In this installment, we look at unfair trade practices.
Now mind you, I’m a free-trade kinda guy. I’m a huge believer that free-trade practices provide competitive pressures that force companies to provide better products. And we’ve seen this happen with the Japanese invasion in the 1970s. The US automakers got complacent in making crap. Along come the Japanese, with their focus on constant quality improvement, and gave the sedentary US auto sector a good run for its money.
As it stands right now, US automakers make cars that are as good, if not better, than what the Japanese make. You’ll never hear this being said, because the major media outlets are more focused on the tag-line that domestic cars suck. The fact is cars from Ford, GM, and Chrysler have come a very long way from even the quality improvements of the 1990s.
This is a prime example of how open markets, and competition works.
Unfortunately, the competitive advantages are skewed against domestic automakers. Much of this is the fault of government.
I was keyed into this by a radio interview I heard with Duncan Hunter, while he was running to be the Republican presidential nominee in 2008. His biggest beef is how foreign governments punish the Big Three overseas, while taking advantage of seemingly draconian tax policies in this country. Human Events had an interview where he detailed how these unfair tax strategies ate implemented:
I believe in supply-side economics. I supported the Reagan tax cuts, the Bush tax cuts, and would support extensions of those—because all of these tax cuts, a number of them, have sunsets and extensions are required. That’s where I’m on common ground with the most other Republicans. But one place where we differ is trade.
We’ve practiced what I call “losing trade”—deliberately losing trade—over the last 50 years. We need to reverse that. Today, other countries around the world employ what they call a value-added tax, in which foreign governments refund to their corporations that are exporting goods to the United States the full amount of their value-added taxes that that particular company pays in making a product. They subsidize them. Japan’s VAT, I think, is 5% or 6%. I believe China’s is 17%.
When American products hit their shores, they charge a value-added tax going in that is the same amount. So they enact a double hit against American exporters. One is that they subsidize their own imports going out, and the second is that they tax us coming in. The United States doesn’t do this.
There is little doubt that even the Founding Fathers would agree that one of the first responsibilities of the federal government is to make sure that US companies are being given a fair shake when it comes to importing and exporting goods. In fact, the federal government has done precious little to provide equity in this arena.
Another tactic used by foreign governments is currency manipulation. Both China and Japan “fix” their currency rates so as to maintain currency levels that are below that of the US dollar. How does this work? Well, a paper by the Automotive Trade Policy Council details the purpose of currency rate manipulation:
Currency manipulation is a policy used by the governments and central banks of some of America’s largest trading partners to artificially set the value of their currency to gain an unfair competitive advantage for their exports.
The IMF defines currency manipulation as “protracted large-scale intervention in one direction in the exchange market.” Since 1998, Japan has spent $505 billion intervening in currency markets more than 160 times. Japanese government officials also continue to send strong messages to the markets to keep the yen artificially weak. This astonishing record, by any standard, is the classic case of disruptive, trade-distorting currency manipulation.
Countries manipulate their currencies to protect jobs and promote exports. This comes at the expense of taking jobs and siphoning economic growth from their trading partners. Japan has used immense resources to maintain the yen at artificially weak levels and avoid making much-needed domestic economic reforms. This weak yen policy has given its exporters a huge subsidy and competitive advantage in the U.S. market, and in its wake, created waves of disruption and harm to U.S. manufacturers.
Now you may be saying that because a majority of Japanese cars are manufactured in the US, this currency fixing isn’t a big deal. Think again:
Japan’s artificially weak currency policy provides an average subsidy of thousands of dollars for each and every car it exports to the United States. For example at 116 yen to the dollar, a luxury sedan imported into the U.S. can receive an $8,000 subsidy from the government of Japan. Japanese cars produced at plants here in the U.S. are also partially subsidized because of their high imported parts content.
Many people believe that Japanese cars and trucks sold in the United States are almost exclusively built in the United States. However, Japan is still exporting nearly 2 million cars and trucks annually into the U.S. – the same level as twenty years ago. In contrast, last year just 15,565 cars were imported into Japan from the U.S.
China uses the same policy. China does not allow the importation cars made in the US, and US manufacturers MUST produce cars to be “sold” in China (let us not forget that China is still a communist country, so the word “sell” has a funky sort of connotation) within the host country. That literally takes money from the US, and places it solely in China.
The Japanese and Chinese are flagrant about the manipulation of their currencies. In a fairly recent Bloomberg report:
Japan’s finance ministry may come under pressure from the nation’s companies to resume sales of the yen to protect their income. Hiroshi Okuda, head of Japan’s largest business lobby group, yesterday said that “measures may have to be taken” to stem the yens’ gains. A strong yen makes the country’s dollar- denominated exports less competitive and reduces repatriated earnings. Japan hasn’t sold its currency since March 2004.
“Excessive and disorderly moves in foreign exchange rates are undesirable because they may hurt economic growth,” Tanigaki said at a regular press conference in Tokyo today. He declined to comment on whether Japan may sell the yen.
“Disorderly moves” in foreign exchange rates, like the kind the US dollar has, is considered “bad business” by the Japanese who want to make sure their products hit US shores cheap, and thus they are guaranteed economic growth. Nice.
Even with free trade agreements between foreign countries, an artificial imbalance exists. For example, consider the current problems with the Korean Free Trade Agreement:
Advocates of FTAs argue that these model agreements level the playing field so that U.S. companies, and U.S. workers, can compete in markets free of distortions. The U.S.-Korea FTA is a perfect example of why such agreements fail to live up to their expectations. First, Korea, as does China, uses an undervalued exchange rate to maintain its competitive position in the U.S. market and in third country markets. Six months prior to the initiation of negotiations on an FTA, during the pre-negotiations stage, Korea began to appreciate the Korean won by almost 15% until it reached its peak just prior to the conclusion of the negotiations. Three months later, the currency depreciated until it was once again at the initial exchange rate. Even to the unpracticed eye, Korea’s exchange rate movements have been convenient in the extreme and indicate how Korea is likely to manage its exchange rate to achieve maximum commercial advantage. Whether intended as a means to gain an unfair competitive advantage or not, Korea’s undervalued exchange rate subsidizes its exports, subsidizes foreign direct investment, and taxes foreign imports into Korea.
Second, after years of observing and negotiating with Korea over a wide range of products and services, I have learned that Korea uses non-tariff barriers, particularly standards, as a means of providing an advantage to its domestic producers. Because the Korean market is relatively small, foreign suppliers are at a disadvantage. As a share of their sales, the Korean market is not large enough to justify meeting those extraordinary standards requirements and, when standards are met, the cost per unit is high. When taxes are added to the product, those taxes are applied to the full cost of the product, thus increasing the absolute price disparity between products. U.S. companies, and thus their workers, must absorb much of those increases through lower profit margins and stagnant wages.
Third, in the case of automobiles, Korean tax authorities have been known to harass purchasers in Korea of foreign automobiles, a practice which has been substantiated by European and North American producers. This harassment has discouraged Koreans from purchasing foreign-made automobiles in addition to other products. The impact on automotive trade is more extreme because of the visibility of those products.
As I’ve already pointed out, countries like Japan, Germany, and Korea directly subsidize their auto sectors. In many instances, they provide subsidies for the purchase of home-grown autos. When was the last time the federal government offered you a nice, fat check to buy a Ford or a Chevy?
I’m not even going to touch the fact that these same countries – Japan, Germany, China, and Korea – all have nationalized healthcare systems, whereas the US is privatized. Thus, citizens of these countries bear the burden of paying for the system (which usually provides poor services in general when compared to US standards of healthcare), and the companies reap the benefit of being able to sell low-cost products to this country.
Now, the liberal response is to play the same game. Their first move would be to nationalize healthcare, subsidize industries, and place us all on a level playing field. This would be disastrous. The key to this prediction is based in the fact that barriers to US good exist in the first place.
If US goods were so terrible, and so expensive, no trade barriers would be required in places like Japan and South Korea – virtually no one would buy our goods. That’s essentially what happened when the Japanese first started selling to the US; their stuff was considered junk. Since then, they’ve learned a thing or two about how to produce quality products. This is because they’ve had to deal with the American notion of competition. If these nations had nothing to fear, they would feel no need to protect their economies. They know, however, the US workers and companies, despite not having all of the subsidies provided to their citizens and businesses, can outproduce them. We can flood their markets with less expensive goods at comparable levels of quality.
The key is for the federal government to selectively start putting up conditional trade barriers to goods sold in this nation. Is this protectionism? Yep. Free markets and free trade doesn’t work when the “in” door swings freely, and the “out” door is nailed shut. Start cutting off access to the markets, pinch off the revenue streams, and we’ll see how quick these countries decide to play fair.
When the wolves polish off the sheep faster than the sheep can reproduce, the end result is the decimation of both parties. This is what’s presently going on in the US.
In the end, trade that is both fair and free benefits everyone.