US Automakers Face Unfair Foreign Trade Practices
From a December 10, 2008 Detroit Free Press article
December 10, 2008
Foreign tax policies put U.S. cars at disadvantage
BY U.S. REP. MIKE MICHAUD
In the debate about the Big Three American automakers, unfair foreign trade practices have scarcely been mentioned and the very unlevel playing field on which we 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. Consider just one of these unfair practices: value added tax systems, which are used to discriminate against American cars, trucks and auto parts, as well as thousands of other products, by more than 150 of our trading partners.
The VAT 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 VAT 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. But it is also a barrier to foreign markets for products from the United States, a non-VAT country.
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.
Compare a German and 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 VAT taxes are rebated, and it costs $17,885 here — a price advantage of roughly 10% due only to the difference in tax systems, not corporate competitiveness.
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.
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).
This VAT 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, I and other members of Congress intend to introduce legislation to address this huge problem. Once we in Congress place the Big Three — and all other 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.
U.S. REP. MIKE MICHAUD, D-Me., represents Maine’s 2nd Congressional District and is the founding member of the House Trade Working Group, a leading voice for fair trade policies in Congress. Contact him through his Web site at www.michaud.house.gov.