We ought to compete in globalization by eliminating the subsidy to offshoring; instituting a VAT tax that's rebateable to equalize our disadvantage in international trade, and activate the Secretary of Commerce's list of those items critical to our national security. This will put America back to work. But the conventional wisdom in Washington is that the only way to compete in globalization is to educate. It's Washington that needs the education.
- Senator Fritz Hollings
Be sure to read our illustration of how North American-built products are priced out of serious consideration by European Tax and Tariff schemes.(Click the image on the right)
In the wide-ranging debate about the bailout of the Big Three American automakers, unfair foreign trade practices have scarcely been mentioned. So many are so anxious to blame American businesses and American labor first -- without ever looking at the broader picture and the very un-level playing field on which we, in particular the U.S. government, force our domestic producers to compete.
Unfair foreign trade and economic practices are not "just a different way of doing business," but are conscious policies intended to distort markets and give foreign firms a competitive advantage over their American rivals. I would like to draw your attention today to just one of these unfair practices, value-added tax systems, which are used to discriminate against American cars, trucks, and auto parts, as well as thousands of other products, by over 150 of our trading partners.
Most of America's trading partners raise a substantial amount of their tax revenues from a value-added tax. This tax is levied at each step of the production process -- whenever value is added to a product and that product is passed up the assembly chain. The VAT is ultimately incorporated in the final price of the product and paid by the end consumer. However, if the product is exported, the producer gets a big break: the tax is rebated. In effect, the VAT functions as an export subsidy. It is also a barrier to entry to foreign markets because it is added to the cost of foreign goods coming into those markets.
The unfairness of the VAT occurs when a VAT-country product comes into a non-VAT country -- like the United States.
If VAT countries trade with each other, it is a wash. Each country rebates the VAT for its exported products and imposes the VAT on imported products. There is rough parity. But in the United States, there is a free ride for foreign products produced under a VAT system -- because we do not levy a VAT at the border that compensates for the export rebate the product received at home. American-made, domestic products sold in our market do contain the cost of our taxes, but exported VAT products don't contain the cost of taxes at home or here.
This VAT disparity exists on cars, trucks, and auto parts imported into the United States, which compete with the Big Three and domestic parts makers in our market with the help of the VAT export subsidy from their home countries.
When comparing a German and American car, each offered to the consumer in its home market for $20,000. When the German car is exported to the United States, the VAT taxes are rebated and it costs $17,885 here -- a price advantage of roughly 10 percent due only to the difference in tax systems, not corporate competitiveness.
The VAT rebate gives the German automaker a tremendous advantage in our market. Please note that in the same example, the $20,000 American car exported to Germany is saddled with the VAT at the border -- which is imposed not just on the base price of the car, but the shipping and insurance costs as well -- and winds up costing $25,792 in Germany, while the German car remains at $20,000 in its home market. Small wonder that Detroit cannot export effectively from the United States but must set up foreign operations to counter the effects of the VAT (and currency manipulation and many other unfair foreign trade practices).
In sum, in competition with a foreign VAT country product, the American-made product winds up more uncompetitive in its home market, as well as in the foreign VAT country market. This disparity is reliably estimated to place an extra $290 billion burden on American manufactured goods and $85 billion on U.S. services -- or roughly half our yearly trade deficit.
In the next session, other members and I intend to introduce legislation to address this huge problem. Once we in the Congress place the Big Three -- and all domestic producers -- on an equal tax footing, American firms will take back lost market share here at home, expanding the domestic economic base to generate more jobs (with good benefits), profits, income -- and tax revenue. Our legislation will promote domestic economic growth and will keep American producers competitive both at home and overseas. It is high time that Congress and the executive act in concert quickly and effectively to eliminate the unfairness of the VAT and the competitive advantage it provides foreign rivals. This simple step would go a long way to assisting the Big Three and their parts suppliers become much more competitive.
Mike Michaud, a Democratic congressman from Maine, along with New Jersey Democratic Rep. Bill Pascrell, and Republican Reps. Duncan Hunter of California and Walter Jones of North Carolina, introduced a bill to negate the VAT disadvantage to U.S. producers. Ohio Rep. Betty Sutton was a co-sponsor. They intend to reintroduce it in the next Congress.