Trade Freely with China
by Fred E. Foldvary, Senior Editor
The US government has put up new trade barriers against imports of textiles from China. The quotas will make clothing more expensive for American consumers, but will do little to protect American jobs. American textile manufacturing has been automating production, replacing labor with machines. Tariffs and quotas on imported clothes increase the profits of the owners of the firms, but do not protect jobs in the long run.
Free trade does not reduce employment. It shifts employment to more efficient industries. The comparative advantage in light manufacturing is now outside the US, mostly in Asia, especially China. The US has a trade deficit of over $100 billion with China, but protectionism is not an effective remedy. Cheap imports from China are a great benefit to Americans, as they have kept prices low. The competition keeps American companies efficient.
Some analysts blame the Chinese currency for the trade deficit. The yuan has been pegged to the US dollar since 1994. While the dollar has depreciated relative to the euro, boosting American exports to Europe, the exchange rate with China has remained fixed. These analysts claim that the yuan is undervalued, so that if left to the market, the yuan would appreciate, making Chinese exports more expensive in dollars, reducing imports into the USA.
The Chinese government has resisted calls to allow its currency to appreciate. The Chinese banking system is fragile, and sudden shifts in policy could cause large currency flows and instability. It would probably be helpful for the global economy for China to gradually allow its currency to float on the market within slowly increasing bounds. Nevertheless, an artificially fixed currency is not a good excuse for trade barriers.
The US has a competitive advantage in entertainment and computer software, both big exports. But movies, songs, and computer programs can be stored as bits in computer disks and easily copied. So many billions of dollars of sales are lost to illegal replication. Many American movies are posted on the Internet even before the official release. Encryption does not help much, because ultimately the consumer needs to hear the song or view the show, and at that point, the text is able to be copied. Tighter restrictions on copying software induces the Chinese and others to develop or adopt alternative software.
Despite such problems, much of the blame for the US trade imbalance falls on US government policy. The US government's budget deficit is now several hundred billion dollars per year, and much of it is financed by foreigners, especially Asians. What is happening is that Americans buy hundreds of billions of dollars of consumer goods from China, paying with dollars that the Chinese then use to buy US treasury bonds. In effect, the American occupation of Iraq is being financed by China and other lenders.
US tax policy makes exports more expensive, reducing exports. Income taxes add to the cost of labor and capital goods. By making labor more expensive, income taxes shift consumption to imports and induce companies to substitute capital goods for labor. Tax policy makes this even worse by granting tax credits for capital goods but not for labor. The increase in capital goods does not create American jobs if these goods too are imported.
It is as though the chiefs of government deliberately want to punish companies for hiring labor. No wonder companies are shifting customer service to India. Millions of American jobs are lost because government taxes and regulations have priced low-skilled American labor too high to hire. But instead of demanding a change in the tax structure, labor leaders cry for trade barriers.
The income tax is fast becoming an antiquated 20th-century relic not suited to the global economy of the 21st century. The global computerized telecommunicating economy of the 21st century has shifted the competitive advantage to countries with low trade barriers. Sales and income taxes are barriers to exports as well as to domestic production. Efficient 21st-century economies require taxes that do not make capital hide, shrink, or flee. The only resource that fits that requirement is land value or land rent.
If politics makes it impossible to tax land value, then the next-best general alternative is a value-added tax. This taxes the value added to each stage of production, as firms sell raw materials, then producer goods, and finally consumer goods. The competitive benefit of the value-added tax is that it is straight-forward to deduct the tax for exports. It still adds an excess burden for domestic consumers and the economy, but at least it does not kill exports.
US states and the federal government have to scrap the antiquated 19th-century sales taxes and the obsolete 20th-century income taxes, and shift to sleek 21st-century land-value taxation. Nothing else will solve the trade problem.
-- Fred Foldvary
Copyright 2003 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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