CPA submitted comments today to the ITC. The topic is Japan’s entry into negotiations in the Trans Pacific Partnership. We objected to Japan’s inclusion because:
1. Currency manipulation enforcement and prevention measures are not included;
2. Japan is a developed country selling finished goods, thereby competing directly with us. Rather than a less developed country selling raw goods that we can add value to.
3. ITC studies have been very inaccurately optimistic when projecting past trade agreement economic results. ITC models should be re-calibrated to reflect the real results of past agreements, before applying them to the TPP. Some reasons that the ITC models don’t work is because they assume free trade exists in relatively pure form. They do not take into account foreign mercantilism like cartel behavior, currency manipulation, border adjustable tax strategies, state subsidies, and other tariff replacements.
4. Japan has a 5% VAT, which is a border adjustable tax. The TPP has no restriction on Japan increasing the VAT, while reducing domestic taxes to therefore create a tariff-like trade advantage. Further, there are credible reports that Japan is, indeed, contemplating an increased VAT during this decade.
Here is the full submission. **********
June 12, 2013
U.S. International Trade Commission
500 E. Street, SW
Washington, DC 20436
Re: Comment: Investigation Nos.: TA-131-038 and TA-2104-030 U.S. Transpacific Partnership Free Trade Agreement Including Japan: Advice On Probable Economic Effects of Providing Duty Treatment for Imports
The Coalition for a Prosperous America represents agriculture, manufacturing and labor organizations and companies across the U.S. We appreciate this opportunity to comment on the President’s intention to commence negotiations with Japan in the context of the U.S.-Trans-Pacific Partnership Free Trade Agreement (TPP).
We have many concerns about including Japan in these talks because:
1. Japan is a currency manipulator;
2. Japan is a high end producer of consumer goods that will compete directly with U.S. advanced manufacturing goods;
3. ITC has failed to develop methods to accurately project the impact of trade agreements thereby giving rise to the worst U.S. trade deficit in history; and
4. Japan utilizes a value added tax system which it can use to frustrate the intent of any agreement by taxing U.S. exports and subsidizing shipments to the U.S. in combination with lowering other domestic taxes.
Former Federal Reserve Chairman, Paul Volker, once said: “In five minutes, exchange rates can wipe out what it took trade negotiators ten years to accomplish.” This is a colorful way of saying that exchange rate manipulation can frustrate the intent of any trade agreement. Yet, the President is not including currency in the negotiations.
Japan has historically been a significant currency manipulator. Rather than confronting the underlying sources of weakness in their financial sector or addressing the long-term demographic trends behind their failure to grow, boosting exports with a depressed yen has become enshrined as the “go to” strategy as soon as any new signs of economic weakness appear. Japan’s Prime Minster Abe campaigned on the need to devalue its currency, and has carried out his campaign promise aggressively ever since. The U.S. Treasury Department, in its April 2013 semi-annual report to Congress, warned Japan to refrain from artificially deflating its currency.
Japan maintains persistent current account surpluses aided by systematic government intervention in foreign exchange markets to accumulate foreign asset reserves and impact the yen’s value. (See Bergstein, Fred C., 2013, Currency Wars, The Economy of the United States and Reform of the International Monetary System. Washington. Peterson Institute for International Economics). Manufacturers in the United States face relatively low tariffs in Japan, which maintains an average 2.6 percent tariff for non-agricultural goods. So Japan’s exchange rate intervention can and will quickly frustrate any tariff concessions.
We oppose Japan’s inclusion in TPP talks unless an effective currency enforcement regime is included.
Further, in any study undertaken, ITC should consider the impact of Japan’s currency undervaluation when utilizing any economic model. Merely considering tariff reductions is insufficient to gain an accurate viewpoint of economic predictions.
FAILURE TO CONSIDER UPSTREAM SUPPLY CHAIN IMPACTS
The President should not consider Japan in TPP talks because Japan is a developed economy selling high end finished products globally. It competes head-to-head with the U.S. economy generally, as compared with a more natural resource intensive economy. Its offerings of “dead end” consumer products offer few value added opportunities to outweigh the import competition threat that is likely to result.
Further, Japan’s cartelized market blocks the many market opportunities that appear to be theoretically available to imported products. The country’s keiretsu and the interaction with METI (Ministry of Economy Trade and Industry) result in an effective industrial policy regime that deters the cartelized supply chains from procuring from outside the club. ITC’s models do not, and probably cannot, account for this cartel impact because such models assume a free market exists.
The office of the U.S. Trade Representative, which seeks to engage Japan, has often spoken of the need to pursue “global supply chains” for U.S. manufacturers. This USTR goal is biased towards OEM (Original Equipment Manufacturers), providing assistance in offshoring their supply chain. But the goal causes the long-term diminution of the first and second tier suppliers in the domestic supply chain. Many of these suppliers are CPA members who lose orders and therefore must lay off employees, slash their R&D budgets, and struggle to keep the doors open. The perniciousness of the global supply chain push is actually a euphemism for long and short-term destruction of the U.S. industrial fabric.
CPA’s former Senior Economist Ian Fletcher phrased it this way:
Real industries are not abstract aggregates; they are complex ecosystems of suppliers and supply chains, skills and customer relationships, long-term investments and returns. Deindustrialization is thus a more complex process than is usually realized. It is not just layoffs and crumbling buildings; industries sicken and die in complicated ways.
[W]hen American producers are pushed out… it is not just immediate profits that are lost. Declining sales undermine their scale economies, driving up their costs and making them even less competitive. Less profit means less money to plow into future technology development.…
When an industry shrinks, it ceases to support the complex web of skills, many of them outside the industry itself, upon which it depends. These skills often take years to master, so they only survive if the industry (and its supporting industries, several tiers deep into the supply chain) remain in continuous operation. The same goes for specialized suppliers.…
Similarly, America starts being invisibly shut out of future industries which struggling or dying industries would have spawned.…
Just as the loss of the VCR wiped out America’s ability to participate in the design and manufacture of broadcast video-recording equipment, the loss of the design and manufacturing of consumer electronic cameras in the United States virtually guaranteed the demise of its professional camera market… Thus, as the United States lost its position in consumer electronics, it began to lose its competitive base in commercial electronics as well. The losses in these related infrastructures would begin to negatively affect other down-stream industries, not the least of which was the automobile… Like an ecosystem, a competitive economy is a holistic entity, far greater than the sum of its parts.
The ITC and the USTR inaccurately, in our view, see the economy in a sector and sub-sector based manner. Accurate economic and industrial policy views the supply chain as “greater than the sum of its parts”, and with a longer-term view of not just current but future production and future innovation.
The ITC models do not take this dynamic view into account. As a result, ITC past projections have been erroneously optimistic about trade agreement results and have depressingly missed the downward spiral of the Tier 1, 2, 3, etc. companies in the economic supply chains.
Because Japan is a developed economy that has benefitted from offshoring U.S. supply chains and competes directly for finished products across the board, the U.S. should reconsider negotiating with Japan.
Additionally, the ITC should dramatically revise its economic models to correct the errors of the past, calibrating those past projections to the actual results of past agreements. Then it can apply the newly calibrated models to the TPP to generate more confidence.
Also, when recalibrating its economic models to more accurately estimate the potential impacts on domestic supply chains, the ITC should take into consideration such anticompetitive, though common, limitations imposed on supply chains abroad (discussed above in the context of cartelized markets) as well as other competition-reducing factors such as marketplace consolidation and concentration and the use of adhesion-type contracts that are commonplace in the domestic poultry and hog industries.
BORDER ADJUSTABLE TAXES
The ITC has previously failed to include, in its economic projections, trade impact arising from the asymmetry of other countries border adjustable consumption taxes where the U.S. has only direct taxes. Specifically, other countries utilize a form of “fiscal devaluation” to increase consumption taxes which are border adjustable, while decreasing other direct taxes that are not border adjustable. This impact is to keep domestic prices relatively unchanged while increasing the price on imports, and enabling a consumption tax rebate to decrease the price of exports beyond what they were previously. This trade strategy was detailed recently in a Federal Reserve working paper (Farhi, Emmanuel; Gita Gopinath; and Oleg Itskhoki. Fiscal Devaluations. Working Paper No. 12-10. Federal Reserve Bank of Boston. October 18, 2012).
One reason the ITC failed miserably to estimate the economic impact of China’s ascension to the WTO, is that it failed to take into account China’s strategic use of the value added tax to conduct its industrial policy. (Indeed, the ITC models have never accounted for foreign strategic mercantilism such as industrial planning, currency manipulation and other cartel behavior). The average VAT in the world is 16 percent. Most countries raise the VAT while decreasing other direct taxes and/or increasing domestic industry subsidies or benefits (pension and health care, for example).
KPMG recently reported that “a gradual increase of the [Japanese] consumption tax rate from five to ten percent by the mid 2010s is currently under consideration as a tax reform proposal.” (Japan: County VAT/GST Essentials. KPMG. October 2011. www.kpmg.com). If Japan increases its VAT by five percent as per the KPMG report, U.S. exports will be charged just like a tariff increase. If Japan cuts other domestic or direct taxes by an equivalent dollar amount (as is typical), their domestic goods’ price will stay nearly the same. The result will be an increased price differential making imports more expensive than their domestic goods.
Border adjustable taxes have wrongly been excluded from trade negotiations in the past 20 years. The U.S. previously tried to neutralize the VAT impact through Foreign Sales Corporations, and believed it came to agreement with other countries to do so in 1981. However, the WTO struck the U.S. FSC system down and we have never sought to otherwise neutralize the foreign advantage. (See, Hufbauer, Gary Clyde. 2000. A Critical Assessment and an Appeal for Fundamental Tax Reform. Washington. Peterson Institute for International Economics).
Because border adjustable taxes (BAT) are not intended as part of TPP discussions, the U.S. should not enter negotiations with Japan. Further, the ITC should include the impact of foreign BATS, especially when used in intended or, at least, de facto fiscal devaluation strategies when projecting the impacts of any TPP agreement.
CPA opposes the inclusion of Japan into the TPP talks because Japan is a currency manipulator, competes head to head with the U.S. for high end finished goods, engages in government assisted cartel-like economic behavior, and utilizes border adjustable taxes as tariffs and export subsidies.
CPA urges the ITC to adjust its economic projection models to include the impacts of exchange rate manipulation, deterioration of domestic supply chains viewed as a holistic entity, border adjustable taxes and other forms of foreign mercantilism. ITC’s past models have been too optimistic in relation to real trade balance results and should thus be deemed unreliable until they have been recalibrated to produce real world results.
Michael C. Stumo