Topic: International Economics and Development

Can We Blame the Record Trade Deficit for Global Warming, Too?

An Associated Press story today on the latest trade deficit numbers noted as an aside, “The trade gap has set new records for five consecutive years, a period when the country lost more than 3 million manufacturing jobs.” 

Thoughtful people can disagree about the long-term implications of the trade deficit, but there is no evidence that the trade deficit itself is responsible for the recent drop in manufacturing employment.  

Manufacturing employment has been on a downward trend, not because of imports, but because of soaring productivity in the sector. In fact, overall manufacturing output in the United States continues to increase. American factories can produce more with fewer workers because the remaining workers are so much more productive.  

During the 1990s, the trade gap set new records for seven years in a row (1994–2000). That was also a period of robust domestic growth in which the country added almost a quarter of a million manufacturing jobs.  

As for the most recent string of record trade deficits (2002-2006), one could also describe that period as one when: 

… the real output of American factories grew by 14 percent.    

… the country added a net 6 million new jobs.   

… the unemployment rate fell from 5.8 percent to 4.5 percent.   

… annual real GDP grew by $1.5 trillion, or 15 percent.  

… the net household wealth of Americans grew from $38.8 trillion to $55.6 trillion.  

As I’ve written recently in a Cato Free Trade Bulletin, the reality behind the trade deficit numbers is more multi-faceted than the public discussion in Washington would lead us to believe. 

IMF Wants to Confiscate Portion of Gold Holdings

International bureaucracies are infamous for bloated budgets, and the International Monetary Fund certainly is a good example. Its headquarters are plush, its staff enormous, its pay extravagant, and salaries are tax free. Nice work if you can get it, as the old saying goes.

Unfortunately for the IMF, nations today generally are avoiding the organization, meaning the bureaucracy isn’t collecting as much “income” from its loan portfolio. So the IMF created a committee to review its financial future. Not surprisingly, this IMF-approved committee did not decide to shrink the IMF staff. Instead, it came up with a novel scheme to seize a portion of the national gold reserves held by the IMF. If a private bank decided to seize depositors’ funds to maintain the country club memberships of management, there would be appropriate outrage.

Hopefully, this proposal to loot the gold reserves will be met with similar scorn. A column in the Wall Street Journal reviews the issue:

And the IMF seeks a new wellspring of funding to support the expansive lifestyle to which it has become accustomed. A Committee of Eminent Persons was assembled to find the money.  …The Committee emerged with a proposal to use 13 million ounces, or an eighth of the gold stockpile [stored at the IMF], to establish an IMF endowment, an independent income stream for the Fund in perpetuity.

But this isn’t really the IMF’s gold. The bullion belongs to the U.S., Germany, Brazil, Ghana and other nations. More than one-quarter of it belongs to developing countries. If the IMF is allowed to open the door to this vault, fears of new missions and unrestrained spending will be confirmed. The gold and the gain it can bring should be returned to national treasuries.

India’s poor could do more with the $1.5 billion that is rightfully theirs than the IMF. …A staff of 500 instead of 3,000 and a budget of $400 million instead of $1 billion would be easily sustained by the investment income on the Fund’s $10 billion of existing reserves.

Behind China’s Headline Export Numbers

China overtook the United States in the second half of 2006 to become the world’s second leading exporter of goods. That fact, contained in a new report from the World Trade Organization and trumpeted in headlines around the country this morning, is bound to further rile up skeptics of America’s growing trade with China.

Although the United States exported more goods ($1,037 billion worth) in all of 2006 than China (which exported $969 billion), figures for the second half of the year show that China has now claimed the no. 2 spot behind Germany.

For those of a mercantilist mindset, to whom trade is all about exporting more than you import and more than the other guy, this news is guaranteed to be alarming. But the real news is nothing of the sort.

First, China is bound to move up in the world rankings of trade. It represents 20 percent of the world’s population, it is surrounded by thriving, trade-oriented economies, and its increasingly open and free economy has been growing at double-digit rates for more than a decade. We should welcome the news that China is more integrated than ever in the global economy.

Second, the United States continues to be a trade and export powerhouse. U.S. exports of goods grew 14 percent between 2005 and 2006, and surpassed $1 trillion for the first time ever. When combined with the $387 billion in services Americans sold abroad last year, we remain the world’s no. 1 exporter.

Third, most of the goods that China exports are in fact designed and in large part made in other countries, including the United States. “Assembled in China” would be a more accurate label than “Made in China” for most of its exports. More than half of China’s exports are made in foreign-owned factories. The most sophisticated components in the computers and other consumer electronics exported from China are in fact made in Japan, South Korea, Taiwan, the United States, and other, more advanced economies. China has become the final link in a deepening global supply chain. (For more detail, see my 2006 study on U.S. trade with China.)

Finally, trade is about more than exports. It’s about, well, trade. We export for the purpose of getting back things of even greater value. Americans benefit at least as much from imports as we do from exports. The $2.2 trillion in goods and services we imported last year make our lives better every day.

As author P.J. O’Rourke summarized in his terrific new book, On the Wealth of Nations, “To give [Adam] Smith’s case against mercantalism in extreme concision: imports are Christmas morning; exports are January’s MasterCard bill.” 

Over-taxed

From the Agoraphilia blog, Glen Whitman ridicules those who ridicule Americans who feel over-taxed:

Sub-headline from an article about a survey on taxes: “An MSN-Zogby poll says that many Americans think they’re paying too much in taxes even though research shows the average tax burden is light compared with other developed countries.”

Interesting. I’ve also heard that for some reason, paraplegics would like to get the use of their limbs back, even though other people are totally paralyzed from the neck down. Oh, and people who have lost an eye would like to get their 3D vision back, despite the existence of blind people. What is wrong with these people?

French Presidential Candidate Calls for 25 Percent Corporate Tax Rate

It is always easy to make fun of the French for their hopeless infatuation with redistribution, intervention, and other statist policies. So it is rather embarrassing that France (33 percent) currently has a significantly lower corporate tax rate than the United States (about 40 percent, if state taxes are included). Imagine, then, how humiliating it will be if Nicolas Sarkozy wins the French presidency and follows through on his proposal to lower France’s corporate rate to 25 percent. To be sure, the impetus for a lower corporate rate is tax competition rather than a new-found appreciation for market forces. And even Sarkozy’s call for a lower corporate tax rate does not mean he has embraced the foreign concept of “laissez-faire.” As Tax-news.com reports, companies would have to jump through numerous hoops to benefit from the lower tax rate:

In an interview with French business daily La Tribune, Xavier Bertrand, a spokesman for the centre-right presidential candidate, said that Sarkozy wants to lower the rate of France’s corporate tax to 25%, bringing the tax down to about the average rate in the European Union. However, unlike France’s European partners, Sarkozy is keen to link a cut in corporate tax to a series of governance criteria, and companies would have to demonstrate that their employment, wage and investment strategies were “synchronised”. …Sarkozy fears that with key European competitors having recently announced corporate tax cuts, including Germany, Spain and the UK, France risks becoming increasingly unattractive as a place to do business and cannot afford to do nothing. Under plans agreed by Germany’s coalition government, the effective corporate tax burden there will fall to below 30% from almost 40% in January 2008, while the UK’s Chancellor of the Exchequer Gordon Brown announced a 2% cut in corporate tax in his recent budget speech. The old EU15 also continue to face growing tax competition from the new EU entrants in Central and Eastern Europe, such as the Czech Republic, where the government has announced proposals for a 15% flat tax on personal income and a 5% cut in corporate tax to 19%.

Albania Joins the Flat Tax Club

Spurred by tax competition, the flat tax revolution continues to generate positive results. Albania will have a 10 percent flat tax beginning in January 2008. The corporate rate also will be 10 percent, as will the payroll tax. The latter reform is particularly interesting since many of the flat tax nations in Eastern Europe retain punnitive payroll tax rates - a policy that undermines the pro-growth and pro-employment effects of the flat tax. The Southest European Times reports:

In a bid to promote growth and improve the business climate, the administration of Albanian Prime Minister Sali Berisha plans a major overhaul of the tax system. The biggest change is a switch to a flat tax. “As of January 1st, 2008, Albania will have implemented the 10% flat tax system, one of the lowest in Europe,” Berisha told a business community meeting in late March. Corporate taxes, currently at 20%, are to be slashed in half. Social security contributions from businesses will likewise be capped at 10%. The government and other supporters of the reform say it will widen the taxable base and simplify tax administration, while also making Albania an easier place to invest. According to Finance Minister Ridvan Bode, the changes will lead to a more streamlined fiscal system. “The flat tax helps eliminate the potential arbitrage between corporate tax, dividend taxes and the income tax,” he says. VAT and other taxes will also be gradually reduced in order to woo investors, the minister added. …In the past, the IMF has been wary of plans to reduce taxes in Albania. This time, however, it seems more receptive – provided the overhaul is combined with more effective revenue collection. “We will negotiate with the Albanian government about the tax reduction, depending on the tax collection,” IMF representative Ann Margaret Westin told the press.

Mauvaises Idées

The International Herald Tribune reports that Ségolène Royal, the Socialist Party candidate for the French presidency, wants to impose price controls on banking services. She also wants to distort the allocation of credit by having the government guarantee loans to young people.

These ideas do not make economic sense, but they are a sign of pogress. Thirty years ago, a Socialist in France would be arguing for nationalization of banks. At this rate, maybe the Socialists will be advocating free market ideas within 300 years:

In a French presidential campaign with recurrent anti-capitalist undertones, the Socialist Party candidate, Ségolène Royal, took aim at banks Tuesday, accusing them of penalizing the poor with low interest rates on savings and high overdraft fees.

…Banks should pay customers more interest on current accounts than the 0.5 percent to 3 percent common today, Royal said. They should also credit bank accounts on the day a transfer is made, and give every young person with a “project” a free €10,000 loan that would be guaranteed by the state.