Free Trade for Thee…

The European Union has enacted a World Trade Organization-sanctioned tariff on U.S. goods ranging from ice cream to "cricket balls." Why? Because the exporters--including Boeing, Microsoft, and Archer Daniels Midland--are snagging some $5 billion in subsidies annually from the U.S. government.

President Bush has called on Congress to kill the subsidies but whether (or when) that will happen is unclear. The tariffs start out at 5 percent and can rise 1 percent a month up to a grand total of 17 percent.

More here.

Reason's recent interview with In Defense of Global Capitalism author Johan Norberg touches on, among many other topics, the often-hypocritical attitudes toward free trade evinced by Western governments.

Comments

[shanep]

Once again, the U.S. government shows it's all about "free-trade" in name and corporatism in practice.

Good for the EU.

Unforutunate, but might make the corporate rent-seekers and their legislative buds think twice......or maybe not. 🙁

[Trader]

It has really gone over all your heads that this "subsidy" is exactly what EU companies enjoy- the ability not to pay taxes on foreign source income. The US provision merely made the playing field equal for US corporations with respect to EU ones. Now US corps will have to pay taxes on all worldwide income while EU corps will continue to pay only on domestic earnings. The only way, so it seems, for Congress to remedy this is to disavow the worldwide taxation system in favor of a nationally based one.

[joe]

Thanks for the info, Trader. The mainstream press coverage of this has demonstrated its standard cluelessness on the specifics and subtleties of anything more complicated than an Oscar Night dress.

[Ayatollah Usoe]

Let me add one thing to Trader's points. Most EU countries have a value added tax: basically a national sales tax. There is no VAT on exports. So the EU operates under what is effectively an export subsidy that is unrelated to an income tax. The US doesn't have a VAT, and instead attempts to create that export subsidy in the income tax. So our export subsidy is not acceptable, but the EU one is.

We could lower the corporate income tax to 20% and make up the difference with a VAT...

[Jean Bart]

So the fact that we Europeans do not tax foreign sales, etc., is bad, and we should tax foreign sales?

[Isaac Bartram]

Jean Bart

I think the point is that the EU does not have as strong a complaint as it is claiming.

Actually the worldwide taxation system was given as the reason for offshore incorporation. But don't look for Congress to change this. What would the demagogues have to rail against?

[matt]

I love how the GATT and WTO are always passed off as "free trade." As far as I'm concerned government managed trade is not free trade.

[shanep]

Trader:
"The WTO has found that since the US claims the right to tax on all income and then excludes some foreign income, that is equivalent to a subsidy."

And I think the WTO is right. It's using the democratic legislative process to distort the marketplace.

You think it's not to exclude "some" income while taxing other?

[shanep]

Trader:
"The US provision merely made the playing field equal for US corporations with respect to EU ones."

Yeah, well your argument maybe went over our heads because what you're talking about: "made the paying field equal" is not free trade.
It's managed corporate trade, plain and simple.

[Jason Ligon]

Trader,

Interesting comments. It is one of many global trade issues I've been too lazy to look up myself.

Along the lines of Kevin's thinking, it is interesting that R&D subsidies don't count against a company. With that in mind, if Boeing is bad, Airbus should be taxed into oblivion.

Kevin, how can I find out how much in the way of subsidies are going to a company? How do you know about them?

[Trader]

Shanep,
Your comments are fair only to the extent that you do not accept any corporate taxation system as something other than managed corporate trade. I suppose you could take that position, but in light of the reality of modern government, it's tough. Any type of income tax distorts the marketplace. Since government isnt likely to give up taxation soon, the only question is how it should be distorted.
Jean Bart,
"So the fact that we Europeans do not tax foreign sales, etc., is bad, and we should tax foreign sales?"
I'm not making any claim as to what is right or should be done.

[David]

At least there's still free trade in female crickets.

[Jean Bart]

Nick,

Are you saying that the E.U. is being a hypocrite for enacting the sanctions regime (which it has promised to drop immediately if the U.S. ends its subsidy)?

[Nick Gillespie]

Jean,

There's enough hypocrisy to go around when it comes to developed nations (and the EU) and trade, but in this particular instance, I was implicating the U.S.

[Jean Bart]

Nick,

So would you argue then that the Bush administration was being a hypocrite for the former steel tariffs issues as well?

Aside from the realm of agricultural subsidies, where do you think E.U. being hypocrite? Is it immigration policy you are concerned with here?

[Jason Ligon]

JB,

Criticisms of the EU in these parts are centrally about agriculture, and there has been plenty blasting of Bush for the steel and the lumber tariffs. He supports free trade until he needs to buy a constituency.

I think that the tax break question is interesting in that I wonder if there would be a problem if overall levels of corporate taxation were dropped to the level of the offending firms. Is it a trade problem if one country just has lower taxes?

[Critic]

Most American consumers have never been exposed to abstract economic theories and principles. They just want cheap goodies, regardless of the methods used to establish their prices. This ignorance leads to demands for subsidies and other favors from all-too-willing political panderers. This cycle will continue to churn until the teaching of capitalism is considered as vitally important in our schools as reading and arithmetic.

[Jason Ligon]

Critic,

This, "This cycle will continue to churn until the teaching of capitalism is considered as vitally important in our schools as reading and arithmetic."

presumes that it is lack of education only that creates the demand for free goodies. It is also the lack of principle. We teach the values of democracy, but not the pitfalls. We justify our goodies by claiming that as long as we have voted, the uber-value of democracy trumps any other concerns. People who object are defined to be selfish at least, and usually lawless (opposed to basic democratic institution) to boot.

[Jean Bart]

Jason Ligon,

As I recall, it was not only a violation of what used to be called the GATT Subsidies Code (I don't know if the name has changed since the switch to the WTO), it was also the fact that foreign businesses doing business in the U.S. were not getting the tax breaks, correct? The latter would be a Article III:2 violation as I recall.

[Jean Bart]

Jason Ligon,

BTW, it is an interesting question; did the Appellate Body address that issue?

[Trader]

The violation here was of the Subsidies and Countervailing Measures agreement (SCM). The tax issues are really complicated, but the basic issue is that the US uses a worldwide system of taxation while the EU and almost every other country uses a nationally based system. This means that the US taxes US corporations on all earnings, whether they are earned in the US or not, while Europe only taxes their domestic corporatioons on income earned in the country. The US tax provisions at issue was first the Foreign Sales Corporation Act (FSC) and then the Extraterritorial Income Exclusion Act (ETI). The FSC essentially allowed corporations to exclude the income for certain foreign sales when calculating their profits. When the FSC was found to violation SCM by the WTO, Congress passed the ETI, which was almos the same thing in slightly different form. The WTO has found that since the US claims the right to tax on all income and then excludes some foreign income, that is equivalent to a subsidy. The EU's system has essentially the same outcome, but the difference is that conceptually the EU never claims a right to tax on all income.

[Critic]

Jason,

Ignorance, greed, dishonesty, entitlement, of course. All of the above.

But...
Has anyone noticed an almost complete lack of outrage over the latest gas-price hikes? No scary stories on the evening news, no demonstrators, not a peep out of my co-workers...are we too busy to notice or does the populace finally get that pesky supply-and-demand thing?

[Kevin Carson]

I assume that $5 billion refers only to direct export subsidies. There's also federal R&D funding which, in the case of Boeing at least, probably amounts to most of their R&D spending. Not to mention federal procurement, without which Boeing couldn't even stay in business. As for Microsoft, despite some talk about going open source, I'd bet the federal government is the single biggest buyer of the Windows operating system in the U.S.

If you start doing away with all the market distorting government interventions that affect international trade, before you get done you'll have dismantled corporate capitalism as we know it.

[Trader]

This case has nothing to do with direct subsidies or R and D funding from the government. See explanation in my post above.

[karl kraus]

re: hypocrasy,
the agricultural protectionism in the us and here in the EU are irresponsible. and this tit-for-tat (althoug i would place the main tit-for-tat culture here in europe) trade games are really a pain in the ass. I feel the EU plays the "ultra holy" role, while technical trade restrictions in the disguise of "harmonisation issues" do prevent the flow of goods or services here in europe. yet, the EU sells itself, in part, to its internal audience as a "free market". to be sure, much has changed, but there is plenty of protectionism on both sides of the pond to go around. If America can show the benefits of free trade (Norberg's "Timbro" organisation is a good site) to Europe, that would really help. Unfortunately it does not seem as if any of the candidates for this November are in favor of the benefits (and obvious growing pains) of free trade.

with greetings from (still) snowy Vienna,
Karl

[shanep]

Trader:
"Since government isnt likely to give up taxation soon, the only question is how it should be distorted."

As little as possible across the board. No special breaks for any special interest faction who happened to have the best and most frequent lobbyists.

[joe]

"Since government isnt likely to give up taxation soon, the only question is how it should be distorted."

Inequities are justified only to the extent that they benefit the lowest people on the totem pole.