Buchananomics for the Dems?


Which Democratic presidential candidate will pull the trigger? Which Democrat will come right out and advocate some old-fashioned protectionism–or "economic nationalism," as some trade warriors like CNN's Lou Dobbs prefer to call it? While both parties have grown more skeptical of trade, the Dems are certainly more so, especially after the last election, where many of their new House and Senate members ran with an anti-free-trade agenda. Now as I noted in my last posting, the recent Democratic presidential debate really didn't touch too much on economic issues. And even if it had, perhaps none of the candidates would have gone beyond the usual: calling for trade agreements to have more labor and environmental standards. But some "fair trade" advocates have gone beyond those ideas, pressing hard for a moratorium on new trade agreements and even reopening old ones, such as the North American Free Trade Agreement, so they can be "fixed." Here is one interesting idea, suggested to me by non-Democrat Patrick Buchanan in a recent appearance with him on CNBC's Kudlow & Co. It goes like this, as Buchanan recently explained:

"While the United States has a corporate income tax, our trade rivals use a value-added tax. At each level of production, a tax is imposed on the value added to the product. Under the rules of global trade, nations may rebate VAT levies on exports and impose the equivalent of a VAT on imports. Assume a VAT that adds up to 15 percent of the cost of a new car in Japan. If Toyota ships 1 million cars to the United States valued at $20,000 each, $20 billion worth of Toyotas, they can claim a rebate of the VAT of $3,000 on each car, or $3 billion–a powerful incentive to export. But each U.S. car arriving at the Yokohama docks will have 15 percent added to its sticker price to make up for Japan's VAT. This amounts to a foreign subsidy on exports to the United States and a foreign tax on imports from America. The total tax disadvantage to U.S. producers–of VAT rebates and VAT equivalents imposed on U.S. products–is estimated at $294 billion. How could we level the playing field? Simple. Impose an "equalizing fee" on imports equal to the rebates. Take the billions raised, and cut taxes on U.S. companies, especially in production. Create a level playing field for U.S. goods and services in foreign markets, and increase the competitiveness of U.S. companies in our own home market by reducing their tax load."

More thoughts later on the ways different domestic tax systems affect international trade, but whenever someone talks about trade subsidies or trade sanctions, you need to keep in mind the primary principle espoused by the late economics journalist Henry Hazlitt: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

And in a globalized economy, groups can be more than just one thing. There aren't just U.S. producers and foreign producers. American companies may well be importing components and materials that go into the domestically sold products. So making those imports more expensive hurts those firms, not to mention making products more expensive for consumers. As trade expert Daniel Ikenson from the free-trade Center for Trade Policy Studies noted to me recently, "As a purported champion of U.S. manufacturing, Mr. Buchanan should want to avoid taxing producers' inputs and raising their costs of production. Since U.S. producers account for about 50 percent of all U.S. imports, that would be the precise impact of the equalizing fee. Countries that refund the VAT tax upon exportation are simply subsidizing U.S. production." Would a parallel cut in corporate taxes fully offset the increase in import prices? Maybe for companies, maybe not–but certainly not for consumers.

international trade
Buchanan, Pat

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