JULY 1, 2013 -- A friend writes: "We are now operating in a global economic environment"; "as long as labor is a major component in the cost of a product, that product will eventually end up being produced abroad"; "that we are moving to a 'labor free economy' with machines and additive manufacturing"; "as labor becomes less significant in production China will no longer have the ability to overpower us in the labor market and production will gradually return on its own to our mainland." Don't count on it!
The economy is a government problem -- not a business problem. The responsibility or duty of business is to make a profit. The responsibility or duty of government is to develop and protect a strong economy. The United States was born in a Trade War - the Boston Tea Party. The Founding Fathers showed the way to fight and build a strong economy by adopting the Tariff Act of 1787 -- two years before The Constitution.
The United States was built on protectionism. Its success in 100 years is best related by Edmund Morris in "Theodore Rex" who writes that the United States was manufacturing for the world and was "$25 billion richer" than the Mother Country. After World War II, the Trade War continued with Japan closing its market, subsidizing its manufacture, selling its export at cost and making up the profit in its closed market.
Now comes China with every predatory practice. If you want to sell in China, you must produce in China. If you produce in China, you must relinquish your technology to China. China provides healthcare for its workers; subsidies for energy, land, buildings and equipment; grants tax holidays and rebates; undervalues its currency; pays its workers poverty wages; provides zero interest loans; doesn't enforce safety or environmental regulations; prevents labor stoppages and provides legacy costs. China with its market of 1 billion, 300 million population sets the competition in globalization. The United States government can't compete with China's government control. But the United States government must maintain its economy with favorable taxes and protection against predatory practices.
The President and Congress can develop a favorable climate for Corporate America to produce in the United States but contributions for reelection come first. Wall Street, the big banks and Corporate America are making a fortune in China. All Corporate America has to do is check daily with a quality control guy in China and play a round of golf. Wall Street, the big banks and corporate America contribute to the President and Congress to not irritate China's government; to not compete in globalization; to not enforce trade laws; to not protect the economy - to do nothing. The President and Congress do nothing.
The President and Congress can start rebuilding our economy by replacing the 35 percent Corporate Tax with a 7 percent Value Added Tax. This immediately releases $2 trillion in offshore profits for Corporate America to repatriate tax free, invest in the United States and create millions of jobs. Last year's 35 percent Corporate Tax produced revenues of $236.8 billion. A 7 percent VAT would have produced $922 billion. This tax cut provides billions to balance the budget in two years rather than ten.
Trade Laws must be enforced. If Presidents Bush and Obama had enforced the Defense Production Act of 1950, the Detroit bailout wouldn't have been necessary. If President Obama would protect steel, motor vehicles, computers and machine tools like President Reagan in 1984, it would create millions of jobs. Congress needs to develop a list of items to be protected for a strong economy.
Globalization is nothing more than a Trade War with production looking for a country cheaper to produce. Rather than the U.S. setting the example of free trade, China leads the way with controlled trade. The U.S. government must compete to survive. The Value Added Tax is rebated on exports and is not regressive. The Corporate Tax is not rebated. The 7 percent VAT is not inflationary. Rather than factor in a 35 percent profit, it's value added, or 7 percent profit. The VAT is easily administered with computers and is self-enforcing - pay it or pass it along.
You can cut the size of government (IRS). The VAT has no loopholes giving instant tax reform. That's why 150 countries compete in globalization with a VAT. Not having a VAT is killing manufacture in the United States. An entrepreneur in the U.S. can be making a profit but has to pay the 35 percent Corporate Tax and a 17 percent VAT when his exports reach China. A competitor can produce the same product in China, import it into the United States tax free, and put the entrepreneur out of business.
America! Get on the President and Congress to do their duty.
Senator Hollings of South Carolina served 38 years in the United States Senate, and for many years was Chairman of the Commerce, Space, Science & Transportation Committee. He is the author of Making Government Work (University of South Carolina Press, 2008).
© 2013, Ernest F. Hollings. All rights reserved. Contact us for republication permission.
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