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August 10, 2009
Exclusive: A Trade War Truce?
Gary Hufbauer of the Peterson Institute for International Economics has made an interesting suggestion. The United States and the European Union should step back from barraging each other with trade complaints at the World Trade Organization as both struggle to recover from the current economic crisis.
Hufbauer has a mixed record on dealing with trade issues. He still has not lived down his prediction during the 1993 debate over the North American Free Trade Agreement that the pact would expand the U.S. trade surplus with Mexico. In fact, the U.S. plunged into a deep trade deficit with Mexico ($64.7 billion last year) as firms took advantage of cheap labor and lax regulation to move factories south of the border. Years later, Hufbauer admitted that gaining access to Mexican labor (as opposed to Mexican consumers) had been the business goal of NAFTA all along.
Yet, even a broken clock is right twice a day, as when Hufbauer warned, “In the absence of a 'grand bargain' between the United States and the European Union, the table has been set for a series of trade disputes as far as the eye can see.” Stimulus programs and macro-economic policies should be off limits to foreign interference through bodies like the WTO. A basic duty of any sovereign state is to promote and protect the economic foundation of its national society upon which its citizens depend for their livelihood. Countries should respect each other’s rights in this regard.
Unfortunately, the EU violated this “gentlemen’s agreement” years ago when it won a case at the WTO against the U.S. Foreign Sales Corporation. The FSC tax break was meant to offset the use by EU countries of the Value Added Tax (VAT) as a way to gain a trade advantage in both domestic and export markets.
Here is how the VAT (which the U.S. does not have) affects trade. When an American company exports to Germany, it pays the 19 percent German VAT in addition to any tariff, plus all the U.S. taxes to which it is subject at home. When a German company sends its products to America, it is not subject to any U.S. taxes other than a nominal tariff and has its home VAT refunded. Without significant tax burdens on either side of the Atlantic, German firms can sell their products for much less than can tax-paying American firms, gaining a competitive advantage. In 2008, the U.S. suffered a $43 billion trade deficit with Germany, and a $95.8 billion deficit with the EU.
The VAT works both as a tariff on imports and as an export subsidy. Washington has tried in vain to negotiate a settlement of this issue, but the EU has refused. The VAT is allowed under the WTO, so the EU has no incentive to negotiate if the U.S. cannot apply pressure through offsetting legislation or does not adopt the VAT itself.
The EU has also threatened to file a WTO case against the “Buy American” provisions in the American Recover and Reinvestment Act. Nearly every country has enacted a stimulus package which seeks to boost domestic economic activity to end the recession and reduce unemployment. To achieve this goal, all governments have sought to direct funds to the home market. It is exactly this kind of measure that Hufbauer’s truce proposal should cover.
Unfortunately, Hufbauer has muddied the intent of his proposal by his own opposition to “Buy American.” He does, after all, work for the Peterson Institute, which is dedicated to the academic theory of “free trade” under which foreign interests are to be treated no differently than American interests. In the ivory tower, borders and national communities have no meaning. Indeed, C. Fred Bergsten, who has headed the Peterson Institute from its inception, wrote in a Financial Times op-ed onJune 23rd that President Barack Obama “must now implement new U.S. spending programs in ways that do not limit foreign participation.” According to this view, American taxpayers should not object to funding the building of factories and the creation of jobs in Europe or China, while watching their neighbors become unemployed as local industry is outsourced. The textbooks say it doesn’t matter where work is done in a “global economy.”
Last February, Hufbauer and his Peterson colleague Claire Brunel wrote a paper arguing for more WTO cases to be filed to keep countries from aiding strategic domestic industries hard hit by the recession. Their main target was the effort to save the American auto industry, which they thought was against WTO rules. They concluded, however, that while foreigners should have the right to block American laws, actually filing a WTO case “is unlikely both because of the environmental requirements of the bailouts and because most countries that could potentially bring a case against the United States subsidize their own auto industries.” Yet, despite this acknowledgement that other governments promote and protect their manufacturers, they still wanted to leave American firms and workers vulnerable. They lamented that, “The auto industry, much like shipbuilding and steel, may gradually leave the realm of WTO disciplines, with large-scale subsidies becoming the norm. If an important industry like autos can remove itself from WTO disciplines, a dangerous precedent would be set and the world trading system seriously weakened.”
Thus, they admit to having a stronger loyalty to an abstract concept like the “world trading system” than to the concrete reality of their own country’s economic foundations. This cosmopolitan attitude should lessen their credibility as “objective” analysts with anyone who feels allegiance to the United States.
There needs to be a distinction made between offensive and defensive trade measures. A truce on cases involving anti-recession policies and stimulus packages is warranted because such measures are defensive in nature. But with global markets shrinking, there is a desire to fight harder to gain a larger share of what is left. This leads to the offensive use of “dumping” to grab overseas sales territory and the defensive use of anti-dumping tariffs to counter alien assaults on domestic firms.
The World Bank's newly updated Global Antidumping Database tracks this struggle in the largest economies. New protective measures like anti-dumping duties and other "safeguard" measures have increased by 31 percent in the first half of 2009 relative to the same period last year. They increased by 34 percent in 2008. While leaders of the Group of 20 large economies again pledged not to resort to “protectionism” at their London summit in April, virtually all of them have been forced by the severity of the downturn to take action to support their home industries.
China's exporters were specifically named in more than 75 percent of the new investigations of predatory exports. The U.S. and EU have both filed cases against the Chinese, and for good reason. Consider the comments made last month by Song Zhe, Beijing’s ambassador to the EU, “By importing technology and equipments from Europe, China managed to accelerate its industrial upgrading and move up in the value chain. Through their investment, the European companies boost employment, generate tax revenues and promote the economic growth of China.” According to Song, the benefits to Europeans are cheap imports and profits for the corporations investing in Chinese development--- not growth or jobs in Europe. But people do not consume their way to wealth; income comes from production and sales. And some of that income needs to be invested to expand output and future income. Focusing on consumption leads to the poorhouse.
Too many Americans, including those in government, have been on an unsustainable spending spree (financed by irresponsible debt) and have neglected the security of the national economic base upon which their ability to live well ultimately depends. So-called “cheap” imports touted by the Chinese, among others, end up being very costly when they destroy domestic jobs and shift industry overseas to support the advancement of rivals. The world operates on the basis of competition, and Washington has a duty to provide Americans with the tools they need to win.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues.
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