to reap the rewards of trade.

Trade surpluses are always a measure of national wealth, despite how that wealth is shared, or not shared, among the citizens of a country. For the purposes of this post, I want to examine two taxation devices that are used to build trade surpluses. Rarely do you ever hear an economist discuss the details of the latest round of trade talks. Knee-jerk responses demand that they approve whatever agreement is on the table–all in the name of “free” trade, of course.

But with the present Depression moving like a hungry wolf around the planet, the U.S. must address the issue of jobs. No longer can it be content merely priming aggregate demand; anyone with half a brain has to understand that supply is the other half of that equation. But even half-brains have been in short supply these last few years. Trade has been on the back burner; monetary policy has been everything. No one gave a thought to job creation as long as easy credit kept the party going.

If this Long or Second Great Depression is going to be with us for a few years, as many now believe, then we must give some thought not only to the engine of our recovery but also to the shape of a new world order that is certain to arise.

Export taxes and Export Tax Rebates

Export taxes: Some countries employ them to reduce exports of key commodities. For example, China raised export taxes from 34% to 135% on urea, an important fertilizer; thus, driving the world price of fertilizer up in 2007. Russia has export taxes on petroleum; Malaysia on palm oil. The U.S. does not use export taxes; they are unconstitutional, apparently.

Export tax rebates: In a VAT tax system, export tax rebates are used to increase trade in given commodities or items. Increasing the rebate makes the good cheaper to export.

What few U.S. economists will acknowledge:

“China’s foreign trade imbalance is driven by brisk global demand for China-made products and the ongoing migration of industries from developed to developing nations,” said Mei Xinyu of the Trade Research Institute of the Ministry of Commerce.
In the 1980s and 1990s, attracted by cheap labor costs, multinational companies began shifting their manufacturing to China, opening factories in East China to process materials and export the processed products.
“The fact is most exports by these multinationals have been included in China’s trade figures, and China’s trade surplus mainly comes from processing trade. A high proportion of export profits in fact stay in the pockets of multinationals,” said Mei Xinyu.

(The entire above article is well-worth reading.)

Between export taxes and export tax rebates on VAT taxation, China can easily fine-tune what products it wishes to export and what products it wants for home use. Export taxes can easily create world shortages of a given commodity; thus driving prices higher. Export tax rebates can easily act as subsidies, creating an unfair advantage for corporations within a country using them.

WTO position

How does the WTO treat the issue of export taxes? They are not prohibited per se–many countries use them, with the exception of the U.S.
How does the WTO treat the issue of export tax rebates? In 2006,

the WTO Secretariat, in the Trade Policy Review for China, directly criticized China’s use of export tax rebates as an industrial policy tool, arguing that this was an implicit subsidy.

Despite the Secretariat’s protestations that export tax rebates are an implicit export subsidy, the problem remains unresolved–and rarely do esteem American economist ever raise the issue.

Export tax rebates remain an essential part of China’s 2008-2009 mercantile strategy:

BEIJING, Nov 12 (Reuters) – China moved on Wednesday to boost its export sector by increasing tax refunds applicable to more than 3,700 items as from next month.

The announcement, carried by the official Xinhua news agency, did not say what sectors or product lines would benefit.

The decision was taken by the State Council, China’s cabinet.

China announced an increase in rebates of value added tax for more than a quarter of tariff lines on Oct. 21.

The government had already increased export tax breaks for the garment sector in July.

U.S. Confused Response

Right now the U.S. is struggling with the issue of trade.

President Obama’s “Made in America” backfired.

Robert Reich correctly observes that it is a question of American jobs not the nationality of the company creating those jobs. For the moment, Robert has ridden to the rescue.

But, alas, Robert’s neat verbal twist does not begin to unravel the issue of jobs, especially those jobs that produce goods and services that are indeed tradable. The reason is simple: U.S. mainstream economists simply are not interested in trade details.

The U.S. is constitutionally prohibited from export taxation. What if we had a shortage of a key material? Would we trade that material away if another country could pay a better price? What tax mechanism does the U.S. have to improve its own trade advantage? How do we compete with cheap labor buoyed by export tax rebates? How can it support its own industries, industries that are here on its own shores, not those that have already fled to Asia and elsewhere?

Let’s take Robert’s observation one step further. Granted it is a question of American jobs, not the nationality of the company. Now consider: Why would any company come to the U.S. to create American jobs when choicer locations lie elsewhere? What inducements are we going to offer? Tax advantages? Lower wages? Are we going to argue that Americans must now compete with impoverished Asians for jobs? I think so. We can build all the infrastructure we want; Japan did that in its lost decade. Finally, we must be making stuff that we want to buy. Robert’s piece sounds nice, but it lacks details.

Beginnings of an Appropriate Response

Already, each country is struggling with the issue of jobs–and when they talk of jobs, they mean trade. The question is: How do we create those jobs while still bringing impoverished nations into the fold? How do we make globalization work for everyone?

I suggest that each country has the right to exercise financial and tax oversight of its corporations, corporations it nourished, even if those companies fled elsewhere.

Being a command economy and owning its important corporations, China has a distinct advantage. For the U.S. the problem is more difficult.

I am not suggesting ownership–although I do think a national bank is in order.

It goes without saying that any help a corporation gets from the U.S. government must be tied to creating jobs here in the states. I would extend a form of that principal to American companies using cheap labor or subsidies elsewhere to re-export goods or services back to the U.S. We may not be able to retrieve the jobs; we can retrieve some of the wealth they are creating for themselves while at the same time rectifying some of the global imbalances that have grown direfully dangerous.

Place a tax on goods or services our companies re-export to the states. Doing so does not in any way disadvantage real foreign competition, competition from firms of other countries, China included. All we are doing is penalizing flight elsewhere if that flight is used for re-export. We are, in effect, asserting that our corporations have U.S. responsibilities. While that responsibility may be a startling assertion to some, I find it quite a reasonable position.

I hear already the cries of “Impossible! Too hard to administer! Protectionist!” Hard to administer? I think not. Protectionist? Not really. The tax can be adjusted so that it does not entirely disadvantage cheaper locales. In short, as impoverished countries climb the consumer ladder, such taxation can be slowly relaxed. The world needs a way to grow in a balanced way, not this misshapen monstrosity that stands in the way of any reasonable development.

If my approach seems too bizarre, too other-worldy, then I put it to all those clamoring for American jobs: How are you going to create lasting jobs? What industries are you going to create that cannot be done cheaper elsewhere?

How are you going to keep them “down on the farm” when they love to sing Beijing?