President Obama's trip to Asia was billed as one to increase American exports. But American multinational corporations aren't interested in increasing exports because they have built manufacturing facilities in China, South Korea, Thailand and other places where labor is cheaper than American labor. Their preferred modus operandi is to export to the American market and sell directly to the local market abroad, hence, exports from the US are a non-starter. For consumers in foreign countries who want an American product, there is no need to import it from the US. They can buy it from a US corporate manufacturing facility located in their own country. That's why President Obama is barking up the wrong tree. He should be more interested in getting multinational corporations, American and otherwise, to locate manufacturing facilities in the US in order to create American jobs even if their only goal is to sell to the American market and not to export. The only way to do this is to change the import tax laws to encourage companies to locate production facilities here. President Clinton threatened a 100% import tax on luxury vehicles and Toyota promptly started locating manufacturing facilities in the US to protect the market for their Lexus.
It doesn't really matter whether foreign multinationals or American corporations build manufacturing facilities in the US. It's all about providing jobs. With current policies successful start-up companies will provide American jobs temporarily until they grow to a certain size, and then they will offshore those jobs in order to increase profits. So small business start-ups will not be the salvation for American job-seekers except in the very short run. Some worry that profits from Toyota's US manufacturing operations, for example, are repatriated to Japan. But so what? Profits from American corporations operating abroad are held offshore where they aren't taxed. So for all intents and purposes they are not repatriated to the US and, even if they were, they would only end up in rich investors' pockets. By encouraging foreign corporations to locate here, they can at least be taxed before their profits are repatriated. That makes them more desirable than American multinationals who neither provide jobs in the US nor pay taxes in the US. Their sole relation to the US is the fact that they originated here and are registered here, but that can be quickly changed as we saw with Halliburton which moved its registration to Dubai. And even "American" companies have subsidiaries in places like the Cayman Islands, the better to take advantage of lax tax laws. From the average middle class American's point of view, if a corporation doesn't provide American jobs or pay American taxes, what good is it? And if a foreign multinational corporation does provide American jobs and pays American taxes, it is preferable to an American multinational.
The only way to get muiltinational corporations to build production facilities in the US is to make it relatively unprofitable for them to import into the US market. This can only be done by an import tax or tariff of some sort. I'm sure there are sophisticated ways to accomplish the same thing without mentionaing the dreaded word "tariff." Tariffs, by the way, were the largest source of federal revenue from the 1790s to the eve of World War I, a period of some 124 years or more than half the country's history. Ideologically at the present time, tariffs are anathema to the US because of its rhetoric and espousal of free trade. But the US is being played by other countries who effectively take advantage of American open markets while effectively closing their own markets. South Korea is a good example. It exports its cars here while closing its markets to cars from the US. However, it is open to the idea of American car corporations building production facilities in their country. Why? Because that provides jobs for their own citizens and local taxes. Thus there is no need to import those cars and other products from the US.
Globalization is not going away. Each country needs to respond to it in such a way as to protect its own interests. So far the US has failed to do so. President Obama's attempts to invoke rules to even out the trade imbalances so far have gotten him nowhere. Trying to jawbone China to revalue its currency is an excercise falling on deaf ears. Even quantitative easing, the Fed's latest attempt to make American exports more competitive only breeds resentment among our foreign competitors and represents taking a club to kill a gnat. The only effective response is one which unilaterally changes American laws and policies to create a benefical trade policy, not going around trying to get a bunch of other nations to cooperate in doing something beneficial to American interests. The only solution is to take a page out of the other countries' books. It's not exports that matter. It's the location of production facilities in the US that matters. That's what will provide jobs and increase tax revenues. So importing into the US market from abroad has to be made more onerous for the importers. Only then will they decide that locating production facilities and hence providing American jobs within the US is the way to go. Over half the imports into the American market are from American corporations which have located production facilities abroad in order to take advantage of cheap foreign labor.
The US taxpayers bailed out General Motors. We actually own a good percentage of GM, but what is GM doing? It's building production facilities abroad. It is not providing American jobs in gratitude for being bailed out. This is from the Detroit News:
Washington -- General Motors Corp. will shift more production of vehicles bound for the U.S. market to China, Mexico, South Korea and Japan, but will keep total imports at roughly one-third of all sales here.
In a confidential 12-page presentation to members of Congress, obtained by The Detroit News on Friday, GM said it will boost U.S. sales of vehicles built in those four countries by 98 percent -- or about 365,000 vehicles -- while shrinking production in Canada, Australia and European countries by about 130,000 vehicles.
GM also disclosed it will start importing vehicles made in China in 2011, reaching 51,546 vehicles in 2014. Imports from South Korea to the United States will jump from 36,967 vehicles in 2010 to 157,126 in 2014.
The automaker said it is canceling expansion projects in Russia, India and Mexico.
GM's plan to import more vehicles from low-wage countries raises questions about whether it should beef up its foreign operations as it is relying on federal money to stay afloat. It also puts the automaker at odds with the United Auto Workers, which is trying to protect U.S. jobs amid a dramatic restructuring of the domestic auto industry.
So GM has no effective allegiance to the US despite being bailed out with taxpayer money. The same goes for Ford. Ford is planning to build a $450 million car plant in Thailand.
It's all about the jobs. How does Germany, a high exporting nation, manage to keep high paying jobs in its own country? That's maybe something Obama and the Democrats should study and try to emulate. One way they do it is that most German companies build their products in Germany and then export them while US corporations build plants near their markets and produce for the local foreign market so their sales do not count as exports. Coca Cola has production and marketing facilities in over 200 countries. Germany has powerful trade unions and an extensive vocational education program. Every manufacturing facility is unionized unlike in the US where unions have a vastly smaller role than they did just 30 years ago. Work councils in Germany put workers and management together in a decision making capacity. All industrial imports into Germany are subject to an "Import Turnover Tax" of 19%, which is charged on the duty-paid value of the import article plus the customs duty, which varies by item. The Import Turnover Tax is designed to place the same tax burden on imported goods as goods produced domestically, on which is levied a 19% "Value-added Tax" (VAT). The German customs authorities collect both customs duty and Import Turnover Tax. Germany's regulations and bureaucratic procedures can be a difficult hurdle for companies wishing to enter the market and require close attention by U.S. exporters. Complex safety standards, not normally discriminatory but sometimes zealously applied, complicate access to the market for many U.S. products. U.S. suppliers are well advised to do their homework thoroughly and make sure they know precisely which standards apply to their product and that they obtain timely testing and certification. Selling into the American market should be considered a valuable privilege. Therefore, according to free market principles, it shouldn't be given away for free. The US government needs revenue. A VAT tax and a corresponding import turnover tax would not only replenish US government coffers but would tend to equalize the profitability of companies manufacturing abroad and those manufacturing in the US. Reunionization of US workers would also contribute a voice in favor of keeping production and, therefore, jobs local and in country.
It's true that Honda and Toyota only located plants in the US because they were worried about import duties that might come into being. But their US plants were just used for assembly operations. They still imported most of the parts from foreign cheap labor countries. What the US needs is an industrial policy that is concerned with providing jobs for American citizens. This means that the US has to be seen as an attractive place for multinational corporations to locate or it has to be seen as an unattractive place to import into a desirable consumer market. In the past tax breaks and other perks have been given to auto companies by states in competition among themselves to get plants located in their state. A national industrial policy needs to be put in place that would prevent the states from competing against each other in order to get plants located within their state. That way the states can't be played off against each other by foreign or domestic corporations.
The US will not be successful in cajoling its trading partners to "equalize" trade balances or to revalue their currencies. Only unilateral policies that seek to get multinational corporations to locate production plants inside the US can hope to change the status quo. Trade policy and industrial policy can effectively provide incentives to create jobs here and to discourage imports. The US needs to renounce its policy of free trade in favor of fair trade, and fair trade can only be established if the US changes its policies from within.
