Bob Marshall Just Doesn’t Get It

VA Blogger over at Too Conservative has a really good post up that just devastates Bob Marshall’s position on trade. But he leaves out one other important point. Marshall’s blathering about how Value Added Taxes hurt American exporters is simply incoherent.

A VAT tax is essentially a tax on the value added to a product at each step of the manufacturing process. It’s a lot like a sales tax.

Here’s what Bob Marshall has to say:

As of January 2007, the U.S. traded with 137 countries which use a “Value Added Tax” or VAT on imports from the U.S. into their country, yet goods and services from foreign countries sold in the U.S. are not subject to VAT, resulting in unequal trade conditions which hurt U.S. based producers.

Countries with VAT taxes often rebate the VAT when their manufactures sell products to the U.S. in effect subsidizing most imports into the U.S. although U.S. exports to VAT countries are not eligible for VAT rebates.  In 2005, 94% of U.S. exports and imports were traded with VAT nations.  Foreign manufacturers trading in the U.S. received $239 Billion from their governments for VAT rebates on exports to the U.S.

In 2007, European Union nations imposed an average tariff of 4.4% plus 19.4% VAT equivalent tax for a total levy of 23.8% on products imported from the U.S.  Under present World Trade Organization rules, imports into the U.S. are charged an average tax of 1.3% with no VAT penalty.

Now, that sounds pretty unfair, right? But here’s the gigantic problem with Bob Marshall’s logic. Domestic companies in VAT countries have to pay the VAT too. So there while there is a “total levy of 23.8% on products imported from the US,” there is a 19.4% levy on products that are made domestically. The VAT does increase the cost of US goods in other countries, but not relative to any other goods made there. It’s the 4.4% tariff that increases the cost of US good relatively. And while the tariff should ideally be zero, it’s pretty small, especially compared to the problem Marshall makes it out to be.

Marshall’s complaint that other counties rebate or exempt the VAT on exports is similarly illogical. The US doesn’t have a VAT. We have a sales tax instead. Foreign goods aren’t exempt from the sales tax, just like US goods aren’t exempt from foreign VAT taxes. The fact that countries exempt exports from the VAT tax doesn’t give them an advantage in trade, it just levels the playing field. US companies don’t get charged a sales tax on exports. If foreign companies were charged the VAT on exports they would be taxed twice before they got to US consumers, both at home with the VAT and here with the sales tax.

In short, both US and foreign companies pay the VAT tax in foreign markets. Neither US nor foreign companies pay the VAT tax in the US market, but they both pay the same sales taxes. That’s not an unfair barrier to trade, thats a level playing field. To suggest otherwise just betrays Marshall’s ignorance of the issues.

Playing Politics with Trade

I’m a little late coming to this, but last week’s New Yorker article “The Free Trade Paradox” is really outstanding. One of the most disappointing things about this primary season for me was watching the Democratic presidential candidates parade around the country talking about their deep seated hatred of NAFTA and their desire to “renegotiate” it and their stances against the Columbian Free Trade Agreement. One of the best things that Bill Clinton did in his presidency was to build and expand a consensus around the concept that trade and globalization are good for the United States. Now, less than 8 years after he left office, Democrats are once again running against trade to try to win working class votes. Instead of explaining to voters why trade is good for them while working to blunt the impact of globalization on those who lose out, Democrats have chose the route of demagoguery. Fortunately James Surowiecki does a good job of deconstructing the arguments against free trade:

It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad. In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

The Democrats opposition to trade really is about trying to swindle people who think trade is bad. Just about no one thinks that Obama or Clinton are really opposed to free trade. Their advisers are all broadly pro-trade, especially Obama’s Austan Goolsbee, who got in trouble for suggesting to the Canadians that Obama isn’t really serious about renegotiating NAFTA. But what people miss is that trade agreements didn’t really hurt America:

The first problem with what the candidates have been saying is that Ohio’s troubles haven’t really been caused by trade agreements. When NAFTA took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.

What changed wasn’t NAFTA. It was the rise of China and India as economic superpowers. There’s not a lot we can do to counter than, beyond helping people who are hurt by outsourcing to China and India get back on their feet. Similarly, Democrats have recently come out against the Colombia Free Trade Agreement. While CFTA isn’t an ideal agreement, it seems to be no-lose for America. Per Matt Yglesias, the deal doesn’t really involve any substantive concessions on America’s side, while Colombia makes all sorts of concessions to US interests. That should be a no-brainer. But because of Democratic paranoia over “free trade” Democrats are opposing the deal.

Democrats really need to come to a more sophisticated understanding of trade. Obstructionism and outright rejection of trade deals are bad for everyone and the focus on “environmental and labor standards” is really just a way to oppose every trade agreement that comes along. Obama seems to get this. The question is whether he is brave enough to say it.