China, U.S. plan new open investment treaty

The U.S. and Chinese governments have nearly completed negotiations on a Chinese Bilateral Investment Treaty, which will make it easier for American companies to invest in China, and vice versa.

Such a treaty would serve the interests of the Chinese government and American corporations, but not necessarily the interests of American citizens and workers.

At the same time, the U.S. government is confronting China militarily in the South China Sea.  And President Obama is trying to sell the Trans Pacific Partnership Agreement on the basis that it will enable the United States and not China to write the rules of international trade.

But this new treaty, based on what has been reported about it, will make the U.S. and Chinese economies even more interlocked than before.

The problem from my standpoint as an American citizen is the difference between the status of Chinese corporations and U.S.-based corporations in their home countries.  Chinese corporations serve the goals of Chinese government policy.  U.S.-based corporations serve the interests of their executives and stockholders, and them alone.

A U.S. investment in China could take the form of buying shares in Chinese companies, or it could take the form building factories or even retail stores in China.  The same would be true of Chinese investments in the United States.

Currently Chinese investment in the United States is greater than U.S. investment in China.  That is a natural result of the Chinese trade surplus.   Dollars that Chinese earn through exports have to go somewhere.  Some of them are used to buy Treasury bonds to help finance the federal government.   Others go to buy American assets.

Free trade, fair trade and economic nationalism

The theory of free trade is that everybody benefits when individuals and corporations based in different nations are allowed to buy and sell goods and services without restriction.

Unfortunately most of the world operates on a different theory—that the exchange of goods and services should be to the benefit of the nation, not the corporation or the individual.

Subcontracting of manufacturing by, for example, Apple Computer to the Chinese company Foxconn is of mutual benefit to Apple and Foxconn, but it is not of mutual benefit to the USA and China as nations.  It is China’s gain and America’s loss.

Governments of China, Japan, Germany and other countries regard regard the unit of international economic competition as the nation rather than to the individual or the corporation.  They don’t care about the economic benefit to the trading partners.  They’re concerned about the economic benefit to the nation as a whole.

If an American corporation wants to do business in China or Japan, its executives have to provide something that benefits the Chinese or Japanese economy—a transfer of technology, or the creation of manufacturing jobs.

You have the strange situation of American business corporations dictating policy to Washington while kowtowing to Beijing.

What is Hillary Clinton’s trade policy?

HIllary Clinton

Unlike with Donald Trump and Bernie Sanders, it is hard to figure out Hillary Clinton’s positions on trade treaties.

They are clearly and consistently opposed to all the major trade treaties from the North American Free Trade Agreement onward, including the proposed Trans Pacific Partnership Agreement.

Clinton has been all over the map on this issue, supporting some trade treaties and opposing others.  The TPP agreement was signed while she was Secretary of State.  She supported it at the time, but now has doubts.  Some observers, however, wonder whether that is her true opinion, or whether pressure from the Sanders’ campaign has pushed her to the left.

If you put that topic to one side, I have to say that her foreign trade proposals are more detailed and thoughtful than either Trump’s or Sanders’.  She at least recognizes that the key is for the United States to rebuild its manufacturing strength rather than trying to force other nations to change their own economic policies.

Here are key Clinton proposals:

• Reform the tax system so that American businesses can’t evade U.S. taxes by “inversion”—an accounting scheme where profits are assigned to overseas subsidiaries in tax havens.
• Provide tax incentives for manufacturing companies to locate and remain in the United States, especially in high-unemployment areas.
• Invest in infrastructure and in research and development to build up U.S. productivity.
• “Aggressively combat” violations of trade treaties by foreign governments.
• Set a “high bar” for future trade treaties.

Don’t ram TPP treaty through on a fast track

The Trans-Pacific Partnership Agreement (TPP) is a proposed treaty being negotiated by representatives of the United States and 11 Pacific Rim nations, which would create international tribunals with authority to override laws and court decisions that interfered with corporate rights.

The treaty is being negotiated in secret, but some alarming provisions have leaked out.  Corporations would have allowed to ask for damages from unfair health and environmental regulations that cost them “expected profits.”  Food safety laws could be overridden if they exceeded “international standards.”  The U.S. Department of Energy would lose the right to regulate exports of natural gas.

Even if I’m wrong and some of these ideas are good, Congress ought to have the final say on these issues, and ought to be able to change policy to meet changing circumstances.

In order to get the treaty through, President Obama will need “fast track” authority, which limits debate, creates an accelerated time frame and requires an up-and-down vote on the treaty with no amendments.

Asking for an up-and-down vote is reasonable; foreign nations shouldn’t be expected to negotiate twice. But the limited debate and accelerated time frame only make sense if the Senate is fully informed about the treaty in advance.  In this case, the draft treaty and the U.S. negotiating position have been withheld from Congress—although not from some 600 corporate representatives who are providing expert advice.

At present the government does not have “fast track” authority.  It lapsed in 2007.  It should not be renewed just to get TPP through.  Even if I’m wrong, and TPP is a good idea, Congress ought to be able to fully understand it before enacting it.   Americans should write their Senators and ask them to vote against “fast track” authority.

Thomas Geohegan’s Germany

I remember once years ago when my friend George was telling a bunch of us what a wonderful vacation he had in Paris.  It was a great place to be, he said, but there was one problem with the French and with Europeans generally.  “They have it too good.”

That’s the impression many Americans have of the European welfare states.  Yes, it’s nice to have long vacations, universal health care, beautiful parks, generous old age pensions and so on – but how then can the Europeans compete with the Chinese, the Koreans, the Indians or, for that matter, us lean and mean Americans.

Thomas Geoghegan, a Chicago labor lawyer, has written a new book Were You Born on the Wrong Continent? How the European Model Can Help You Get a Life to argue that the reverse is true.  He wrote that what looks like socialism to us Americans is precisely what makes France, Germany and the other leading European countries competitive.

He concentrates on Germany, because it is Europe’s leading economic power and because he likes the German model better than that of France and some of the others.  Germany’s social democracy is based not so much on governmental power as on empowerment of workers, he writes.  They have strong unions, workplace councils, representation on boards of directors and regional collective bargaining (so that the German equivalents of Borders and Barnes & Noble have to pay the same wages.)

This works.  The European Union, unlike the United States, has a positive trade balance.  Germany has a positive trade balance with the world, and with China specifically.  In fact, Germany for years was the world’s leading exporting nation, and now is a close runner-up to China; the United States is a distant third – astonishing when you think Germany has a population of 83 million, the United States more than 300 million and China more than 1 billion. None of this would be true if the keys to success in the global economy were low wages, no benefits and union-busting.

Yes, Geoghegan admits, Germany isn’t perfect, Germany has problems, the German economic model is eroding a bit under global competition, but overall Germans are doing better under their system than we Americans are doing under ours.

In Germany, it is difficult (though not impossible) for corporations to shut down operations and shift production to poor countries, so they think about ways of making their domestic industry more efficient and productive.  And because workers have a voice in decisions, they accept what is decided.  In the United States, Geoghegan says, it is easy for corporate management to make a decision, but difficult to implement it; in Germany, it is difficult to come to a decision, but easier to carry it out once decided.

China as number one

China, which has overtaken Japan as the world’s second-largest economy and Germany as the world’s largest exporter, is poised to overtake the United States as the world’s largest manufacturer, according to the Financial Times of London.

China has been a manufacturing and exporting powerhouse throughout most of its history, going back to ancient times when the Romans bought Chinese silks transported over the central Asian silk road.  The Chinese lost the preeminence only after the Industrial Revolution in England and, at that, it took the Opium Wars for the British to obtain a favorable balance of trade.

So, as the FT points out, the rise of China shouldn’t be surprising.  It is a giant both in area and population.  It has the resources to create a high-tech sector the size of Germany’s while maintaining a low-wage sector the size of India’s.

China’s progress could be a good thing for the United States, if we ourselves were not falling behind. We have more to gain from the prosperous China of today than the starving China of the 1950s and 1960s.  China could be as a good customer for our companies as it is for German and Japanese companies.

China has a lot of problems, which may cause its economy to falter or crash. I would not wish to live under the autocratic Chinese government. But the Chinese leaders get one important thing right.  They understand that the key to national power is a productive economy, and their priority is jobs, jobs, jobs.

What good are Democrats?

During the 2004 election, Senator John Kerry, the Democratic nominee, told an unemployed worker that he had no real answer to the outsourcing of U.S. jobs overseas, but that he unlike President George W. Bush would not make things worse. This was an honest statement, and a true statement, but it also was an inadequate statement.

Does President Barack Obama have any better answer than Senator Kerry did? If not, what good are the Democrats?

Joe Bageant, in Deer Hunting With Jesus, and Thomas Frank, in What’s the Matter With Kansas? wrote about the disconnect between college-educated white liberals and the struggles of working people.  They pointed out that it is not so much that so many working people vote on the so-called cultural issues – abortion, gay rights, school prayer – rather than economic interests, as that there is not a dime’s worth of difference between the two parties on economic issues.

I have to admit that I don’t have a complete answer to these problems myself, but then I’m an old retired guy in Rochester, N.Y., not someone who claims to be qualified for the highest office in the land.

I think that a good start for a Democratic administration would be to (1) take advice from labor and consumer organizations more than investment bankers, (2) put people to work repairing our deteriorating bridges, levees, water and sewer systems and other infrastructure, (3) regulate and break up predatory financial institutions that divert savings and wealth away from the real economy, (4) use the power of government contracting to foster “green” and high-tech industry, as was done in an earlier era with semiconductors, the airlines and other industries and (5) yes, as Kerry said,  stop making things worse, such as with tax breaks for industries that close U.S. plants and relocate overseas.

Are corporations over-taxed?

Are U.S. taxes on corporate profits too high?  They are the second-highest in the industrial world.

Many European countries keep corporate taxes relatively low by raising money through the Value-Added Tax, a kind of sales tax imposed at every stage of production on the value is supposedly added.  The advantage from the standpoint of government is that the tax is invisible; prices in European countries are generally higher than in the United States, but the reason is not immediately obvious to the consumer.

Another advantage of a VAT is that it is rebated on goods that are exported.  The United States years ago tried to offer subsidies for exports equivalent to VAT rebates, but this was ruled an unfair trade practice by the World Trade Organization.

Don’t weep for corporations, though. Nearly two-thirds of U.S. companies, including General Electric and ExxonMobil, pay no U.S. income taxes at all.  In large part, this is because they get credit against their U.S. taxes for taxes they pay in foreign countries, and they arrange things so that most or all their profits are earned in foreign countries.

Some say that corporate profits shouldn’t be taxed at all.  The argument is that corporate stockholders are taxed twice, once when the corporation reports a profit and a second time when the stockholder receives a dividend. My answer is that, as a stockholder in a corporation, I get many benefits not available to an individual businessperson. The corporation is an artificial person which acts as a buffer between its creditors and me, the owner. If a corporation goes under, the most I can lose is what I invested; all other losses are absorbed by other people.

Another advantage of owning stock is that I have a choice as to when and whether I sell it and take a capital gain.  If I have stock in my estate when I die, in most cases the gain in the stock price over my lifetime is not taxed at all.

The economist Robert Reich, who was Secretary of Labor in the Clinton administration, suggested in his book Supercapitalism that corporations be exempted from income taxation, but owners of stock be taxed both on dividends and on reinvested profits.  In theory, this would be fair, if investment income were taxed at the same rate as wages and salaries. In practice, this would be a huge deterrent to investing in stocks; in a year like 2009 when the value of my stock portfolio fell through the basement, I would still face a sizable tax liability for those reinvested profits.

Senators Ron Wyden, an Oregon Democrat, and Judd Gregg, a New Hampshire Republican, have proposed a tax bill which they say would close the loopholes that would enable corporations to avoid paying U.S. taxes, while lowering the top corporate income tax rate from 35 percent to 24 percent. President Obama hasn’t taken a position on it, but their idea reportedly has White House support.

I guess I am for this if the loopholes really are closed. I don’t have an informed opinion as to what corporate tax rates should be; from the government’s standpoint, it is better to get some revenue from a 24 percent top rate than zero revenue from a 35 percent rate.

My misgiving is that the proposal is in part a reaction to the power of corporations to play national governments against each other. They have the power to to pack up and move if they don’t like a national policy.  The only solution in the long run is international agreement on corporate taxes through some body such as the Organization for Economic Cooperation and Development.

German companies and labor representation

Germany, as I noted in an earlier post, shows that it is possible for a nation to maintain a high material standard of living while still competing successfully in the global arena.

Germany is the world’s second-largest exporting nation, behind China, and for many years was number one, and it has the world’s third-largest trade surplus, behind China and Japan. Be it noted that there are about 60 million Germans and more than 1 billion Chinese.  At the same time German workers get six-week vacations, generous old age pensions and guaranteed health insurance.

Thomas Geoghegan, a Chicago labor lawyer, has an excellent article about this in the March 2010 issue of Harper’s magazine.  He attributes Germany’s superior economic performance to its system of worker participation in corporate governance which, ironically, was imposed on Germany by the victorious allies after World War Two.

Workers have equal representation on the boards of directors of large corporations with shareholders, although the shareholders have the deciding vote in case of a tie.  The important thing from the workers’ perspective is that they know what’s going on.  They know the financial situation of the corporation, and they know its plans.  If a company is considering moving a manufacturing operation to Asia or eastern Europe, the union can make a counter-proposal to make it economically feasible to stay in Germany.

I don’t think that is the whole story, but I do think it is a great advantage to Germany to avoid the kind of class warfare we have in the United States.  Workers can suggest improvements in efficiency without fearing they will jeopardize their own jobs.

In the 1950s, Walter Reuther, the head of the United Auto Workers, reportedly urged General Motors, Ford and Chrysler to make a line of fuel-efficient cars; the companies reportedly reacted with outrage at this infringement of management prerogatives, and told Reuther to restrict himself for bargaining for pay and benefits.  (I don’t have a historical reference for this, but I find it believable.)

Even if you don’t think worker participation is the cause of Germany’s economic success, the facts show that it hasn’t prevented that success.

You may say that this is all very well for Germany, but its institutions can’t possibly be transplanted to the United States.  But the United States has a long history of adopting good ideas from Germany.  The Joint Chiefs of Staff of the U.S. armed forces are modeled on the Prussian General Staff.  U.S. corporate research laboratories and research universities were inspired by Germany models.  The U.S. interstate highway system is modeled on the German autobahn.  The secret of success is to take other people’s good ideas and improve upon them.

Deficits public and private

I posted this item on March 20, 2010 and expanded my comments on June 6, 2010.

I think the overall U.S. trade deficit is a more serious problem than the government revenue deficit. Our unemployment rate is worse than the world average, but our economic decline is not so bad.  You can click on highlighted words for the full CIA World Factbook lists or look below the fold for the basic figures.

The point of all this, it seems to me, is that these are all forms of deficit. If we as a nation import more than we export year after year, that is a deficit. If we fail to find jobs for our working-age population, that is a deficit.

A declining economy feeds into all the other deficits. If we had good economic growth, if we had a high-wage full-employment economy, all other problems would be relatively easy to deal with. But with a stagnant or declining economy, the other problems become intractable.

The loss of American independence

In 1956, the British and French governments defied the wishes of the U.S. government by invading Egypt and taking over the Suez Canal.  President Eisenhower forced them to stop by threatening to sell the U.S. government’s holdings of Pound Sterling bonds, which would have crashed the value of the British pound and brought about an economic depression.

Now the United States government will soon be in a position, and may already be in a position, where the Chinese government could order us out of Afghanistan, or tell us to keep hands off Taiwan, simply by threatening to sell their U.S. Treasury bonds, thereby crashing the dollar and the U.S. economy along with it.

The weak U.S. position is not so much due to the U.S. government budget deficit as to the overall U.S. trade deficit with the world.  It would not be so bad if we were borrowing from foreigners in order to build factories and create new businesses and industries, but our borrowing is to finance current consumption. What we need to be thinking about as a nation is how we can produce more for our own needs and to export.  We can’t downsize our way to prosperity.

A parable for our time

Charlie Munger, the long-time partner of Warren Buffett in his Berkshire-Hathaway investment fund, wrote a caustic parable which sums up very nicely the economic history and current economic plight of the United States. Click on this to read it.

Germany as an economic role model

The excuse we Americans give ourselves for the erosion of our manufacturing industries is that we can’t be expected to compete with the sweatshop industries of China and other low-wage countries.  But workers in Germany get higher wages than American workers, and yet Germany enjoys a trade surplus with the world and with China.  While the United States exports soybeans to China, Germany exports high-speed railroad technology.  Germany in fact was the world’s top exporting nation for years, until last year when it took second place to China. That’s amazing, when you consider that Germany has only 83 million people.

There is a good article about Germany’s achievements by a business writer named Eamonn Fingleton in the March issue of The American Prospect magazine. Click on this to read it.

The basic facts about Germany’s economic performance can be found here and here and here and here.  The counter-argument is that although Germany as a nation is more solvent and its workers better-off, the growth of its Gross Domestic Product has lagged behind the United States. But Gross Domestic Product is a poor indicator of national well-being, as has been known for some time.

The basic fact about Germany is that it is run for the benefit of producers rather than consumers.

Germany’s policy of fostering manufacturing industries goes back for more than a century. Unlike Americans and Britons, Germans historically have believed that the unit of economic competition is not the individual nor the firm, but the nation.

Germany never enacted anti-trust laws. When German companies have dominant positions in their industries, like Eastman Kodak Co., Xerox Corp. and IBM Corp. in the 1970s, the German government encourages them, not tries to break them up.  The structure of German industry is like what U.S. industry would be if, a century ago, industrialists and financiers such as John D. Rockefeller Sr. and J.P. Morgan had been given free rein.

As a result, German banks are closely allied to industry in a way that wouldn’t be considered proper in the United States.  Fingleton notes that German manufacturers have hausbanks that keep them going through recessions, and enable them to come back stronger than ever. We have had nothing like that in the United States since the Morgan era.  Big American banks  devote themselves to “financial engineering”; the German banks invest in companies that do actual engineering.

The Germans have more effective means of promoting savings and investment than cutting the top tax rates for millionaires and billionaires.  Fingleton points out that German industrialists early on saw the relationship between scientific research and industrial growth.  When George Eastman decided to establish Kodak Research Laboratories here in Rochester, he traveled to Germany to see how it was done.

The other major force in the German economy is the power of the German labor movement.  German trade unions resist outsourcing, but work with their employers to make their companies more efficient and competitive.  Unions have representation on the boards of directors of large corporations – an innovation introduced in the late 1940s by the British occupation authorities under the then Labor government.

The power of labor unions means German workers have greater job security, which may be a handicap to individual employers but benefits the German economy as a whole, Fingleton claims.  In downturns, German firms tend to cut hours of work rather than employees.  German employers have a greater incentive to increase the productivity of their workers, through training and technology, and as a rule German workers stay with their employers instead of taking new skills elsewhere.

When you look at these achievements, you have to consider that German industry was devastated during the Second World War and Germany had to rebuild their economic structure literally from the ground up, and then that for the past 20 years Germany has been struggling to integrate the dysfunctional East German economy into the larger economic structure.  It’s quite a success story, and if not one to copy in all aspects, one to learn from.