U.S.-China Relations: Improving U.S. Competitiveness Through Trade

Finance: U.S.-China Relations: Improving U.S. Competitiveness Through Trade, April 22, 2021

The exit of Donald J. Trump from the White House almost instantly improved our trade relationship with China. Since both sides want to return to normal, it should happen rather quickly. Let us not do so too quickly. There are significant human rights abuses that should be addressed before we dot the i’s and cross the t’s. Let us not waste a good crisis to deal with the plight of the Uygurs. If not now, when? See our attachment, which contains our prior comments on slave labor and supply chains. 

While competitiveness is a good thing, justice is a better thing. Consumers may have to pay a bit more for goods produced at home and abroad, but there are worse things.

The Chinese economy depends on migrant labor, with rural migrants going to the coasts to work, but taking their social service systems with them. Peasants do not receive the same benefits as workers from urban China. They are sitting on a time bomb. 

Eventually, these migrants will object to the locality system imposed upon them and demand the same level of pay, benefits and consumerism as is earned by those designated as urban. When this occurs, the valuation of the Yuan will occur, assuming that the Chinese Communist Party survives. We do not make this assumption, however.

Chinese workers are not the only ones getting the short end of the stick in international trade. The CEO/Donor Class attack on unions for the past 30 years trades “competitiveness” for worker rights.. It has taken its toll on the American worker in both immigration and trade.  

Cheap goods and food are part of the equation, but not the only part. Tax policy is a major driver That has been facilitated by decreasing the top marginal income tax rates so that when savings are made to labor costs, the CEOs and stockholders actually benefit.  When tax rates are high, the government gets the cash so wages are not kept low nor unions busted.  As Chinese workers are not allowed to unionize, the working class in both nations become expendable factor in production rather than human beings.  

Increasing marginal tax rates will help. I am confident that a second reconciliation will make that happen, although the proposed rate increases on the richest taxpayers are not large enough to make a major difference. Until there is basic change in the economy, anything this Committee does will be a mere Band-Aid.

True competitiveness for workers can only come from ownership and control of not only the shop floor, but also supply chain decisions. If labor rates for overseas subsidiaries provide the same standard of living received by American workers in the same jobs (with more equal pay scales between them), there will be no thought of competitiveness. If common ownership includes common consumption, global price competition effects will be muted.

The question is how to get there. Merely encouraging worker investment in the market is not enough. It must be targeted toward direct control of the workplace.

The USA accounts proposed by President Clinton had the same feature, although as a supplement to the Social Security benefit rather than a partial replacement, although this feature would be muted by enactment of value added taxes. The flaw in using foreign investment to make up for lost worker revenue is that eventually foreign workers either radicalize or become consumers and demand their own union rights. 

The tendency for consumerism to follow industrialization is why globalization is a poor substitute for expanding the domestic population. Increases to the Child Tax Credit (and adding refundability) in the American Recovery Plan Act were a good first step, but we stop walking too soon. These changes need to be made permanent and sustainable. Government distribution of the benefit is fine when attached to unemployment and disability insurance payments.

Workers need the money regularly, as part of pay. In the short term, the quickest way to distribute money is to offset pre-payment of these credits as part of wages against quarterly income tax payments by corporate and individual filers. In the long term, comprehensive tax reform is required. Our current proposal is included in a second attachment.

An employer-paid subtraction VAT is the best means for distribution of the child tax credit in real time. This will decrease resistance to larger credits and, along with funding either public or private health care (as another credit), will end much of the incentive to resort to franchising, the gig economy and 1099 employment to dodge requirements for direct employment of full-time workers.

Separating out taxation of capital gains and income into an asset value added tax will end the need for all but the wealthiest workers to file income taxes at all. Ending direct filing should be a bipartisan goal. For a while, it certainly helped Mike Huckabee when he proposed it in 2008. Expanding provisions to avoid taxation of capital gains to all shareholders who sell to qualified ESOPs will kick start employee-ownership.

Another essential step toward employee control is repeal of the Taft-Hartley Act prohibitions on concentrated pension fund ownership. Once we are farther down that road, we can discuss how changing the flow social insurance payments might speed up the process. Seen from the perspective of employee-owners, there will be less resistance.

Over a fairly short period of time, much of American industry, if not employee-owned outright  (and there are other policies to accelerate this, like ESOP conversion) will give workers enough of a share to greatly impact wages, management hiring and compensation and dealing with overseas subsidiaries and the supply chain – as well as impacting certain legal provisions that limit the fiduciary impact of management decision to improving short-term profitability (at least that is the excuse managers give for not privileging job retention).  

As previously stated, employee-owners will find it in their own interest to give their overseas subsidiaries and their supply chain’s employees the same deal that they get as far as employee-ownership plus an equivalent standard of living.  The same pay is not necessary, currency markets will adjust once worker standards of living rise.  

Over time, this will change the economies of the nations we trade with, as working in employee-owned companies will become the market preference and force other firms to adopt similar policies (in much the same way that, even without a tax benefit for purchasing stock, employee-owned companies that become more democratic or even more socialistic, will force all other employers to adopt similar measures to compete for the best workers and professionals). 

China could end its peasant labor system in advance of revolution.  Hopefully quick adoption of our suggestions to expand employee-ownership is more likely than revolution in China. If not, trade wars and rumors of trade wars will always be with us, along with the damage they do to both the financial markets and the real economy.

Eventually, trade will no longer be an issue.  Internal company dynamics will replace the need for trade agreements as capitalists lose the ability to pit the interest of one nation’s workers against the other’s.  This approach is also the most effective way to deal with the advance of robotics.  If the workers own the robots, wages are swapped for profits with the profits going where they will enhance consumption. This is the type of competitiveness we should be fostering.

I have not forgotten about the need to increase marginal rates. Separate consumption, employer, asset and high salary taxes will stack payments and remove shetlers, which is something the current system does not do.

Attachment from Finance: Fighting Forced Labor: March 18, 2021

...The other issue with China, as well as south Asia and the global south, is defacto slavery. Boycotting the products of slavery worked in fighting the Confederacy. The mass migration of slaves had more of an impact. A boycott of Xinjiang cotton and tomatoes is problematic during a pandemic, but generally it cannot succeed as a stand-alone action. Even though it may hurt in the short run, we should still do it. 

To make a boycott work, we cannot do it alone. At minimum, Islamic nations must join in as well and start linking the cause of the Uygurs to the New Silk Road. The ethnic Turkmen range from modern Turkey to Xinjiang, so a little solidarity on their part could go a long way. If we do go this route, the whole effort to interfere in Iran must end. We cannot be with South Asian Muslims on some things and expect solidarity with them on others.

On the moral front, I am not sure we have room to talk. We hold migrants in stark conditions prior to deportation. If you doubt it, visit Lewisburg Federal Prison. Also stop in the Federal Prison Industries factory while you are there. Visit any food processing plant with large immigrant workforces (send people undercover) and see how many workers were trafficked and how local law enforcement reacts when they decide they want to leave. Examine the plight of sex workers in the United States and see how many of their pimps have arrangements with local police.

Our best weapon is our example. As long as slavery exists in the United States, our moral voice is compromised. Again, I am not saying to ignore this situation. I am saying to go “All In” to really fight slavery. Also, call it slavery. On the same subject, examine the Chinese treatment of peasant workers at their factories. There is a two-level society, and American consumers benefit from this. Our commitment to abolishing slavery cannot live only in the fringes.

This is not to say that loopholes cannot be closed, although we must stop our own unfair trade practices as well. American food should not show up in countries just before harvest when doing so depresses the price of local agricultural products. Poverty begets slavery. Making others poor is an invitation to exploitation.

Poor farmers can either be individual or tenant farmers who are essentially peons. The drive for lower food prices for American consumers comes at a human cost. This is especially true when only one buyer dominates the market, as is sometimes the case for export to America (if not often). Poor factory workers never have access to collective bargaining. This factor also  drives down wages in American factories - often those with immigrant labor bearing the brunt of bad working conditions, poor wages and lax enforcement. The major difference is that being blacklisted in the United States for attempting to organize is rarely deadly, as it can sometimes be overseas.

Improved enforcement takes money and the willingness to accept higher food prices. More inspectors with more authority are needed at home and abroad. Government or third party inspection is vital to make sure work is safe, fairly compensated and able to organize. We cannot expect worker protection in China or Guatemala if we do not insist on it in North Carolina and Alabama.

Attachment: Tax Reform