- - Tuesday, July 24, 2012


Which China-related trade and offshoring outrage should be raising more American hackles? One that entails about $904,000 in merchandise that objectors sayshould be Made in the USA, not the PRC? Or one that last year alone artificially juiced nearly $280 billion worth of Chinese exports to the U.S. to the detriment of American-based competitors?

It sounds like a no-brainer. But Americans and their political system have fulminated almost entirely over the former, and in the process, they have revealed why widespread popular alarm about jobs and wealth moving to China and elsewhere overseas has produced so little official action.

The $904,000 brouhaha was triggered two weeks ago by the U.S. Olympic team’s Ralph Lauren-designed, Chinese-made dress uniforms. ABC News reported that figure as the value of the yacht-club ensembles the American contingent will wear at the games’ opening ceremonies.

Yet the $280-billion affront is practically unknown. A new study by Swiss economists indicates that’s the annual value of Chinese merchandise exports to the United States that Beijing subsidizes by rebating value-added taxes (VAT) paid by the companies that produce them. The result: major price advantages for fully 70 percent of the Chinese-made products sold in America for reasons completely unrelated to free-market forces, much less free trade.

According to the Swiss authors’ methodology, this scheme subsidized more than $1.3 trillion of China’s global exports in 2011. No doubt that’s why they call the practice “probably the largest ‘beggar thy neighbor’ protectionist policy in the world.”

Yet the gargantuan U.S. figure (based on America’s purchases of one-fourth of China’s total goods exports each year) may not tell even half the story. The study apparently didn’t measure the value of U.S. goods shut out of the Chinese market by the same VAT system. Because all products to be consumed in VAT countries receive such levies, imports from VAT-less America carry this Chinese tax burden as well as the U.S. tax system’s full burden. The VAT rebates, however, liberate Chinese exporters from most Chinese taxes, and the U.S. tariffs they face typically are marginal at best.

Nor is China the sole offender. At last count, 177 U.S. trade competitors employed VATs. When those countries trade with each other, the discriminatory VAT effects tend to be neutralized. But as in the China case, VAT-less America’s commerce with any of them gets hit coming and going.

Trade lawyer Terence P. Stewart, a pioneer in researching VAT trade effects, estimated that these policies generated more than 56 percent of America’s immense $646 billion trade deficit in goods in 2010 — a persistent shortfall that keeps weakening the nation’s already anemic economic recovery. And China’s VAT system was responsible for more than 17 percent of those losses.

Even worse, VAT-related damage has been inflicted for decades. Yet although the news on the Olympic uniforms sparked an uproar and demands for immediate fixes, especially on Capitol Hill, longer-standing VAT complaints by numerous domestic manufacturers have sparked mainly yawns. In 2007, congressional briefings by U.S. Business and Industry Council President Kevin L. Kearns helped produce a promising legislative solution. But even many sympathetic lawmakers balked, and two subsequent versions fared little better.

More encouraging is the Commerce Department’s June decision to count VAT rebates when calculating duties on dumped imports from non-market economies like China. But such trade-law-based approaches are inherently piecemeal and reactive, and this one may be overturned by the World Trade Organization’s VAT-using majority.

Obviously, the China and broader trade-policy overhaul needed to stem and reverse offshoring faces many obstacles — especially the clout of multinational companies that supply America from abroad and thus benefit at the domestic economy’s expense from foreign subsidies like VAT rebates. But the Olympics and VAT episodes reveal that the priorities of many avowed offshoring critics need overhauling, too.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website, www.AmericanEconomicAlert.org.

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