“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR JANUARY 12, 2017
This blog post contains several articles about recent developments in the Trump Transition and its impact on trade. January 20th, inauguration day, is only 8 days away and Trump will be President. The transition, however, moves quickly.
Although the past appointments of Governor Branstad of Iowa as Ambassador to China and Wilbur Ross to Commerce, two persons who know China well, indicate no potential trade war, the two latest appointments of Bob Lighthizer to USTR and Peter Nararro as Chairman of the National Economic Advisors indicate that protectionism, especially against China, is back on the menu.
Trump may be trying to use uncertainty to create leverage and a deal with the Chinese and other governments on trade and other topics. Bob Lighthizer will be the hammer of the Trump trade policy that will negotiate those deals.
But the next question is how will Trump help revive manufacturing in the United States and help the Rust Belt states, Wisconsin, Michigan, Pennsylvania and Ohio, which put him in the White House?
One answer may be taxes, the border adjustment kind, which may, in fact, be a response to the Value Added Taxes levied on US exports. Trump and Congress have apparently decided to fight fire with fire—mercantilism to fight mercantilism, border adjustment taxes to fight value added taxes, which put US exports at a major disadvantage.
No longer will the US take a passive approach to foreign trade barriers to US exports. Trump and his team will raise US trade barriers to counter the trade barriers erected by other countries. Reciprocity is the name of the game.
Moreover, the recent noises from many US companies indicate that they like what Trump is doing and manufacturing will move back to the US. Low corporate taxes, less regulations and the threat of trade barriers will bring manufacturing back to the US. In fact, it may even encourage Chinese and other foreign companies to move production to the United States. Trump will do everything possible to increase jobs in the United States.
Also the US China Trade relationship is getting out to an interesting start in 2017 with the filing today, January 12, 2017, of a major WTO case against China on Aluminum.
Hopefully Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them, will expand. But TAA for Companies is not TAA for Workers. They are very different programs.
In addition, with regards to the recent WTO complaint China filed against the US and the EC for failing to give it market economy status under their antidumping and countervailing duty laws, Canada and Japan have now jumped into the case because of the impact on their trade laws.
Under the Universal Trade War theme, attached are newsletters from Roland Zhu of the Allbright Chinese law firm on Chinese trade law.
Finally, a recent 337 intellectual property case was filed against China on Basketball Backboard Components.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address email@example.com.
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TRADE AND TRADE POLICY
TRUMP’S APPOINTMENTS NOW BECOME MORE PROTECTIONIST AND TOUGH ON TRADE—BUT MAYBE THAT IS WHAT IS NEEDED IN THIS ENVIRONMENT
After the first two appointments of Governor Branstad as ambassador to China and Wilbur Ross as new Commerce Department secretary, the two recent appointments of Bob Lighthizer as United States Trade Representative (“USTR”) and China critic, Peter Navarro, to head the National Trade Council indicate that the Trump Administration will take a much tougher line on trade and China. Full disclosure in the late 1980s, as described more below, I worked for Bob Lighthizer at Skadden, Arps, and he is certainly a much tougher negotiator than any trade negotiator China or other countries have dealt with before.
Recently on Bloomberg news, I heard one bank spokesman say that their research group gives a 25% chance that under Trump the US will return to a Smoot Hawley situation, such as in the 1930s. Although Lighthizer is a very tough guy, he is also a very experienced trade lawyer with substantial contacts in Congress so hopefully he will be pragmatic enough not to simply put up the protectionist walls and return the US to the 1930s.
But let there be no mistake, the Trump Administration will erect barriers to imports to offset the many trade barriers other countries, including Mexico, China and the EC, have erected against US exports. Reciprocity will be the new approach to trade policy.
USTR FROMAN ADDS A PARTING SHOT
As present USTR Froman of the Obama Administration is leaving, he issued on January 5, 2017 the attached Cabinet Exit Memo, USTR-Exit-Memo. In that Cabinet Exit Memo, Froman stated that the United States cannot withdraw from Globalization. The issue is whether the US can shape globalization so as to benefit the US. Froman also warned that if the US withdraws, the major beneficiary will be China. As Froman stated:
“The fundamental economic question of our time is not whether we can stop globalization, but whether we can use all the tools at our disposal to shape globalization in a way that helps the majority of Americans, and reflects not just our economic interests, but our values.”
Froman went on to emphasize the importance of Agreements, such as the Trans Pacific Partnership (“TPP”):
“These agreements offer a positive vision for American leadership in the global economy. This vision is vitally important, because in the absence of U.S. guidance and leadership, the world is likely to turn to alternative policy models that will put the United States at a permanent disadvantage.”
Froman went on to argue that the US can only counter China through negotiations that set high standards for the World’s trading countries:
“If we step back from a global leadership role, it will be our loss and China’s gain. This alternative vision would place a large portion of America’s industry at risk of lost exports and create powerful incentives to invest in Asia in order to sell in Asia. Should this alternative come to dominate the next generation of trade agreements, the consequence will be an erosion of economic security and opportunity for all Americans.”
Froman apparently is arguing that the trade game cannot be changed and only small changes can be made through negotiations, such as the TPP, because globalization is here to stay. Trump intends to overturn the trade policy table all together.
TRUMP PICKS AN ENFORCER ROBERT LIGHTHIZER AS NEXT UNITED STATES TRADE REPRESENTATIVE (“USTR”)
On January 3, 2017 Donald Trump announced that he has picked a very tough negotiator, Robert Lighthizer, a Skadden, Arps partner, as the next United States Trade Representative (“USTR”). In doing so, Trump stated:
“Ambassador Lighthizer is going to do an outstanding job representing the United States as we fight for good trade deals that put the American worker first. He has extensive experience striking agreements that protect some of the most important sectors of our economy, and has repeatedly fought in the private sector to prevent bad deals from hurting Americans. He will do an amazing job helping turn around the failed trade policies which have robbed so many Americans of prosperity.”
Almost 20 years ago, I worked with Lighthizer in the late 1980s at Skadden, Arps. Before joining Skadden, Arps, Lighthizer was a Deputy USTR and was legendary. One of my colleagues at Skadden told me that as a Deputy USTR when Lighthizer was negotiating with the Japanese government on a trade deal, he took one proposal from the Japanese government, folded it into a paper airplane and threw it out the door.
After Lighthizer joined Skadden in the late 1980s, Lighthizer brought in US Steel as a client and went on to represent US Steel for decades bringing many antidumping and countervailing duty cases against steel products from various countries. Being the former Chief of Staff to Senator Robert Dole, the former Senate Majority leader, Lighthizer has extremely good contacts with the Republicans in Congress.
From my personal experience with Lighthizer, he will be an extremely tough negotiator with an agenda of protecting US companies from import competition and he will not be a friend of China, but that may be a good thing. In contrast to the tough approach on trade of President Trump, Lighthizer may be the best choice free traders could get. Lighthizer is a very experienced trade lawyer, who is not an ideologue, but a pragmatic deal maker.
More importantly, Trump’s appointment of an experienced tough trade lawyer as the USTR indicates that Trump does not really want a trade war. He wants better, tougher deals more in line with US interests, such as a renegotiated NAFTA and possibly even a renegotiated TPP. Trump is seeking to hire one of Washington’s top trade lawyers to negotiate tougher international trade agreements and then enforce them more vigorously. Lighthizer, in effect, will be the hammer of Trump’s trade policy.
The desire for a much tougher trade policy is bipartisan. Many Democratic lawmakers agree with Trump and many Republicans on a tougher trade policy. On January 3rd, AFL-CIO President, Richard Trumka met with nine House Democrats to urge renegotiation of the North American Free Trade Agreement with Mexico and Canada and stating that he does not think Trump “has enough Republican support to do it, and rewriting the rules of trade is a necessary first step in righting the economy for working people.”
In response to the appointment, Senator Orrin Hatch of Utah, the chairman of the Senate Finance Committee, who knows Lighthizer very well and will hold hearings on his nomination, stated:
“Ensuring our past, present, and future trade agreements are the best possible deals for American workers and job creators is a shared goal supported by pro- trade lawmakers and the Trump Administration alike. As the incoming administration undertakes this enormous responsibility, Bob will be a critical player in ensuring that America’s trade agenda reflects U.S. commercial interests, while helping set the standard for global trade. Armed with bipartisan Trade Promotion Authority, the incoming Trump Administration has a unique opportunity to pursue new, bilateral trade pacts of the highest caliber that can be submitted to Congress for an up or down vote with no amendments. As the world and our economic competitors move to expand their global footprints, we can’t afford to be left behind in securing strong deals that will increase access to new markets for American-made products and services, protect our intellectual property rights abroad, and ensure domestic businesses can successfully compete in the 21st century global economy. I look forward to a vigorous discussion of Bob’s trade philosophy and priorities when he comes before the Finance Committee.”
Bill Brock, the former USTR under President Reagan, stated:
“He is in most ways, if not many ways, in line with Trump’s comments during the campaign. He’s very bright, he’s very aggressive.”
There was speculation prior to the Lighthizer appointment that USTR would take a secondary role in trade negotiations. In fact, Lighthizer’s appointment indicates that Trump wants to make USTR under Lighthizer’s leadership the tip of sword in changing and negotiating tough trade agreements and enforcing them. Of Trump’s trade advisors, only Lighthizer has government experience.
Alan Wolff, another former senior American trade official who represented the steel industry as co- counsel in many trade cases with Lighthizer, referred to Lighthizer’s broad knowledge of trade law and went on to state:
“Those who say U.S.T.R. will be subordinated to other agencies are mistaken. He’ll be a dominant figure on trade, in harmony with Wilbur Ross and Navarro.”
Lighthizer’s appointment is a clear indication that the Trump Administration will focus on the enforcement of trade agreements and on the letter of the law. Lighthizer is not a bull in a China shop. He is a very smart, tough trade lawyer and negotiator, and he will do everything possible to protect the US industry.
And Lighthizer will be very tough with China. In the attached 2010 statement testimony to the US-China Economic and Security Review Commission, LIGHTHIZER 2010 STATEMENT US CHINA ECONOMIC SECURITY COMMISSION, Lighthizer stated:
Misjudging Incentives for Industries to Shift Production Wholesale to China and then Ship Back to the United States. . . . In other words, supporters assumed that since the United States had been granting MFN status to China for decades, granting MFN on a permanent basis would make no significant difference to how companies would serve this market.
But this assumption failed to account for the many incentives Western companies had to bet on the other side, and use China as a manufacturing platform to serve the U.S. market. As shown throughout this paper, China practices numerous forms of mercantilism – including subsidies, currency manipulation, and government programs that encourage developing new products in China – that give companies strong reasons to move production to that country. China’s relatively weak labor and environmental policies have a similar effect. China also manipulates raw material markets in a manner that encourages manufacturers to move there. . . .
Many experts agree that our trading relationship with China presents a serious threat to our economy and the effective functioning of the WTO. How should U.S. policymakers respond to these problems? As described in more detail below, I believe they should stop being so passive, take a number of straightforward steps to mitigate the harm caused by Chinese mercantilism, and consider more imaginative steps to deal with China.
We must stop being so passive. For ten years now, U.S. policymakers have done very little as China pursued policies that have resulted in an enormous trade imbalance. This approach has not worked, and it is past time for the U.S. government to become more aggressive. . . .
Lighthizer went on to state:
Indeed, I would take the argument even further. Trade policy discussions in the United States have increasingly been dominated by arcane disputations about whether various actions would be “WTO consistent” – treating this as a mantra of almost religious or moral significance. The fact is that the WTO is built upon a framework of mutual concessions and purported mutual benefits from expanded trade and open markets. WTO commitments are not religious obligations, do not (and should not be construed to) impinge upon national sovereignty, and are not subject to coercion by some WTO police force. Viewing them as such – and implicitly establishing this viewpoint as the inviolate touchstone of all U.S. trade policy – is at odds with the structure of the WTO itself, not to mention the vociferous and repeated statements made by proponents of the WTO when it was established.
In this regard, WTO commitments represent mutually beneficial, market opening stipulations by individual countries. Where a country fails to fully implement commitments it has made, other countries are given the right to reciprocally suspend market opening commitments of their own – in an amount precisely equivalent to, and no greater than, the value of trade they have lost as a result of the derogation that has occurred. In this way, the entire WTO system is in a very real sense premised upon the assumption of relatively equal costs and benefits among and between WTO participants – whereby compliance with WTO norms is encouraged by the knowledge that derogations will result in the suspension of equivalent trade concessions. Where this relationship does not hold – that is, where a trade relationship has become so unbalanced that the threat of retaliation pales in comparison to the potential benefits of derogation – it only makes sense that a sovereign nation would consider what options are in its own national interest (up to and including potential derogation from WTO stipulations).
This need not be seen as some fundamental threat to the integrity of the WTO system. Indeed, let me state explicitly that I am not advocating that the United States leave the WTO – that body is too important to us and the global trading system. I am merely pointing out that derogation may be a common sense, economically rational analysis by participants in the system – whereby potential decisions to derogate from WTO rules give rise to compensatory rights of other parties within the system.
Indeed, such an approach is plainly anticipated by the WTO agreements and has been acknowledged by U.S. policymakers. Properly understood, WTO rules do not infringe on the ability of individual nations to make their own sovereign decisions about economic policies –subject to the rights and obligations that flow from the WTO agreements themselves and any derogation of those agreements. In this regard, U.S. officials have consistently stated that WTO commitments do not interfere with our national sovereignty, and that WTO rulings cannot alter U.S. law. These points were made repeatedly by Members of Congress during the debate over whether the United States should join the WTO. Furthermore, USTR has plainly stated that WTO legal panels “have no authority to change U.S. law or to require the United States or any state or local government to change its laws or decisions.” USTR has specifically explained that other countries cannot force the United States to comply with WTO law; instead, their only available response is to retaliate by withdrawing trade benefits . . .
In the context of U.S. China trade – whereby the United States is consistently running trade deficits viewed by virtually all rational observers as catastrophic and unsustainable – it is certainly advisable to consider all options available. To the extent that the United States were to consider more dramatic action to address the problem – such as tariffs or quantitative limitations that would arguably derogate from WTO commitments – the prospect of reciprocal denial of trade benefits by China must of course be assessed. At some point, however – where goods imports from China exceed $300 billion while U.S. exports to China are below $70 billion – one must ask whether potential retaliation from China really would or could even remotely offset the benefits to the United States of more aggressive trade measures. . . .
Of course, none of the policies I have suggested can be effective unless U.S. policymakers have the will to implement them in a strong and determined manner. For years, our economic position vis a vis China has deteriorated because U.S. policymakers have refused to take the inevitable risks associated with challenging Chinese mercantilism. As a result, we are now burdened with a trade imbalance that everyone agrees is unsustainable. Wringing our hands and hoping for the best is not the answer. We need strong leaders who are prepared to make tough decisions, and who will not be satisfied until this crisis has been resolved.
“One must ask whether potential retaliation from China really would or could even remotely offset the benefits to the United States of more aggressive trade measures.”
On the other hand, although Lighthizer’s statements show that he will be very tough on China, as certain trade experts have stated, in light of the very tough trade policy of the next President Donald Trump, Lighthizer’s appointment may be the best that free traders could hope for from this new Administration. Lighthizer is a very smart, experienced political operator with excellent contacts in Congress, especially on the Republican side of the aisle, and a tough, outstanding negotiator. But these experts also believe that Lighthizer is not a blind ideologue, but a pragmatic, rational deal maker. After driving a very hard bargain and reaching a deal, he could end up even keeping NAFTA and possibly even the TPP. Relations with China may actually improve, but only after a better deal is reached.
PETER NAVARRO TO HEAD NATIONAL TRADE COUNCIL
In another sign that the Trump Administration will take a much tougher line on China, on December 21, 2016, Trump announced that he has picked Peter Navarro, a China critic, to be the head of a new National Trade Council. A Harvard trained economist, who is a professor at the University of California, Irvine, Navarro has taken a very strong position on China. He is the author of a book, “Death by China”, which became a 2012 documentary film in which a Chinese knife stabs a map of the United States causing blood to throw. See http://deathbychina.com/. Navarro, in effect, argues that China is waging an economic war by subsidizing exports to the United States and blocking imports into China creating an enormous trade deficit.
Trump has stated that he will persuade China to change its policies by applying pressure through trade laws, designating China a currency manipulator, and, if necessary imposing high tariffs on Chinese imports. As indicated below, however, those tariffs may actually be border adjustment taxes.
In a statement, Mr. Trump described Mr. Navarro as “a visionary economist” and said he would “develop trade policies that shrink our trade deficit, expand our growth and help stop the exodus of jobs from our shores.”
On December 23, 2016, in response the China Daily stated:
That individuals such as Navarro who have a bias against China are being picked to work in leading positions in the next administration, is no laughing matter. The new administration should bear in mind that with economic and trade ties between the world’s two largest economies now the closest they have ever been, any move to damage the win-win relationship will only result in a loss for both sides.
Still, Chinese companies in the US should be on high alert to a more difficult business climate.
US TRADE POLICY MAY CHANGE AND THREATS DO NOT HELP THE US CHINA TRADE RELATIONSHIP
There is an old saying in Chinese “Bei Mi Yang Feng You Dou Mi Yang Chao Ren” (杯米养朋友，斗米养仇人) one cup of rice makes a friend, thousands of cups of rice make an enemy. Another old saying in English, give a person $5 make a friend, give a person $100 make an enemy.
Since World War II the United States has been a relatively open market and many foreign countries, including China, have benefitted. As described more below, with border adjustment taxes and the current US economic situation, that situation may well change and could change dramatically. Many countries will be very upset when the US starts to close down, in effect, favoring domestic products over imports. When markets are taken away and countries lose their bag of rice, they will not be happy.
Mexico’s peso is in free fall and has fallen to the lowest level against the US in decades. Mexico is in crisis because under pressure from Trump US companies are canceling plans to set up production facilities in Mexico and moving production facilities back to the US. Mexico is not happy.
China is upset with the Lighthizer appointment and is talking about retaliation. On January 4th, in response to the Lighthizer appointment, China’s state-run Media, the Global Times, warned Trump of ‘Big Sticks’ if he seeks a Trade War:
“There are flowers around the gate of China’s Ministry of Commerce, but there are also big sticks hidden inside the door — they both await Americans.”
When a current US China trade deficit of well over $300 billion, however, that threat rings hollow.
On January 9, 2017, State-run Chinese tabloid Global Times warned U.S. President-elect Donald Trump that China would “take revenge” if he reneged on the one- China policy, only hours after Taiwan’s president made a controversial stopover in Houston.
When the Chinese State-Controlled media, such as the Global Times, castigates Trump as an “ignorant child” and threatens the Trump Administration with Chinese retaliation, it is waving a red flag in front of a bull. The new Trump Administration will not be intimidated. It will not be bullied. Threats will not work with this Administration.
So it is a much better idea to let cooler heads prevail and negotiate. As stated above, the Trump Administration wants a deal and the Chinese government and other governments are extremely good negotiators so negotiate.
Let’s keep any Trade War at the cold war stage and not let it break out into a hot Trade War where every country, including the United States and China, are burned.
BORDER ADJUSTMENT TAXES MAY BE THE NEW TRADE PROTECTIONIST BARRIER TO IMPORTS
As stated in my last blog post, Trump and Republicans in Congress may be creating an alternative to tariffs to spur US manufacturing and that is taxes. Tariffs have become so passé. There is now an attempt in Congress to give American-made products a big tax advantage over their foreign competitors through border adjustment taxes, and, in effect, counter the value added taxes used in other countries to deter imports.
The key issue is a plan to fundamentally remake the tax system by taxing US companies based on where they sell their goods, not where the business happens to be located. As part of that, Republican tax legislators want to include what experts call “border adjustments” — new taxes on imports as well as tax rebates on exports.
Another fancy term for this new tax is “destination-based cash flow tax with border adjustment” or DBCFT. This plan would replace the current corporate tax code with something known among experts as a “border-adjustable, destination-based” tax system. Under their proposal, imports would be charged the same 20 percent tax that domestic companies would face. Exports would be excused from taxes. It would amount to a fundamental change, with the government taxing companies based on where they sell their wares, rather than where the business is located.
The way this tax would work is if a U.S. company sold a product for $100 and it spent $70 on its workers’ pay, under the Republican plan the remaining $30 would be subject to the 20% tax. That would produce a $6 tax bill. An imported version of the same product would be forced to pay the 20% tax on the entire $100 sale, producing a $20 tax bill.
The best case for a border adjustment tax is an article by Stephen Moore, an expert on economic issues at the Heritage Foundation, in the International Business Daily in which he argues that a Border Adjustment Tax, in effect, is equivalent to the Value Added Tax that countries use to kill imports. See http://www.investors.com/politics/columnists/stephen-moore-we-need-tax-reform-not-tariffs/.
As Moore states:
If America’s competitors were intentionally trying to design a tax system to destroy the American economy, they probably couldn’t come up with a dumber tax system than the way the United States currently taxes our own businesses.
To fully appreciate the stupidity of the American corporate tax, consider this simple example:
If you are an American company making cars in Michigan, you have to pay a 35% profits tax on the car made here and then if the car is sold across the border to Mexico, the Mexicans slap a 16% value added tax on the car, so it is taxed on both sides of the border. Almost all countries tax goods produced in the United States this way.
Now let us say that the auto factory is moved from Michigan to Mexico City. Now the car produced in the factory in Mexico is not taxed by the Mexicans if the auto is sold in the United States.
Even more amazing: the U.S. imposes no tax on the imported car. To summarize, the car is taxed twice if it is built in America and then sold abroad and never taxed if it is built abroad and sold here in the U.S. And we wonder why companies are moving out in droves for China, India, Ireland, Mexico and the like.
Donald Trump is right. What we have in America is not free trade. It is stupid trade with the deck sacked against American producers and workers. Our federal tax is effectively a 35% tariff imposed on our own goods and services.
It doesn’t help matters that our 35% rate is the highest in the industrial world. Yet the corporate tax- despite being onerous and complex — and despite depressing employment, investment and wages here at home — raises very little revenue for the government. . . .
To create a level playing field, the U.S. has to reconstitute our tax system. This can be accomplished by lowering the tax rate and then turning the tax on its head so we are taxing our imports, but not our exports. In other words, we should tax activities based on where they are consumed, not where they are produced.
This is called a border adjustable tax system, and here are the reasons we need to do it:
- A border adjustable tax will end all talk of tariffs and trade wars.
tariffs violate our trade agreements and often lead to retaliatory measures by other countries. The free traders will rightly object loudly to these trade barriers.
A better solution is to impose the Trump 15% corporate income tax on goods when they are brought into the U.S. and exempt from tax goods produced in the U.S. but sold outside the U.S.
In other words, our corporate tax would be based on where goods are consumed, not on where they are produced. This tax does not violate trade laws and only mirrors the valued added tax systems foreigners use to gain advantage over us. . . .
In exchange for a border adjustable tax, the U.S. should eliminate all existing tariffs and duties which can now range from 2% on shoes to 25% on toys. . .
Retailers like Walmart will complain . . .
We have to make things in America to make America great again. Tax reform is the key to making that happen.
In effect, taxes, whether border adjustment or value added, have become the new tariffs. But if one is to look at it rationally, tariffs were always taxes. In fact, after the American Revolution, the first tax the US Government used to run the government was tariffs on imported goods.
The fact that border adjustment taxes will hurt retailers is evidenced by Trump’s criticism of large internet retailer Amazon when he stated that Amazon will have “such problems” during his Presidency because of this new tax system. Jeff Bezos, who owns Amazon also owns the Washington Post, and that newspaper has not been Trump’s friend.
The argument against the DBCFT is made by Brian Garst in the attached article, CFP_PolicyBrief_Border_Adjustment, entitled the “Political and Economic Risks of a Destination-Based Cash Flow Tax,” published in January 2017. In the Article, Brian Garst argues:
The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means it is explicitly designed to preclude tax competition. . . . This mercantilist approach typically is associated with credit-invoice value-added taxes (VATs) that exist in European nations.
Garst goes on to state that in addition to retailers another target industry is energy because the United States is a net importer of oil and petroleum products. Trump might argue, however, that when he is done cutting regulations the United States will be a net exporter of oil and petroleum products. But Garst also points out that when other countries adopt the DBCFT, there will be more taxes on US exports.
More importantly, Garst points out what happens when the Democrats come back into power:
“In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes. A highly probable outcome is that the United States’ corporate tax environment becomes more like Europe, consisting of both consumption and income taxes.”
Garst goes on to add that the eventual result of higher taxes, no matter what they are called, is bigger government and slower economic growth.
On December 19, 2016, however, Chairman Brady of House Ways and Means stated that U.S. companies that rely on imports will “have to adjust” to a House Republican plan and that such a plan is a priority of the Trump Administration. As Brady stated on a December 18th CSPAN program:
“We cannot leave in place any tax policies that encourage our companies to move their operations overseas just to sell back to the United States. We want to listen to and find solutions with those who rely a lot on imported goods coming into America.”
The plan would apply a 20 percent corporate tax to revenues earned from goods and services consumed within the United States, while exempting economic activity outside the U.S, amounting to a 15 percent cut in the nominal corporate tax rate and eliminating corporate taxes on U.S. exports.
The opposition to this new tax system is not only from retailers but from US producers, which either assemble products in the US from imported parts or use cheaper raw materials to produce competitive value added products. Many manufacturing groups that rely on global supply chains, such as Boeing and other companies, should be very concerned about this new policy.
But the border adjustment tax proposal has allowed Trump to call out automobile companies, such as GM, which produce substantial cars in Mexico and praise Ford Motor Co. for its decision to scrap plans for a $1.6 billion factory in Mexico. The threat of a border adjustment tax is enough during this Presidential transition period to cause US companies to bring production back to the US.
Many businesses that rely on imported raw materials or component parts, will not be able to deduct the cost of imported goods under the GOP plan, the full value of these goods is taxed instead of just the value added in the U.S. This means that even if Congress lowers the corporate tax rate from 35 percent to the Republicans’ proposed 20% or 15%, companies could still see an effective increase in their tax rates.
Jennifer Safavian, the executive vice president of government affairs at the Retail Industry Leaders Association, recently made this point stating:
“With this tax on imports, we actually will see our effective tax rate increase. It will increase, in some cases, double or three times the amount we’re paying right now. Some companies are concerned that they will actually have to go out of business because they’ll owe more in taxes than they’ll actually bring in in income.”
COULD MANUFACTURING RETURN TO THE UNITED STATES?
As stated above, during just this Presidential transition period, the threat of border adjustment taxes and a dramatic change in trade policy, along with cuts to corporate taxes to as low as 15 to 25% and regulations rollback, has caused many companies, such as Ford, Softbank, Fiat, Sprint and Carrier, to announce their reduction or abandonment of offshore production and their movement back to the United States. Jack Ma at Alibaba also met with Trump to state that he believes 1 million more jobs can be added in the US from small and medium size business.
In December 2016, small business optimism in the United States has soared to levels not seen in over ten years. The National Federation of Independent Business Index jumped 7.4 points in December the highest since 2004. Trump and Congress are using carrots and sticks to move US production and jobs back to the United States.
With almost 40% of the US population on some form of welfare, the situation has to change. Even here in Seattle, one dramatic example of the state of economy during the Obama Administration has been the dramatic rise in homeless camps. The election of Trump means change. And change it will be.
Recently, a Chinese entrepreneur asked me how could manufacturing move from China back to the United States because China has so many advantages. In October 2016, Fuyao Glass announced a $1 billion investment into Moraine Ohio and Plymouth Michigan to start producing windshields in the United States. When Chinese media and the government asked the owner Cho Tak Wong why he was moving production to the United States. There were two answers: higher wages in China and higher tax rates.
Wages in China have steadily moved upward and the lower wage countries now are Vietnam, Bangladesh and other countries. Much of China’s textile manufacturing capability has moved to Bangladesh in the search of lower wages.
Another major problem in China is taxes. Although the US has the highest corporate tax rate of 35% in the developed countries, higher than China, China has corporate tax rates ranging from 25 to 33%. More importantly, China has a personal income tax rate of 45% with US tax rates for the highest incomes ranging from 35 to 39.6%.
When I started working in China in the 1990s and all the way until about 5 to 10 years ago, although the tax rates were high, the Chinese government was very liberal on deductions. The more expenses the company and the person had, the lower the actual tax rate. Thus Chinese employees were always looking for a “fapiao”, a receipt so that they could claim expenses.
But several years ago, the Chinese government cracked down and started to enforce the actual tax rates. High tax rates give companies and individuals a real incentive to leave the place where they are located. Residents vote with their feet. We can see that in the United States, where high tax rates in the states of New York and California have caused companies and people to move to lower tax states like Texas and Washington State, which has no state personal income tax. An old economic saying, when you tax more of anything, you get less of it.
China and the United States are competing with other countries to attract foreign investment and even domestic investment in their own countries. Higher tax rates and excessive regulations cause companies to move and seek better places to produce products.
Another reason to move to another country is trade restrictions. In the early 2000s, Windshields from China were hit with a US antidumping case. I represented two companies in the case, Xinhe and Benxun; Fuyao was represented by another law firm. Antidumping rates in this case went down to single digits and eventually the case went away. But this does not mean a new case could not be brought.
Fuyao coming to the US to escape potential US trade cases is nothing new. Many, many Japanese companies, including automobile companies, Toyota and Honda, auto part companies, such as Nippon Denso, television producers, such as Sanyo, portable electric typewriter companies, such as Brother, and photography companies, such as Fuji, set up production operations in the United States to get around US antidumping orders and other trade restrictions. In fact, Chinese solar companies, such as Wanxiang Energy, have started producing solar panels in the United States to get around move US antidumping and countervailing duty orders against Chinese solar cells and solar panels.
So manufacturing can move back to the United States if the business environment is better than other countries. When companies move back to the US and economic growth increases significantly, all boats rise and that means more good paying jobs and the average American will do better.
TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS
TAA FOR FIRMS/COMPANIES IS NOT TAA FOR WORKERS
In my blog post last month, an open letter to the new Commerce Department secretary was included about the Trade Adjustment Assistance for Firms/Companies program. It is important, however, to distinguish TAA for Companies from TAA for Workers. The two programs are very different.
TAA for Workers is government money given to displaced workers to retrain workers. On January 12, 2017, Jamie Dimon of Chase spoke out on Good Morning American about TAA for Workers. In the past when Dimon has spoken out for TAA for Workers, financial publications, such as Forbes, have spoken out against the program because they view the $711 million program as an entitlement, a handout to workers, that does not save jobs.
The TAA for Firms/Companies program, however, is very different from the TAA for Workers program because the objective of TAA for Companies is to save the company and by saving the company save the jobs that go with that company. I believe that publications, like Forbes, might change their tune if they knew that President Reagan probably personally approved the TAA for Firms/Companies program. Why do I say this? Jim Munn.
Congress started the TAA adjustment assistance programs in 1962 as part of the Trade Expansion Act and as a means of securing support for the Kennedy Round of multilateral trade negotiations. Trade Adjustment Assistance essentially was a tradeoff. If Unions and Workers would support trade liberalization, including free trade agreements, workers would be compensated because of the disruption caused by increased imports.
In the early 1980s, President Reagan himself put in requirements to set up standards so that Trade Adjustment Assistance for Workers would not simply be an open ended entitlement. President Reagan, however, was puzzled by the TAA for Companies and asked an old friend, Jim Munn, here in Seattle to look into the program.
As stated in the attached 2002 obituary, JIM MUNN, Jim Munn was a famous criminal lawyer in Seattle and an early supporter and personal friend of Ronald Reagan. I am now on the Board of Directors of the Northwest Trade Adjustment Assistance Center (“NWTAAC”). When I started my involvement in NWTAAC, I was told that the Center was in place because President Reagan himself asked Jim Munn to look into the program.
Both President Reagan and Jim Munn were firmly opposed to government interference in the marketplace. What did Jim Munn discover when he looked into the Trade Adjustment Assistance Program for Companies? It works. Jim Munn decided to head up NWTAAC for the next 22 years.
In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure. Yet the program does not interfere in the market or restrict imports in any way.
Right now the total cost to the US Taxpayer for this nationwide program is $12.5 million dollars—truthfully peanuts in the Federal budget. Moreover, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.
As stated in my last blog post, TAA for Firms/Companies works. In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today. For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.
But as also stated in my last blog post, in this environment with so many injured companies, funding for TAA for Firms/Companies has to be increased so it can do its job.
An article from David Holbert, Executive Director Northwest TAAC, below states how the program works in more detail.
IMPORTS HAVE LANDED – SOMETHING HAS TO CHANGE
David Holbert, Executive Direct Northwest TAAC
The issue of trade competition and lost jobs is well discussed in the media. I work with small and medium-sized enterprises (SMEs) who are negatively affected by import competition, what is often called “trade impact” in policy lingo. It’s a big issue. According to the U.S Trade Representative, the United States’ 30 million SMEs account for nearly two-thirds of net new private sector jobs in recent decades. This is one in a series of posts about trade impact.
In a previous post I talked about recognizing trade impact. Once a company figures out that imports are the cause of sales declines, they must respond. That response depends on the specifics of the trade threat.
Companies work within a set of cost and market access factors. Where those factors are shared, a new competitor or an established one upping their game, is usually a manageable theat. Some alteration in course might be recommended, but it is all in the range of expectations in a competitive landscape. Imports, however, generally perceive a significant advantage before they enter a market – whether that’s in design, technology, scale, or cost. Extreme cost differentials tend to be the province of imports and, more specifically, imports from low-labor cost, low-regulation sources. New arriving imports tend to be very strong competitors if not disrupters.
Before the imports arrived, customers had seen value in the available options. Now those customers can see a better cost-benefit exchange with the imported product. Unattended, the new entrant (the import) will gain market share – the only questions are how much and how fast.
Imports may have any of several weaknesses:
- Importers are probably bearing a loss producing level of initial expense to establish a brand, set up sales capability, and establish distribution and service networks. The domestic company already is established, or can become so more easily.
- Importers often have to order and ship in large quantities. It takes time for delivery to occur. What is an advantage in a standard product/price sensitive segment is a disadvantage in a customized / price elastic segment. Customization is almost always an advantageous capability for the domestic company
- Importer service capability and quality can be weak. Service can be a challenge for those in different time zones, and speaking different languages. In low-cost economies, businesses often display a culture that values cost and quantity over all else. Quality and service are likely comparative strengths of the domestic company.
If the price differential is minor, improvements in operations without changing the business model may close the gap. The challenge is not less urgent, just less extensive. Every business I’ve worked with has a list of pending improvements. Now would be the time to implement some of these. Topping the list would the ones that lead to revenue faster. At this stage, the domestic company is probably losing sales. To the extent that you need a “plan”, that list is probably it. Let’s call it the minimum required response.
If the price differential is large, the business will face the uncharted territory of strategic change. That change will likely affect product, systems, processes, distribution, promotion, and pricing. In other words, everything.
Just as every business owner has a list of pending improvements, they also have more than one idea about a serious change in course. That is very likely an incomplete list. How could it be otherwise? Whatever the right change may be, the confidence to take that leap will almost certainly be absent. That is where TAA comes in. Most people don’t realize how thin of a line of viability businesses walk. It took a lot to get to the point where things work. A lot of what seemed like good ideas were proven wrong along the way. Changing that formula under conditions of less than certainty and necessity is almost always a bad idea. With trade impact, a business may have a condition of necessity. Now that business has to work on certainty.
It is not exactly clear how to get to that state of envisioning a strategic change with confidence and assurance. For a business owner, this is a life’s work. For the record, there are consultants that are capable in this area. Not that hiring in help is necessarily a solution. What is clear is that a full range of options and information supporting them become precious commodities.
Here are how some companies with TAA help dealt with trade impact:
A commercial products company makes a specialized tool and faced a sudden entry of imports at close to half the price. The company’s plan was to radically improve operations in the same market position. The owners had been complacent in a mature market. The plan included such actions as developing an automated version of the tool, emphasizing service and parts replacement capability, and revising sales and promotion activity. This works in commercial markets because buyers are informed and easily value factors like quality, service, and durability.
A contract manufacturer that machines metal parts specializing in titanium had lost their single industry customer base to imports. The owner recognized that their capabilities would be valued in the aerospace industry. Achieving AS9100 (aerospace industry quality certification) was an essential step. Entering the industry and becoming known among buyers was the larger challenge. This works because at the time aerospace was growing in the region.
- A nut grower was priced out of its commodity market position by imports. The owners had thought of packaging for consumers and private labeling. With TAA help, they gained the confidence to proceed. It was exactly the right move –they removed a layer of distribution and gained back their profit margin. The company grew at tech industry rates.
- A safety products producer was being displaced in large retailers by imports priced about 50% lower. With outside TAA consultants, they developed a radical plan to concentrate on commercial uses of their products that emphasized perpetual restocking rather than consumer products as final articles. This entailed converting from producing hundreds of low-cost, finished products a week to producing dozens of high-cost units and thousands of micro-orders of replacement articles. The company reversed sales declines in a surprisingly short time.
Threats from imports tend to be severe. They may have an insurmountable cost advantage. Under these conditions, the domestic company cannot win by just trying harder – something has to change. The first thing that has to change is the plan for the business. Deferred improvements might become urgent necessities. Incompletely conceived ideas about a change in the business model might have to be seriously considered. In future posts, I’ll talk about challenges of implementation.
Our role at the Northwest Trade Adjustment Assistance Center is to help small and medium-sized companies that are negatively affected by trade. Sometimes called “made in America grants” this federal program offers a matching fund for outside expertise of up to $75,000 for qualifying companies. NWTAAC serves companies in Washington, Oregon, Idaho and Alaska. You can learn more about us at NWTAAC.org.
NEW US WTO CASE AGAINST ALUMINUM FROM CHINA
On January 12, 2017, in the attached notice, Obama Administration Files WTO Complaint on China’s Subsidies to Aluminum Produ, USTR announced that it was bringing a WTO case against China for its subsidies to aluminum producers. As the notice states in part:
United States Trade Representative Michael Froman announced today that the United States has launched a new trade enforcement complaint agains the People’s Republic of China at the World Trade Organization (WTO) concerning China’s subsidies to certain producers of primary aluminum. This action follows numerous bilateral eforts by the Obama Adminisration to persuade China to take strong seps to address the excess capacity situation in its aluminum sector. The complaint fled today begins a process to address U.S. concerns that China’s subsidies appear to have caused “serious prejudice” under WTO rules to U.S. interests by artifcially expanding Chinese capacity, production and market share and causing a significant lowering in the global price for primary aluminum. Today’s announcement marks the 16th trade enforcement challenge the Obama Adminisration has launched agains China at the WTO.
“This lates challenge once again demonsrates the Obama Adminisration’s unwavering commitment to ensuring a fair and level playing field for American workers and businesses,” said United States Trade Representative Michael Froman. “Artifcially cheap loans from banks and low-priced inputs for Chinese aluminum are contributing to excess capacity and undercutting American workers and businesses. Today’s action follows significant engagement by this Adminisration on excess capacity and demonstrates our commitment to hold China to its trade obligations. Our record of tough enforcement with China speaks for itself: When China cheats, we’ve been right there, securing recourse for our workers, farmers, ranchers and businesses. This is the 16th time we have taken action agains China at the WTO, and we’ve won every challenge that has been decided.”
CANADA AND JAPAN JUMP INTO CHINA’S WTO CASE AGANST THE US AND EC FOR FAILURE TO GIVE CHINA MARKET ECONOMY STATUS IN AD AND CVD CASES
As indicated in the past blog post, pursuant to the China WTO Accession Agreement, from the Chinese point of view December 11, 2016 is the date when countries can no longer treat China as a nonmarket economy under their antidumping (“AD”) and countervailing duty (“CVD”) law. Neither the United States nor the EC declared China a market economy country on December 11th so predictably China filed a WTO complaint against the US and EC over their price comparison methodologies used in their AD and CVD laws.
On January 5, 2017, Canada and Japan decided to jump into the WTO case as third-party observers, citing the case’s potential to dramatically alter global antidumping laws. As Canada stated in its announcement:
“In many cases, Canadian exports to the United States compete directly with exports from China. As a result, Canada has a substantial trade interest in these proceedings which concern the ability of U.S. investigating authorities to properly determine normal values for allegedly dumped Chinese exports.”
As the Japanese Government stated:
“The legal basis of China’s complaint identified in its requests, if accepted, appears to affect anti-dumping investigation practice of many WTO Members … and in turn have substantial impact on international trade involving products originating in China. Japan is one of the major importers of goods … from China and one of the users of anti-dumping measures.”
The dispute is at the consultation stage, but will soon move on to a WTO panel.
FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES
UNIVERSAL TRADE WAR CONTINUES
With the election of Donald Trump, as stated in my last newsletter, the Universal Trade War will continue. In addition to the US bringing AD and CVD cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia, Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States. These countries have adopted the US law which finds dumping in 90% of the cases. The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.
Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases. What is “fair” trade for the United States is “fair” trade for every other country. Many countries want to make their industries Great again.
Because of this situation, this part of the newsletter will concentrate on trade cases in other countries and how other countries see the trade problem with the United States.
CHINA AD/CVD NEWSLETTERS
Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law. Team’s newsletter-EN Vol.2016.47 Team’s newsletter-EN Vol.2016.48 Team’s newsletter-EN Vol.2017.01 Team’s newsletter-EN Vol.2017.02.
SECTION 337 AND IP CASES
NEW 337 CASES AGAINST CHINA
BASKETBALL BACKBOARD COMPONENTS
On December 30, 2016, in the attached ITC notice, BASKETBALL 337, Lifetime Products, Inc. filed a section 337 patent case against Russell Brands, LLC d/b/a Spalding, Bowling Green, Kentucky; and Reliable Sports Equipment (Wujiang) Co. Ltd., China.
If you have any questions about these cases or about Trump and Trade, border adjustment taxes, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.