Heads, I Win; Tails, You Lose

by David Trumbull

April 20, 2007

"How can I compete against that?" That was the question a representative of an American company was putting to a U.S. Department of Commerce official. The occasion was the Exporters Textile Advisory Committee meeting last week in Washington, and the speaker was addressing the two radically different systems under which he and his foreign competitors operate.

To understand why we have lost three million U.S. manufacturing jobs since January 2001 you must understand how the international trading rules favor U.S. imports of foreign goods and penalize U.S. exporters. Take the yarn spinner I heard from at the Washington meeting. He cannot sell his product in China because even if he can meet the price of locally-produced Chinese yarn (which benefits from the low wages and environmental standards in China and the government subsidies such as free electricity) he is faced with paying the 17% Chinese valued-added tax (VAT) on top of the 10% import duty. He has already paid the full cost of U.S. federal, state, and local taxes, and will have to pay Chinese tax in addition.

On the other hand, a Chinese company can ship yarn to the U.S. and pay just the import duty (also about 10%). The U.S. has no VAT or other taxes imposed on imports comparable to the income tax, property tax, and other taxes paid by domestic manufacturers. Furthermore, that Chinese company can get a Chinese government refund of the VAT when the company exports to the U.S.

Simply put, we tax our own industry at a higher rate than we do imports. The Chinese --and every one of our trading partners-- do the opposite. Their tax system favors their own industries over imports. Our manufacturers exporting to VAT countries pay the tax in both countries. Their manufacturers exporting to us pay little tax in either country. Heads they win; tails, we lose.

Next week Representative Bill Pascrell [D-NJ], Michael Michaud [D-ME], Walter Jones [R-NC] and Duncan Hunter [R-CA] are going to introduce the Border Tax Equity Act in order to remedy the VAT Inequity. The bill requires the U.S. Trade Representative to certify to Congress whether the U.S. has achieved the goals of equitable border tax treatment in WTO negotiations, and, if such goals have not been met, to authorize (1) imposition of a tax on imports from any country that employs indirect taxes and grants rebates of same upon export, and (2) compensatory payments to eligible U.S. exporters to neutralize the discriminatory effect of border taxes paid by such exporters.

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