Fighting in Trade War

by Former U.S. Senator Ernest F. Hollings

Our founding fathers were politicians who believed in government.   They didn’t have economists hovering over them to make sure they created growth for the economy i.e. “don’t cut spending; don’t increase taxes”.  Economists act like globalization is a recent phenomenon.  Globalization began in 1776.  The U.S. was founded in a trade war – Boston Tea Party.  Today globalization is nothing more than a trade war with production looking for a country cheaper to produce.  China sets the competition.  To sell in China you must produce in China.  To produce in China you must surrender your technology to China.  China favors research so Corporate America offshores research, innovation, technology, production, jobs – our economy.  Refusing to fight, our country is on the road to ruin.

When Thomas Jefferson argued David Ricardo’s free trade Doctrine of Comparative Advantage in agriculture, Alexander Hamilton enunciated the Doctrine of Government Advantage with his Report on Manufactures.  President George Washington in his first message to Congress stated: “…that they should promote such manufactories, as tend to render them independent on others, for essential, particularly for military supplies.”  Our forefathers knew how to fight in a trade war.  The Congress enacted the Tariff Act of 1787 – two years before the Constitution.  Henry Clay in 1836 exclaimed about free trade on the floor of the U.S. Senate: “…it never existed.  It never will exist.”  The forefather’s industrial policy or protectionism worked so well that Edmund Morris in Theodore Rex writes “This first year of the new century (1900) found her (U.S.) worth $25 billion more than her nearest rival Great Britain…The United States was…more self-sustaining than any industrial power in history.”

Sunday’s New York Times (8/5/12) cites our dilemma.  Lawrence Summers, the top economic advisor to the President until 2010 argues … “that an overly aggressive trade stance could hurt manufacturing – by, for instance pushing up the price of imported steel”.  President Obama isn’t supposed to make sure the country imports cheap steel but produces steel for defense and the economy.  Another economist Timothy Geithner, Secretary of the Treasury, warns: “…labeling China a currency manipulator… it’s going to be a trade war if we go there”.   The economists keep President Obama AWOL in the trade war.

Economists rave about The Great Recession.  The recession has been over for three years.   It’s the worst recovery.  The Princeton economist Allen blinder in 2006 estimated that the United States would offshore 30-40 million jobs in ten years.  That’s an average of 3-4 million offshored jobs a year.  Annualizing the good report for July of 163,000 jobs shows that we are offshoring more jobs than we are creating.  The offshoring can’t be prevented.  But it must be limited by enforcing our trade laws and developing an industrial policy for a strong economy.  The President is told by the economists enforcing trade laws will “hurt manufacture”; “start a trade war.”  If President Obama would enforce the War Production Act of 1950, we wouldn’t be begging Russia for helicopters for Afghanistan.  If President Obama would protect steel, motor vehicles, computers and machine tools like President Reagan in 1984, we would have 5% instead of 8.3% unemployment.

Fundamental to an industrial policy is the Value Added Tax that’s rebated on exports.  The Corporate Tax is not rebated.  150 countries compete in globalization with a VAT.  Not having a VAT is killing manufacture in the United States.  A U.S. manufacturer exporting to China pays the 35% Corporate Tax and is levied a 17% VAT when the exports reach Shanghai.  But a manufacturer in China exports to the United States tax free.  The economists caution against a VAT saying it’s complicated, a money machine.  The VAT is not complicated – easily implemented with computers.  The tax is on the difference of cost and materials and the sales price.  The VAT has no loopholes, giving us instant tax reform.  The VAT is self-enforcing so we can cut the size of government (IRS).   Running annual deficits in excess of a trillion dollars we need a money machine.  Last year the Corporate Tax produced $181.1 billion in revenues.  A 7% VAT for 2011 would have produced $872 billion in revenues.  With spending cuts we can balance the budget in two years rather than ten years.  Cancelling the 35% Corporate Tax and replacing it with a 7% VAT immediately releases a trillion dollars in offshore profits for Corporate America to create jobs in the United States and jumpstart the economy.  But the President and Congress refuse to consider this tax cut.  They fight in every war but the one necessary.