Time for U.S. automakers to be on equal tax footing
Mike Michaud
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 unlevel 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. One of these unfair practices is the Value-Added Tax, which is 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 tax 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 such as 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.
For example, compare a German and an 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 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 tax 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 branch 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 is the U.S. representative for Maine's 2nd District.
On 12/11/08 at 10:31 AM,
pizanos wrote:
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With all due respect this analysis does not compute. No Value Added Taxes are levied on American cars in the production process, so that is why foreign manufacturers rebate these taxes on vehicles exported to the US. When American cars are exported to VAT countries. a VAT is levied at the border because all cars in such countries are equally burdened with VAT. Incidentally, very few cars are exportes from the US because they are generally considered too large and fuel inefficient. On the other hand, both Ford and GM produce excellent smaller cars overseas that generally aren't available to US consumers. They do so in countries where labor costs and benefits are at least as high as in the US or higher. Aside from all of this, none of the cars Germany exports to the US are "bargains" in any price category. Unfair competition nor labor are the problems here, management is.
On 12/11/08 at 12:02 PM,
MEIndependent wrote:
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Michaud´s been my pick, but lately he´s going over the top. He just voted to give $15 billion of our money to Detroit for making lousy cars, and now he wants to give them further perks and trade advantages. He talks about fair trade, but all he´s really asking for is more protectionism for his own union jobs.
Pizanos is right -- this doesn´t even begin to add up.
On 12/11/08 at 2:01 PM,
Maetrix66 wrote:
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I did not vote for Mike Michaud in the election last month. However, after reading this Contribution, I wish I had.
I see complaints of protectionism, but wouldn't protectionism require that the playing field be tilted towards domestic offerings instead of
installing equal controls on both foreign and domestic products? The theory that if we cast our doors open wide and watch as American
Ingenuity triumphs in an open market has failed. The reason for failure is not the laziness, or inability to compete for the worlds currency, but
that while we have tried to allow or even encourage trade from other countries, they have not.
Do a little research on Chinese and Japanese trade practices, and if you don't feel duped, you should. China will not allow a foreign manufacturer to own over 50% (a controlling interest) of a country operating on their soil. Japan does something similar.
What about all of the Buicks GM is supposedly selling in China, you ask? GM has entered into a partnership with a Chinese company, in which GM allows them to sell our vehicles through their dealerships. GM has minimal control over how their vehicles are marketed and sold in China and Japan, and must agree to the draconian trade laws if they want access (albeit limited) to the burgeoning market in China.
If most major auto producing countries levy a VAT to imports, then so should we. The people opposed to helping our automobile industry either invariably own foreign makes, or are supported financially in some means by their business (ala Senator Shelby, who shoudl be tried for Treason, in my opinion. Hiding behind a reluctance to spend taxpayer money to help corporation is merely a front for him to play favorites to the Koreans and Japanese, who have plants in Alabama. # of domestic plants? 0)
There are those in our country that believe that since we are doing the right thing, that everyone else will do so on honor alone. Such is expecting Large corporations to "trickle down" increased wealth during economic good times to the low men and women on the totem pole. A few of the only companies to actually attempt to do this, the "Big Three", are now paying the price. It doesn't work. (The current labor cost differential wasn't awarded to the UAW during the recession, it was passed along during times of prosperity, when it was easier to reward their employees for good work than to have a strike while their coffers were nearly full.
The banking industry only had to bat it's eyes at the re-election funds of Congress to get it's way, while the automobile companies have had to crawl through the mud. Have the Big Three made plenty of mistakes, absolutely. Do they deserve the current situation they are in? Probably, though they were well on the road to recovery until the credit crisis made it nearly impossible for the majority of the country to buy a vehicle. Even the foreign brands are seeing >30% drops in sales.
The current management needs to be evaluated and mostly replaced. The money needs to go to the Big Three, with appropriate concessions from all involved to ensure that they are accountable for the loans. I haven't heard a word rebutting that fact from GM, Chrysler is a marionette for Cerberus, who is more concerned with keeping themselves off the hook than ensuring Chryslers viability, and Ford has auctioned everything not tied down (that iconic Blue Oval logo? no longer owned by Ford, as well as others) to keep cash on hand to slide by.
The reality is that the rest of the world isn't playing fair. Free trade is obviously not the same as fair trade. The only American companies that are able to sell across the globe are the few that are sold at a premium (LL Bean, Harley, etc.). If we don't take corrective measures now, we will simply become the farmers market of the world, only selling things like corn and grain that can't be bought in reasonable quantites elsewhere.
On 12/11/08 at 2:06 PM,
jasonmorse wrote:
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Quality products sell themselfs, Corporate greed at every corner has been the problem since the 1800's , Even if Michaud was the working man's GOD, the flys are to thick and the s#its to deep by now for minority union men or anayone else to make a difference, 'when in rome do as the romans do' and 'birds of a feather flocktogether' Dont expect anayone to stand head and shoulders above the rest, The way our government is run needs to be completley overhauled if not replaced from scratch. Show of hands: who would have voted for Obama if they new his colleuges were being arrested right and left, He isnt in office and theirs scandal over his seat. Mabe its time for more than 2 or 3 cannadates whom choose to run, simply pulling a name out of a hat might be better, Who gambles all that money to run for elected positions whitch pays a fraction of the startup cost? All the pollitions would be in jail if they didnt collerabrate and take care of each other to some point, they cast asside "WE THE PEOPLE" to kiss "we the wealthy"s ass and their saddly used and manulapted, and in the end "we the people"pay the price for the game they played . Mabe stoping this expensive war might stimulate the ecconomy?, on average we spend 800% more than all the other countrys spend combined on defence, 911 proved it's been wellspent over the years, or was that a boston tea party? Good excuse to go to WAR for no apperent reason otherwise, When we go broke on big overspenditures whats left of anay value to defend? Sam walton's spread, or the bush estate? wheres our taxation with representation?
On 12/11/08 at 2:24 PM,
jasonmorse wrote:
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Sorry matrix LLbean sold to japan 20 years ago after leon died, harley sold to AMF in the seventies, Even Budweiser recently sold, CATERPILLAR remains as the only American owned company of anay magnatude and we all can be proud of Wall Mart, they will be the last to sell once that long strange trip is over.
On 12/11/08 at 3:12 PM,
Maetrix66 wrote:
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Walmart is a national company, to my knowledge they don't sell overseas. They certainly BUY from overseas, but case in point.
So, I ask. Is it just that there are 0 american companies that make anything of value to the rest of the world, or are there more
nefarious games afoot?
On 12/11/08 at 6:53 PM,
Educateyourself wrote:
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MEIindependent, you're an idiot. "He just voted to give $15 billion of our money to Detroit for making lousy cars" - According to JD Power and Associates 2008 Initial Quality numbers for midsize cars, this year’s IQS winner in the midsize segment, by a healthy margin, is the Chevrolet Malibu. The Nissan Altima finished below average, as did the Honda Accord. So if domestics make "lousy" cars, does that mean Honda makes horrible cars?
On 12/12/08 at 3:04 PM,
MiloCrabtree wrote:
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Walmart has stores in 17 countries. In China alone, there are 104 stores and China Wal-Mart employs over 50,000 chinese workers. So I guess they sell overseas.
Maybe if congress can combine the ideas of the lobbyist who actually wrote this op-ed (Michaud is too dense to have written it) with a good chapter 11 plan that eliminates or curtails the UAW, Detroit can bounce back.
On 12/12/08 at 8:19 PM,
MiloCrabtree wrote:
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Senator Shelby rocks. The guy isn't in the pocket of union muppets and he's against taking my hard-earned cash and giving it to some sleazy UAW shop steward. Instead of being tried for treason, Shelby should be given a Nobel Prize. It shouldn't be that hard - Al Gore got one for an imminently debunked theory that posits man-made carbon dioxide is warming the planet. What a tosser.
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