Monday, May 5, 2008


For all the gnashing of teeth in the Democratic primaries about NAFTA, you’d think that were our number one trade issue. Just “fix” NAFTA, and our record trade imbalance will disappear, right? Wrong!

In fact, the most important impediment to American producers in the global market is our antique tax system. Unlike more than 140 of our trading partners, the United States stubbornly sticks to a system that primarily taxes personal and corporate income. Virtually every major American trading partner large and small (all but the oil exporters) has as a major component if its tax regime some sort of consumption tax. The most common form is a value added tax as in the EU, China and Mexico. Other countries, notably Canada, rely on sales taxes.

Whatever the form, these consumption taxes have one thing in common. Under international trade rules, they are “border adjustable.” That is, they are applied to imports at the same rate as to domestically produced goods, and they may be and usually are rebated on exports. Typically, the border adjustment runs in the range of 15 – 25 percent. Ten percent here, five percent there; pretty soon, you’re talking about real money, as a former senator from Illinois might have put it.

Since the US declines to adjust its tax system, it is by choice a loser in international trade. We have decided not to join ‘em, so they beat us. We seem to insist on doing poorly as a trading nation.

By comparison, most international trade negotiations and most trade disputes involve factors a lot less significant than the disparity in taxes. In fact, our “free trade” agreements are silent on border tax adjustments, leaving our trading partners free to increase their advantage not just while negotiating but even after the agreement is in place.

What’s wrong with Americans? Why is there no sense of outrage at this huge self-inflicted wound? Part of the answer can be found in our “silo” concept of economic policy-making. We have no sense of national purpose or strategy when it comes to economics and trade. Tax people do taxes; trade people do trade. Never the twain shall meet, apparently.

If you think we’ve paid too high a price for too long for silo government, feel free to join in a discussion this Thursday May 8th with Yale Law Prof. Michael Graetz. He has a plan for a “competitive tax” system that I like a lot. He’ll be addressing the Coalition for a Prosperous America Issues Forum (which I chair) from 10:30 until noon EDT. Contact IAS at or 202-393-8600 if you want to be there in person or join or Webinar. You trade people will be glad you did!

Charles Blum

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