The following article appeared in the Daily Media Report of the American Iron and Steel Institute on May 25, 2011.

GENEVA — China has appealed against the World Trade Organization’s rejection of its complaint over punitive US tariffs on Chinese tire imports, the trade body said Tuesday.

“On 24 May 2011, China notified the Dispute Settlement Body of its decision to appeal the panel report in dispute case DS399, ‘US — Measures Affecting Imports of Certain Passenger Vehicle and Light Truck Tires from China’,” the WTO said on its website.

Beijing lost its case against Washington in December, when the WTO cleared the United States for invoking a safeguard clause in 2009 in the Asian giant’s WTO accession agreement to impose punitive duties on Chinese tires over three years.

WTO arbitrators ruled that China “failed to establish prima facie that the tires measure exceeds the period of time necessary to prevent or remedy the market disruption.”

The tire dispute ignited the first trade spat of US President Barack Obama’s presidency with the Asian giant, with warnings that a rise in Chinese-made tires had cost more than 5,000 US jobs.

The United States can file a counter-appeal within 10 days.

Sens. Brown, Stabenow, Rockefeller, Casey, Bingaman, Cantwell Lead Group Of 41 Senators To Tell President Obama: Hold Firm On Halting Free Trade Agreements Until Trade Adjustment Assistance Is Extended-Senators Request Extension of 2009 TAA Reforms to Cover Service Workers and Job Losses to Non-FTA Countries Like China, Updates to Health Care Tax Credit

May 23, 2011

WASHINGTON, D.C. — Forty-one U.S. Senators—led by Sherrod Brown (D-OH), Debbie Stabenow (D-MI), Jay Rockefeller (D-WV), Robert P. Casey, Jr. (D-PA), Jeff Bingaman (D-NM), and Maria Cantwell (D-WA)—sent a letter today to President Barack Obama reinforcing his decision not to submit any free trade agreements to Congress—including pending agreements for Colombia, Panama, and South Korea—until Congress agrees to extend a long-term extension of Trade Adjustment Assistance, including the 2009 bipartisan reforms.

The senators asked the President to work with them to secure bipartisan support for an extension of the Recovery Act-version of TAA, including coverage for service workers as well as workers who lose their jobs to countries other than those with which the United States has formal free trade agreements, including China. This version of TAA also covers an expanded version of the Health Coverage Tax Credit (HCTC), which helps Delphi retirees and other trade-affected workers afford private health insurance.

“We have an obligation to take care of American workers and American industry first. TAA is one critical piece to rebalancing our trade policy, along with strengthened trade enforcement. Too often, we pass free trade agreements and then turn our backs on the American workers who have watched their jobs go to Mexico or China,” Sen. Brown said. “At a minimum, we cannot move forward on any other trade agreements until updates to Trade Adjustment Assistance and the Health Care Tax Credit are passed, and I applaud the President for standing with workers on this issue. With more and more American and Ohio jobs moving to countries like China and India, we need to ensure that these hardworking men and women have the skills to compete for new jobs. TAA is a win-win for Americans training for new jobs and employers looking for a skilled workforce.”

“Congress should not be considering new trade agreements before renewing protections for people whose jobs are sent overseas,” said Sen. Stabenow. “Along with extending retraining to help workers transition to the industries of the future, it is time to strengthen trade enforcement and finally get tough on China and other countries violating fair trade rules. U.S. trade policy should put American families and businesses first.”

“Before we focus on trade agreements with other countries, we must first and foremost take care of American workers who are looking for work or may have lost their jobs to outsourcing,” said Sen. Rockefeller.  “We must extend TAA assistance for the many American workers who need it to help put food on the table and get needed training for new jobs.  I have seen too many West Virginia families suffer because their jobs were moved out of this country.”

“If we truly want to get America get back on the road to prosperity, then we must ensure our workers have the proper tools to be able to find new employment. TAA helps workers, who have lost their job due to outsourcing production outside the United States, do exactly that.  In the current economic environment, it is critical that we restore this vital program, especially before considering additional trade agreements,” Sen. Casey said.

“TAA has been a pillar of U.S. trade policy for decades. Congress modernized the program in 2009 to meet the needs of today’s economy by extending TAA eligibility to people in the services sector and factoring in trade competition with non-FTA countries. Because of these changes, TAA has been a lifeline for hundreds of thousands of American workers over the past two years.  As Congress prepares to consider the pending trade agreements, we must strengthen the safety net for middle class workers by extending these critical job retraining, health insurance and unemployment insurance benefits,” said Sen. Bingaman, a senior member of the Senate Finance Committee and long-time TAA advocate.

“We need to make sure American workers have the skills they need for 21st century jobs that grow our economy,” said Sen. Cantwell. “Trade Adjustment Assistance has provided vital retraining to thousands of displaced Washingtonians to get back into the workforce. Moving forward, we must extend this critical program so workers impacted by trade have the support they need to find new jobs in emerging sectors of the economy.”

The letter was also signed by Senators Ron Wyden (D-OR), Tom Harkin (D-IA), Patty Murray (D-WA, Chuck Schumer (D-NY), Dick Durbin (D-IL), Ben Cardin (D-MD), Barbara Boxer (D-CA), Carl Levin (D-MI), Kirsten Gillibrand (D-NY), Richard Blumenthal (D-CT), Tom Udall (D-NM), Sheldon Whitehouse (D-RI), Jack Reed (D-RI), Kent Conrad (D-ND), Bob Menendez (D-NJ), Michael Bennet (D-CO), Al Franken (D-MN), Amy Klobuchar (D-NM), Herb Kohl (D-WI), Jeff Merkley (D-OR), Frank Lautenberg (D-NJ), Mark Begich (D-AK), Chris Coons (D-DE), Kay Hagan (D-NC), Claire McCaskill (D-MO), Barbara Mikulski (D-MD), Jeanne Shaheen (D-NH), Bernie Sanders (D-VT), Joe Manchin (D-WV), Daniel Akaka (D-HI), Mark Udall (D-CO), Jon Tester (D-MT), Tom Carper (D-DE), Daniel Inouye (D-HI), Patrick Leahy (D-VT), and Bill Nelson (D-FL). The full text is below.

Dear President Obama:

We share the goal of your National Export Initiative to double U.S. exports and are looking forward to working with you on implementing a strong trade and competitiveness strategy. We are writing to support your decision to insist that Congress agree to extend Trade Adjustment Assistance (TAA), including a long term extension of the 2009 bipartisan reforms, before you submit the pending trade agreements with South Korea, Colombia, and Panama. We recognize, as you do, that such a deal will be challenging to secure because it requires significant bipartisan commitments in both chambers of Congress to vote in favor of a TAA extension. The challenge is worth it. We agree with you that strengthening the safety net for the middle class by extending TAA should be a prerequisite for the consideration of new trade agreements.

TAA has been a core pillar of U.S. trade policy. The program ensures that workers who lose their jobs and financial security as a result of globalization have an opportunity to transition to new jobs and emerging sectors of the economy. Important reforms were made to TAA in 2009, which have helped streamline the program and make it more efficient for beneficiaries. In 2009, Congress also expanded eligibility to all workers whose jobs have been moved offshore, regardless of whether the United States has a trade agreement with the particular country. It also recognized the important role of the service industry in the U.S. economy by bringing service workers into TAA.

The program also improved and expanded access to TAA’s Health Coverage Tax Credit (HCTC) – an initiative that promotes private health insurance access for recipients, and makes health insurance coverage more affordable to workers who lose their jobs due to trade and offshoring.  In the absence of this program, more Americans would need public assistance and more individuals nearing retirement would be forced to use the emergency room as their sole source of health care.

These bipartisan reforms to the TAA program help hundreds of thousands of workers, in every state, by moving workers more quickly from government support to private sector jobs. Since new TAA began in May 2009, the program has assisted 185,000 Americans who may have otherwise been ineligible for services, with usage in some states increasing by more than 40 percent. The 2009 reforms also help ensure accountability and results by requiring data on performance and worker outcomes, enabling Congress to identify where improvements are needed.  Unfortunately, these critical TAA reforms expired on February 12, 2011. Just this month, the Department of Labor denied the first three petitions filed by groups of workers seeking TAA assistance under pre-2009 eligibility. The continued denial of critical training will impede private sector employment in emerging sectors of the economy.

While we the undersigned may have differing views on elements of the trade agenda – with some of us looking forward to supporting the pending trade agreements with South Korea, Colombia, and Panama, and others skeptical of the impact of the agreements –we are unified in our belief that the first order of business, before we should consider any FTA, is securing a long-term TAA extension.

We look forward to working with you to extend and implement TAA as part of broader trade and competitiveness strategy that creates jobs and builds the middle class.

The following article by Andrew Higgins appeared in the Washington Post here.

DONGGUAN, China — China’s export juggernaut is not unstoppable: Just ask Lawrence Yen, president of Woodworth Wooden Industries. His factory here in southern China used to ship 400 containers of bedroom furniture to the United States each month. It now sends 60.

That is just what Yen’s struggling American competitors were hoping would happen when, back in January 2005, the Commerce Department slapped import tariffs on Chinese-made beds, nightstands and related wares.

What happened next, though, was not part of the plan: Yen opened a factory in Vietnam and began exporting to the United States from there. Others did the same. He is now building a big plant in Indonesia and hopes to sell even more to the United States.

America’s own furniture industry, said Yen, “can never compete with Asia.”

The result: Imports now account for about 70 percent of the U.S. market for beds and similar items, up from 58 percent before Washington intervened to try and protect domestic manufacturers from Chinese “dumping,” or the export of goods at unfairly low prices.

The United States and China have exchanged accusations of dumping for years and imposed tit-for-tat duties. All along, though, China has generally come out on top: Its trade surplus with the United States rose to $273 billion in 2010, according to U.S. Census Bureau figures, more than three times the level of a decade earlier.

The trade concerns have led to growing calls for tougher action from Washington to stem the tide and protect U.S. jobs. But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million.

Over the same period, however, imports of the same goods from Vietnam — where wages and other costs are even lower than in China — have surged, rising from $151 million to $931 million. The loss of jobs in America, meanwhile, only accelerated. The number of Americans now employed making bedroom furniture is less than half what it was when the tariffs began.

Furniture workers in Dongguan, a throbbing industrial city near Hong Kong, earn about $170 a month, compared with less than $80 in Vietnam. Their American counterparts make about $12 an hour.
“This whole saga is a perfect example of good intentions gone completely haywire,” said Keith Koenig, president of City Furniture, a big Florida-based retailer and critic of the tariffs. Like many retailers, he relies on imported goods, which are cheaper than those made in America.

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a “protection racket.”

Fearful of having their tariff rates jacked up, many Chinese furniture makers pay cash to their American competitors, who have the right to ask the Commerce Department to review the duties of individual companies. Those who cough up get dropped from the review list.

David Cai, manager of the Dongguan Huada Furniture Co., likens the process to a shakedown: “It is like the mafia: You buy protection.” He, too, has slashed bedroom furniture exports to the United States.

How much gets paid in “settlements” each year depends on negotiations with Washington lawyer Joseph Dorn, who represents American furniture makers who first petitioned for the anti-dumping tariffs. Dorn said, “It is wrong for Chinese companies to criticize” the practice, as they “came up with the idea” and “voluntarily agreed” to pay.

The ruin caused to U.S. furniture manufacturing by a tsunami of Chinese goods is beyond dispute. Since the 1990s, hundreds of factories in North Carolina, Virginia and other furniture centers have closed as production moved offshore, often to Dongguan. In 1992, U.S. furniture imports from China totaled $129 million, according to Census Bureau data. By 2003, they had ballooned to $5.28 billion — an increase of nearly 4,000 percent. That was when a small group of American manufacturers banded together to try and stop at least some of the rot.

They formed the American Furniture Manufacturers Committee for Legal Trade and, warning of dire consequences to “our way of life, our culture and the competitiveness of American in the world,” begged Washington to throw them a lifeline. Along with labor unions, they filed a petition that accused their Chinese rivals of “dumping” bedroom furniture on the U.S. market.

After lengthy debate, the Commerce Department ruled that China had sold beds and related items “at less than fair value” and “materially injured” American producers. To level the playing field, it imposed duties on Chinese exporters, a modest 7 percent for most but much higher for a few companies.

In Dongguan, furniture makers held a meeting in a hotel to decide how to respond. Most were from Taiwan and, unlike local Chinese businessmen, didn’t have close ties to the Chinese state. Furious at being accused of benefiting unfairly from China’s Communist Party-dominated system, they set up a fund to support lobbying efforts in Washington and started hiring lawyers.

Yen had another idea. “I told them I would set up a factory in Vietnam,” he said.

That, he explained, would shield his business not only from U.S. tariffs but also from the rising costs of manufacturing in China, where wages, electricity and other costs have all gone up steadily.

Today, Yen still makes furniture not covered by tariffs in Dongguan but has moved nearly all his bedroom production out of China. His Dongguan factory has cut its workforce from 3,000 to about 1,200. His factory outside Ho Chi Minh City, formerly Saigon, which didn’t exist when the Commerce Department imposed duties, now employs 2,800 Vietnamese.

Supporters of the tariffs — extended in December for a further five years — acknowledged at hearings by the U.S. International Trade Commission last fall that jobs haven’t returned to America but argued that the domestic furniture industry would be worse off without the anti-dumping campaign.

“There would be nobody here today if we had not done this,” said John Bassett, chairman of Vaughan-Bassett, a Virginia company that has been in the vanguard of the drive to slow imports from China. “We turned a stampede. No, we didn’t bring it to a screeching halt, but we turned it, and we slowed it down.”

The stampede from Vietnam, meanwhile, has only gathered pace. Thanks largely to transplants from Dongguan and elsewhere, Vietnam has now replaced China as the biggest source of wooden bedroom furniture sold in America.

Travis Belle, an American buyer who moved from Virginia to Dongguan at the height of China’s now fading furniture export boom, scoffed at claims that the anti-dumping cause has helped America’s own industry. “The only thing that has changed is where you have your dinner at night,” he said. “Before it was Dongguan, but now it is Ho Chi Minh City.”

The following article by Gilbert B. Kaplan and John C. Taylor appeared at the New America Foundation site here.

Exporters of goods from the United States face an enormous disadvantage every time a U.S. product leaves our shores. There is no rebate of the income tax paid with respect to that product, and as such the embedded costs of the export include a tax cost. The exact amount of that cost can vary, but it can be high given that the current U.S. corporate income tax rate is 35%. This contrasts dramatically with exporters of goods from almost every other country in the world, who receive a rebate of their Value-Added Taxes (“VAT”) upon export.

The main reason the U.S. cannot rebate income taxes upon export is because of a provision in the General Agreement on Tariffs and Trade (the “GATT”) which was later incorporated in the WTO. This provision makes the rebate or non-collection of income tax from exporters a prohibited “export subsidy.” In contrast, the rebate of a VAT upon export is permitted by the WTO agreements. In WTO parlance, VAT is an “indirect tax,” and the non-excessive rebate of an indirect tax is not an export subsidy. The rebate of a direct tax such as an income tax, however, is considered to be an export subsidy. It is prohibited, and subject to a variety of WTO offsets and penalties.

The economic effect of this divergence is enormous. It means, for example, that when a U.S. pipe company ships a ton of pipe to Europe it gets no tax rebate. In order to be profitable, the U.S. company must price its pipe at a level sufficient to pay the tax on the income generated from the sale. In contrast, when a Brazilian pipe company sells the same ton of pipe to Europe it is granted a 17% rebate upon export of that pipe as it leaves Brazil. It can therefore be sold at a much more competitive price in the EU (or any other export destination, including the United States), undercutting U.S. manufacturers.

In response to this problem, two major solutions have been offered. First, it has been proposed that the United States should change from an income tax to a VAT system. Currently this is not politically feasible.

The other potential solution is to change the WTO agreements to allow the rebate of income taxes upon export by all producers. But because the United States has the tax system in the world that suffers most heavily from this trade burden, it is very unlikely that the rest of the international community will join in agreeing to this change. The issue has been raised repeatedly over decades in the GATT, and now in the WTO, but it appears to be essentially a dead letter in the Geneva WTO negotiations.

Yet the impact of this unfairness continues to be enormous. U.S. products do not get a tax rebate on export and are thus much less competitive in foreign markets. Moreover, U.S. products can be subject to the VAT in foreign export markets, so they are essentially double taxed, once in the U.S. (with the income tax) and once abroad (with the foreign VAT). This has made it essentially impossible for anything but the most competitive U.S. products to sell in export markets. Products which are fantastic and for which there are few or no competitors-such as sophisticated semiconductors or state of the art agricultural machines from U.S. heavy equipment makers-have a chance to sell abroad. But the average U.S. product cannot overcome the price disadvantage caused by the tax incidence differences, and a commodity product made in the U.S. has almost no hope of doing so at all.

This has resulted in day-to-day disadvantages for U.S. exporters, and has hastened the migration of manufacturing out of the U.S. to foreign locations.

This paper proposes a solution to this problem which has the potential to make U.S. exporters of goods much more price competitive, and thus help to revive the U.S. manufacturing sector. Our proposal is that the United States create VAT Trade Zones, where manufacturers could choose to locate and, in these Trade Zones, would be required to pay a value-added tax in lieu of income tax. In order to simplify the tax accounting treatment for companies who use such zones, one requirement would be that the plant would have to be within its own corporation. This corporation could be a member or “affiliate” of a large U.S. corporate group of companies whose main locus was outside the zone. The rules to establish what income derives from the plant and thus would not be subject to income tax have been fairly well established under U.S. tax law, and could be applied to companies in the zone.

Within the zone, the corporation would be required to pay a U.S. VAT, which would be established as part of this proposal. The exact rate of tax would be determined to equalize the tax effect versus the payment of income tax, but preliminary estimates are that a 5-10% VAT, which is actually lower than the VAT in many other countries, would be close to the right level.

The proposal would not be budget neutral, because if the manufacturer elected to export product from the zone, the company would have the VAT rebated, as is the rule in substantially every other trading nation. But, as a result of the fact that the tax being rebated is a VAT tax, and not an income tax, such rebates would not be inconsistent with the WTO, would not be a prohibited subsidy, and would not be subject to WTO penalties. Certain other requirements would have to be met to ensure WTO consistency, such as non-discrimination as to foreign-owned companies, actual tax neutrality between the VAT and the income tax, and general availability of these VAT Trade Zones across companies and industry sectors, but these objectives could be accomplished.

The U.S. could also consider offering other assistance to companies located in such zones, similar to the incentives offered in special industrial zones in other countries.  While the lure of such zones in other countries is often superior industrial infrastructure and tax breaks, many also offer streamlined regulatory processes with “one stop” administrative offices.  Others offer assistance with worker training and have dedicated funds to assist with research and product marketing through loans or grants.  Some zones in China even offer “seed money” for recent college graduates to start entrepreneurial endeavors.  One indirect benefit from the location of manufacturing enterprises in such zones could be clustering, which leads to increased innovation and closer cooperation between input suppliers and downstream manufacturers.

Once this program went into effect it might ease the transition to a more broadly applied VAT. But even if that broader VAT were established, the other Trade Zone benefits described above could still remain in effect, such as those relating to streamlined administration, research grant money, and, perhaps most importantly, clustering of manufacturing plants.

The question then becomes, why would this VAT Trade Zone system be easier to implement than adoption of a VAT across the entire economy? There are several reasons.

First, this proposal would create U.S. jobs. Rather than making things off shore because of the advantages accruing to countries using a VAT tax and rebating it, manufacturers would be drawn to the United States because of these VAT Trade Zones that would offer similar tax benefits.

Second, the concern about the regressivity of the tax would be lessened as it would only apply to a small segment of the economy.

Next, the administrability of this program could be eased by the fact that the United States already has a Foreign Trade Zone Program where certain trade and customs benefits are provided to users. As such, there is already a mechanism for setting up trade zones (though such zones have no VAT or other tax elements) and that mechanism could be extended into this program.

And finally, this proposal would encourage    U.S. exports, a goal which is almost universally supported politically. In fact, President Obama has set a goal of doubling exports over a five year period. Nothing could more fully accelerate progress toward that goal than the immediate enactment of this program.

The issue of the revenue impact would certainly have to be considered. However, it is worth noting that the United States has one of the highest corporate income tax rates in the world, and there have been strong calls to lower that rate. Even President Obama has indicated a willingness to consider reductions in the corporate income tax rates. Our proposal, rather than lowering the corporate tax rate overall, would be to enact this VAT Trade Zone Program and provide the benefits of tax rebates to manufacturers who create or preserve U.S. plants and jobs through increased exports.

We therefore urge the Administration and the Congress to pass immediate legislation to create the American Manufacturing VAT Trade Zone Program, (the AMVATTZ Program, as we call it) and proceed to unleash the export power and imagination of U.S. manufacturers.

Gilbert B. Kaplan is an International Trade Partner at King & Spalding law firm in Washington, D.C. He formerly served as Deputy Assistant and Acting Assistant Secretary at the U.S. Department of Commerce. J.D. Harvard Law School., A. B. Harvard College.

John C. Taylor is an International Tax Partner at King & Spalding in London.  He previously was a partner at the London office of one of the “Magic Circle” firms. LL.M. in Taxation New York University School of Law, J.D. University of Tennessee, B.S. University of Tennessee.

The following article by Binyamin Appelbaum appeared in The New York Times here.

WASHINGTON — The Obama administration said on Monday that it would not seek Congressional approval of free trade agreements with Colombia, Panama and South Korea until Republicans agree to expand assistance for American workers who might lose jobs as a result.

President Obama has made the three deals a focus of his foreign and economic policy, but the Monday ultimatum reflects the political difficulty of advancing the deals in the face of high unemployment and opposition from parts of the Democratic base.

“This administration believes that just as we should be excited about the prospect of selling more of what we make around the world, we have to be equally firm about keeping faith with America’s workers,” said Ron Kirk, the United States trade representative.

The announcement puts the White House in line with Congressional Democrats who have made expanded benefits a condition of their support for the trade deals, and at loggerheads with Republicans who say the government cannot afford the cost.

Senator Orrin Hatch, the ranking Republican on the finance committee, said in a statement that the decision was “hugely disappointing.”

“It makes no sense to shut the door on increasing U.S. exports by over $10 billion in order to fund a costly program,” said Mr. Hatch, who is from Utah.

The federal government has provided supplemental assistance to workers whose jobs were shipped overseas since the 1960s, but the scale of those benefits has waxed and waned. The current benefits include training programs, money to cover the cost of searching for a job or relocating to a new city, and tax credits for health insurance.

In 2009, Congress expanded eligibility for the program significantly as part of broader economic stimulus legislation. The Labor Department estimates that the program provided benefits to about 280,000 workers last year at a cost of about $1.3 billion. But the expanded eligibility lapsed in February after House Republicans opposed its renewal.

Gene Sperling, director of the National Economic Council, said Monday that the White House was confident it could persuade Republicans to reverse that decision.

The administration started informal talks with the Senate about the three trade deals early this month, a step that seemed to reflect confidence on both sides that a deal can be done.

“We can work on Congressional leadership to get that accomplished,” Mr. Sperling said.

Conservative groups like the Cato Institute in Washington say there is little evidence that the program helps workers find new jobs, and that the government cannot afford the expense. They also question why the government should provide special help to the relatively small portion of unemployed workers who lose jobs to overseas competition.

“Furthermore, the existence of the program reinforces a false impression that international trade is a negative factor for the economy,” Sallie James, a trade policy analyst at Cato, wrote in a recent policy note arguing against continued financing.

But a range of business groups have sided with the White House, supporting the expansion as a necessary step alongside passage of the trade deals.

In a letter sent to Congressional leaders this month, the groups, including the United States Chamber of Commerce, wrote that the program was “an essential part” of the nation’s trade policy that had enjoyed bipartisan support for most of the last 50 years.

One thing is for certain already: the present international trading order will not be here in ten years, and quite likely not in five. The unsustainable American trade deficit alone makes this a certainty.

Since the end of the Cold War, and accelerating after NAFTA in 1994, that order has consisted in ever-expanding “free” trade worldwide — which in reality is a curious mixture of genuinely free trade practiced by the United States and a few others with the technocratic mercantilism of surging East Asia and Germanic-Scandinavian Europe.

From America’s point of view, this order is free trade, at least on the import side of the equation, so it is as free trade that we must criticize it, prepare to celebrate its passing, and investigate what should replace it.

Our free trade policy is the answer to a question that currently has most mainstream economists scratching their heads: what killed the great American job machine? This policy has been partly responsible for increasing inequality in the United States and the gradual repudiation of our 200-year tradition of broadly shared middle-class prosperity. It is a major player in our rising indebtedness, community abandonment, and a weakening of the industrial sinews of our national security.

America’s economy today continues to struggle to emerge from recession because our trade deficit — fluctuating around $500 billion a year for a decade now — acts as a giant “reverse stimulus” to our economy. It causes a huge slice of domestic demand to flow not into domestic jobs, thus domestic wages and thus more demand, but into imports, therefore foreign wages, and therefore a boom in Guangdong, China; Seoul, South Korea; Yokohama, Japan; and even Munich — not Gary, Indiana; Fontana, California; and the other badlands of America’s industrial decline. Our response? Yet more stimulus, leading to an ever-increasing overhang of debt, both foreign and domestic, the cost of whose servicing then exerts its own drag on recovery.

The American economy has, in fact, entirely lost the ability to create jobs in tradable sectors. This cheery fact comes straight from the Commerce Department. All our net new jobs are in nontradeable services: a few heart surgeons and a legion of bus boys and security guards, most of them without health insurance or retirement benefits. These are dead-end jobs, and our economy as a whole is also being similarly squeezed into dead-end industries. The green jobs of the future? Gone to places like China where governments bid sweeter subsidies than Massachusetts can afford. Nanotechnology? Perhaps the first major technology in a century where America is not the leading innovator. Foreign subsidies are illegal under WTO rules, but no matter: who’s going to enforce them when corporate America is happily lapping at their very trough?

All the complaints just mentioned are familiar to the public, but they fly in the face of a sanctified myth that the superiority of free trade is a known truth of social science. Supposedly, it was proved long ago that protectionism is just a racket for the benefit of special interests at the expense of consumers.

Never mind that every developed nation, from England to South Korea, and including the United States, became a developed nation by means of this policy. That little piece of economic history is airbrushed out of the picture in favor of the Cold War myth of the absolute superiority of perfectly free markets. America never embraced this myth on its merits, merely as a tactical device to prop up the non-communist economies of the world and make them dependent upon us.

The cycle repeats: China today is reenacting this 400-year-old mercantilist playbook, which was born among the city-states of Renaissance Italy and never quite forgotten.

Economic theory will be sorted out eventually. Thanks to the work of a small, brave group of dissident economists — scholars like Ralph Gomory, William Baumol, Erik Reinert, and Ha-Joon Chang — the credibility of free trade as a theoretical doctrine is crumbling, and the discipline will eventually change its mind. But it will almost certainly be a lagging indicator, ready to vindicate policy forged in crisis well after the dust has settled. Academia is a superb rationalizer, and will doubtless find a way to avoid embarrassing questions about its own past positions when it teaches undergraduates twenty years from now that free trade is a delusion and a mistake.

What’s wrong with free trade? A whole host of problems, many of them long known to economists but assumed in recent decades to be unimportant.

The technical plot thickens here fast, but we can begin by noting that any serious discussion of free trade must confront David Ricardo’s celebrated 1817 theory of comparative advantage, whose tale of English cloth and Portuguese wine is familiar to generations of economics students. According to a myth accepted by both laypeople and far too many professional economists, this theory proves that free trade is best, always and everywhere, regardless of whether a nation’s trading partners reciprocate.

Unfortunately for free traders, this theory is riddled with dubious assumptions, some of which even Ricardo acknowledged. If they held true, the hypothesis would hold water. But because they often don’t, it is largely inapplicable in the real world. Here’s why:

Ricardo’s first dubious assumption is that trade is sustainable. But when a nation imports so much that it runs a trade deficit, this means it is either selling assets to foreign nations or going into debt to them. These processes, while elastic, aren’t infinitely so. This is precisely the situation the United States is in today: not only does it risk an eventual crash, but in the meantime, every dollar of assets it sells and every dollar of debt it assumes reduces the nation’s net worth.

Ricardo’s second dubious assumption is that the productive assets used to generate goods and services can easily be shifted from declining to rising industries. But laid-off autoworkers and abandoned automobile plants don’t generally transition easily to making helicopters. Assistance payments can blunt the pain, but these costs must be counted against the purported benefits of free trade, and they make free trade an enlarger of big government.

The third dubious assumption is that free trade doesn’t worsen income inequality. But, in reality, it squeezes the wages of ordinary Americans because it expands the world’s effective supply of labor, which can move from rice paddy to factory overnight, faster than its supply of capital, which takes decades to accumulate at prevailing savings rates. As a result, free trade strengthens the bargaining position of capital relative to labor. And there is no guarantee that ordinary people’s gains from cheaper imports will outweigh their losses from lowered wages.

The fourth dubious assumption is that capital isn’t internationally mobile. If it can’t move between nations, then free trade will (if the other assumptions hold true) steer it to the most productive use in our own economy. But if capital can move between nations, then free trade may reveal that it can be used better somewhere else. This will benefit the nation that the capital migrates to, and the world economy as a whole, but it won’t always benefit us.

The fifth dubious assumption is that free trade won’t turn benign trading partners into dangerous trading rivals. But free trade often does do this, as we see today in China, whose growth is massively dependent upon exports. This is especially likely when trading partners practice mercantilism, the 400-year-old strategy of deliberately gaming the world trading system by methods like currency manipulation and hidden tariffs.

The sixth dubious assumption is that short-term efficiency leads to long-term growth. But such growth has more to do with creative destruction, innovation, and capital accumulation than it does with short-term efficiency. All developed nations, including the United States, industrialized by means of protectionist policies that were inefficient in the short run.

What is the implication of all these loopholes in Ricardo’s theory? That trade is good for America, but free trade, which is not the same thing at all, is a very dicey proposition.

Beyond the holes in Ricardo, there is an entire new way of looking at trade growing up around the theoretical insights of Ralph Gomory and William Baumol of New York University. The details are technical, but the upshot is they have managed to bridge the gap between the Pollyannaish “international trade is always win-win” Ricardian view and the overly pessimistic “international trade is war” view. The former view is naive; the latter ignores the fact that economics precisely isn’t war because it is a positive-sum game in which goods are produced, not just divided, making mutual gains possible.

So at long last, someone has given us a theoretical framework that can accommodate economic reality as we actually experience it, not just lecture us on what “must” happen as Ricardianism does. It’s both a dog-eat-dog and a scratch-my-back-and-I’ll-scratch-yours world. Economics has finally given common sense permission to be true. Ironically, their sophisticated mathematical models are actually closer to the thinking of the man on the street than those they replaced.

There is an appropriate policy response. For starters, the United States should apply compensatory tariffs against imports subsidized by currency manipulation, an idea that originated with Kevin Kearns of the U.S. Business and Industry Council and was passed by the House of Representatives in the previous Congress. Also essential is a border tax to counter foreign export rebates implemented by means of foreign value-added taxes.

Perhaps even more important than the pure economics of free trade is its political economy (an older and more accurate term). For the fundamental reality of free trade is that it relieves corporate America from any substantial economic tie to the economic well-being of ordinary Americans. If corporate America can produce its products anywhere, and sell them anywhere, then it has no incentive to care about the capacity of Americans to produce or consume. Conversely, if it is tied to making a profit by selling goods made by Americans to Americans, then it has a natural incentive to care about American productivity and consumption.

Productivity and consumption are prosperity. The rest is details.

Right now, America is confronting any number of long- and short-term economic problems with one hand tied behind its back: corporate America is, increasingly, quietly indifferent to America’s economic success. This must change. While any proposals to end the K Street dictatorship in America’s public life are welcome, the reality is that mechanical reforms are less likely to touch on true fundamentals than realigning the economic incentives they reflect.

This is not a utopian project. In fact, it has already been accomplished, during the long 1790-1945 era of American protectionism. America wandered away from Founding Father Alexander Hamilton’s vision of a relatively self-contained American economy in order to win the Cold War. We threw our markets open to the world as a bribe not to go communist. If we fail to return to a policy of strategic, not unconditional, economic openness, we may lose the next Cold War — to a Confucian authoritarianism no less opposed to the idea of a free society than Marxism, and considerably more efficient.

The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Press Advisory: Wednesday’s Trade Deficit Report

Tuesday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $47.7 billion in March, up from $45.8 billion in February.

This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.

Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years.

Jobs Creation

The economy added 244,000 jobs in April; however, 360,000 jobs must be added per month to bring unemployment down to 6 percent over the next 36 months. With federal and state governments trimming civil servants, private sector jobs growth must exceed 360,000 per month to accomplish this goal.

Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Simply, policies regarding energy and trade with China are not creating conditions for 5 percent GDP growth that is needed and easily could be achieved to bring unemployment down to acceptable levels.

In April, the private sector has added 268,000 jobs per month, but many were in government subsidized health care and social services. Netting those out, core private sector jobs have increased only 229,000 in April—that comes to 73 non-government subsidized jobs per county for more than 5000 job seekers per county.

Early in a recovery, temporary jobs appear first, but 22 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.

Economic Growth

Since the recovery began in mid 2009, GDP growth has averaged 2.8 percent, disappointing Administration economists who have consistently assumed 4 percent growth in budget projections and forecasts for the job creating effects of stimulus spending.

Consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures in U.S. markets have offset those positive trends.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking additional business in China.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

The following testimony can be found here.

Testimony of former U.S. Senator Slade Gorton before The U.S.­China Economic and Security Review Commission hearing on China’s intellectual property rights and indigenous innovation policy

U. S. corporations consistently lose billions of dollars in intellectual property every year due to patent, copyright and trademark piracy and infringement, together with the impacts of Chinese indigenous innovation policies. All in all, not surprisingly, China is the greatest offender.

How to measure these losses presents huge challenges, but let’s start with a study by the International Data Corporation. It estimates China’s software piracy rate in 2009 to have been 79%, with a value of about $7.6 billion. Another study found direct losses to copyright industries in 2005 to have been on the order of $58 billion in lost output and accompanying lost jobs, earnings and tax revenues. A reasonable assumption might be that China accounts for about 25% of this number, or $14 billion.

We can, of course, take for granted that these losses have been matters of great concern to several American administrations and therefore the subject of constant negotiations, the only common feature of which is a lack of success.

And it is, of course, the resulting frustration, coupled with the huge imbalance in our bilateral trade with China, that has spawned retaliatory schemes like Senator Schumer’s proposal to sanction China’s artificial valuation of its currency.

But while I believe that the senator’s ideas stem from an appropriate concern over those trade imbalances and unfairness, I do not feel that his approach is likely to succeed.

We should recognize that the control of a nation’s own currency to the maximum extent possible is in its clear vital sovereign national interest. One need only reflect on the reaction here in the United States to any Chinese attempt to order us to raise interest rates so as to strengthen the dollar to understand and even to sympathize with China’s view on the same subject.

At the same time, however, the protection of our national intellectual property is clearly a vital national sovereign interest of the United States. We have the sovereign right to adjust our trade policies so as to protect that interest. Unfair trade policies should be met by trade sanctions.

Thus, our protection of that intellectual property having been so ineffectual, I submit to you once again an idea first brought to your attention several months ago by my friend, Leo Hindery.

The United States should impose on all imports from China a goods tariff designed to produce each year 150% of the losses of US intellectual property in the previous year. The GAO should determine that number, and the policy should continue for as long as that piracy exceeds an appropriate share of US exports to China, say 10%. The policy should be universal, that is to say it should apply equally to all other trading partners the piracy in which exceeds a certain level. The president should be given some, but very little, authority to waive the policy, in whole or in part, upon a determination that it is in our clear national interest to do so.

The goal, of course, is not to produce revenue for the federal treasury, but to reduce intellectual property piracy, and any degree of presidential discretion should be directed at rewarding success in that endeavor.

It will be objected that this policy violates a number of our international trade agreements, as it does, thus allowing retaliatory trade sanctions against US exports to China, though it should be pointed out that Chinese piracy is so extensive as to constitute such violations as well.

True as that right of retaliation is, and perhaps effective in the case of any trading partner with whom we have a trade surplus, it is clear that a China with a $273 billion surplus (2010) with the United States can only lose, and lose big, by any set of tit for tat retaliatory trade sanctions with the United States.

This general proposal does not, of course, answer all relevant questions. Do we treat patent, copyright and trademark piracy and violations in the same fashion? And what about government indigenous innovation policies? To what extent do they differ from trade secret sharing in the normal course of corporate negotiations? And how do we fairly and accurately determine the losses resulting from IP piracy?

Each of these questions is food for examination by this Commission, but the time for decisive action has already passed and we should not wait on the results of future fruitless negotiations.

For immediate release: 

Contact: Christopher Kilcullen  at 303-250-8338 or America’s Got Product website here.

TEST DRIVE AMERICA! June 1-June 30th!

With our national debt at crisis levels and the stubborn unemployment continuing to hamper our recovery AmericasGotProduct.com is asking every American to get out and Test Drive America during the month of June!

“In March of this year, we the people bought just over 1.2 million cars and trucks according the Wall Street Journal and MotorIntelligence.com.  When we deduct all the foreign and domestic models build in over 30 communities all across this country, there were more than 350,000 pure imports left.  These are the Kia’s, Audi’s, Lexus, VW, Volvo and other brands with models not built in America.  At a $30,000 average price, that is just over $10 billion that left this country, one buy at a time and in just 30 days.” Said Christopher Kilcullen, founder of AmericasGotProduct.com.

Test Drive America is a job creation event that can generate billions of dollars in economic stimulus with no tax payer dollars.  This event is designed to create thousands of jobs, build consumer confidence and consumer spending that ripples back through this economy.  By simply making better choices, our spending will create jobs, today.

The multiplier effect of one job in the auto industry is 10 additional jobs created, according to Kim Hill from The Center for Automotive Research.  That does not even touch the additional jobs created in the service industries as these companies and their employees buy computers, pizza, clothing and  the travel industry with both business and vacation travel.  This is simple supply and demand, basic economics and represents the low hanging fruit of job creation for the US economy!

Every purchase produces paychecks and with the national debt now at $54,000 per person it is time we start putting more Americans back to work and off unemployment to help pay down this debt.  We the people have to accept some of the responsibility for this recovery and become more intentional about our nations future.

AmericasGotProduct.com is a web site designed to celebrate the products and companies that support this economy.  This is cause marketing that the American consumer can get excited about and our rating system helps the consumer identify products that produce paychecks.  Along with our rating system, we are highlighting the community behind the product to hep the consumer see real people and real economic have an impact on.

“The American public has an unprecedented sense of concern for the future. AmericasGotProduct.com provides a resource to help empower the consumer to leave a positive economic footprint with their purchases” said Kilcullen.  Mr. Kilcullen, who spent most of his career in franchise sales and development in the real estate and hotel business created this site out of a passion for this country and a frustration for this economy.

“I am not a politician, not an economist not am I in the manufacturing business, just an average American who wants his economy back.  We have to start looking at our nation as a business.  Last year alone, we lost $500 billion through trade alone and that has to stop,” say Mr. Kilcullen

The following blog post by Justin Elliott appeared at Salon.com here.

Donald Trump has emerged in recent years as the nation’s foremost China basher, going after the Asian superpower for undervaluing its currency and for taking American manufacturing and jobs. So it’s at least ironic — and at most an example of gross hypocrisy — that Trump’s own line of men’s wear, the Donald J. Trump Signature Collection, is manufactured in China.

I discovered this after walking from Salon’s offices to the large Macy’s in midtown Manhattan, where an entire section is devoted to the Donald J. Trump Signature Collection of suits and ties. This particular corner of the store is decorated with an oversize portrait of Trump; the line promises to provide “the pinnacle of style and sophistication” and “the necessities to be boardroom ready all of the time.”

Here is the tag on one of the Trump shirts:

Yes, that says “MADE IN CHINA.” (That pink dress shirt retails, by the way, for $69.50.) Other pieces were made in Mexico and in Bangladesh.

Now, Trump has long complained about Chinese currency “manipulation” and has called for a large tariff on imports of products from China in order to bolster U.S. manufacturing. But he has also gone further, urging Americans to buy fewer products from China, claiming that Chinese goods are shoddy and maintaining that, in his own business dealings, he favors American manufacturing over Chinese manufacturing.

All of which makes it a little strange that Trump’s own brand of clothing is made in China.

The phone number listed on Trump’s website for the Signature Collection goes to the “licensing coordinator” at the Trump Organization, Amy Steinfeldt. She did not immediately return a call. But it appears that the shirts and ties are made by the Phillips-Van Heusen Corp., which owns a license on the Trump brand.

Here’s a typical Trump exchange on China from a year ago on Fox with Neil Cavuto (via Nexis):

TRUMP: And you know, again, the problem with our country is we don’t manufacture anything anymore, I mean, very little. China is doing — I just bid furniture out on a major project I’m doing, and I have six bids. Every bit of furniture is being made from China. The one from America is more expensive because of all the other problems that have been caused by us. So you know, if…

CAVUTO: Well, why wouldn’t you give — even though it’s expensive, why wouldn’t you give the American company the job?

TRUMP: I did.

CAVUTO: You did?

TRUMP: I have to tell you, I did, because you know what? They actually make a much better product. I mean, the product is 100 percent better. The product, the stuff that’s been sent over from China is — it falls apart after a year and a half. It’s crap.

In the case of his clothing line, of course, a Chinese factory was given the job.

Here’s another telling exchange between Trump and Fox’s Neil Cavuto in January:

CAVUTO: We start — I would imagine a President Trump would then start urging Americans to buy less from China.

TRUMP: Absolutely.

CAVUTO: Trade war ensues.

TRUMP: Well, I would urge that anyway.

Trump also told CNN last year: “When it comes to manufacturing, China is making all of these products. And they could be made in North Carolina, they could be made in Alabama, they could be made in lots of our places. And right now they’re not. Personally, I’d tax China very, very heavily. ”

A spokesman for Trump did not immediately respond to a request for comment. I’ll update this post if Trump’s people get back to me.