Digital Economy Trade Policy

Finance, Trade: Opportunities and Challenges for Trade Policy in the Digital Economy, November 30, 2022

That the Global South was ignored by the subcommittee and the witnesses is troubling. For these nations, the digital economy will include distance learning modalities. While the SpaceX Starlink constellation has been criticized as not being affordable for most people, a village or neighborhood could be given a shared link and server. 

Distance learning could include STEM, more advanced language proficiency and a more realistic look at American civic culture in all of its gore. The way Black and Brown people are really treated may stem the drive to leave home for a life of low wage labor in America.

In June of this year, we highlighted the fact that the next labor market to be tapped is Africa. As Asian labor markets mature, capitalists will seek cheaper workers. American trade policy should step in to train workers  before WalMart’s supply chain arrives.  From June, historically…

… capitalist firms would set up factories in developing nations with excess labor forces (usually due to modernization of agriculture or rent seeking by landed elites) and pay the workers as cheaply as possible. It is the messy way to industrialize. It seems to work, but it carries human costs while workers gather the leverage to organize and the power to increase domestic demand by consumption. Both of these factors increase wages.

We need not be messy about assisting the Motherland on its road to industrialization. As capitalism moves toward establishing a foothold in Africa, our trade policy must be ready to insist on the right of African workers to organize, partnered with the American labor movement in helping them to do so. We can partner with American colleges to establish campuses in sub-Saharan Africa so that their best and brightest need not come to us. We can come to them. 

Technical assistance on employee-ownership (which is still emergent in the United States), as well as in the creation of property rights for farmers, is essential. Finally, we can assist Africa in creating commodity futures markets of their own so that farmers can obtain working capital by selling futures and decide whether it is in their interest to sell food abroad. The natural progress toward industrialization is not inevitable. It can move past exploitation without stopping there.

The Ranking Member’s opening statement is correct, the Administration should begin working on restarting a Trans Pacific Partnership. It was ill-advised for Secretary Clinton to take it off the table in response to its rejection by the Stable Genius who pressed the issue, just to refresh all of our memories of why TPP was dropped.

Much of our supply chain difficulties come from the trade war started by the prior Administration, although the current administration does own its continued existence by not acting to reverse Trump’s petulance. In June 2019, we characterized 

trade negotiations with China, Japan, the EU, and the UK threatening tariffs have taken on the character of economic gunboat diplomacy, but without the Navy. These occur because the President is ill equipped by his background as a businessman to work cooperatively, which is the essence of governance in a free society. He has a freer hand in trade negotiations. Sadly, his experience as a CEO has not served the nation well. The modus operandi of most executives is to break things in order to be seen fixing them.  This must stop. The public is not amused, including the Chamber of Commerce, farmers and the stock and commodity markets. 

In March of 2020, we stated that “recent developments indicate that Amateur Hour at the White House over trade policy has ended. Our naked emperor has moved on to self-defense, allowing the adults to put things back together again.” 

On the security front, the “digital mercantilism” of China is troubling, however, it will not last. The Party  has backed down on its Zero COVID policy, but victory in the streets traditionally means that taking it to the streets has begun to work. It is a heady thing. There is no putting the genie back in the bottle. Not in China, not in Iran, not in  post George Floyd America. 

In each case, today’s protesters and revolutionaries will become the backbone of the next revolution.  For example, when the Civil Rights revolution made its way to the District of Columbia in 1968, it stayed to both end discrimination and move toward home rule. While most of that generation has retired or passed on, the District’s delegate is still going strong.

Again, to repeat prior comments, China is still firmly under the control of their Communist Party and membership still has its privileges, but the entrepreneurial spirit unleashed there has morphed into revolution. Their AI industry is often with the support of American expatriates. It is now surpassing what we can do. Research has or will soon surpass American progress. China may soon begin talking about our problems in protecting intellectual property, which are numerous. 

Let us hope that oura Expats also teach Democracy as well as they teach business.

Economic progress in China is not terribly different from the progress of economic and political freedom in the Global North of the Western World. While a Marxist revolution has never occurred in a Marxist state, a Marxian analysis (not the elevator speech that Stalin and Mao implemented), society moves forward in largely predictable ways. 

Aristocracy (or Party) brings about industrialization under a capitalistic despotism, which includes militarism and imperialism. As the peasantry is forced into slave like conditions in urban factories, they soon acquire skills and savings. Eventually, they demand civil and union rights, which their capitalist masters resist until a consumer surplus is required to match the labor surplus, usually because production exceeds worker income. 

Until the revolution occurs, and even after it does, current history has proven our digital vulnerability. It is simply unwise to keep the public Internet and the Internet of Technology on the same system. 

When I was a cost analyst with the United States Air Force, we had a dedicated line from the Air Force Finance and Accounting System in Colorado Springs. This was before the world wide web, but was likely part of the single system. More recently, as a contract administrator at the Department of Energy, we worked out a deal with our providers to allow Verizon to keep control of connections within buildings, while competing what is called “pipe” from buildings to data centers. 

To create a TechNet, it is better to keep physical connections separate rather than trying to program fire walls. In other places, we have proposed creating a network of overhead power and digital connectivity for electric vehicles, ending the need to further develop lithium ion batteries or self-driving cars. Such a system must separate system communication with Internet communication so that the system cannot be hacked, all the while letting passengers watch CNN, Fox News or Netflix on the way to their destinations. This infrastructure would also provide power to homes, factories and offices.

The next issue is the international use of Big Data, including the one-sided treatment in China where they see ours, but do not show theirs. I will further discuss issues of data privacy below, when discussing employee-ownership as an alternative to international labor agreements. For now, it is important to make a distinction. 

Some data is intellectual property to be used in creating a product or service. Other digital technology is the product, for example, the reading of an X-Ray by a South Asian doctor working from home. This work is for pay, so the question is the taxation of internationally provided services generally, as well as physical products. Readers familiar with the Center’s previous comments know where I am taking this from here on out.

The United States, in refusing to adopt consumption taxes, has cut off its nose to spite its face. Under the credit invoice VAT regime, imported goods and services would lose their VAT burden for what they export, with the importing nation adding their own VAT at import. Doing so ends the permanent disadvantage faced by American workers and small businesses and eliminates the ability of our new Billionaire Class to borrow against their fortunes to avoid taxation while consuming high-end goods and creating new ventures. 

This should become an electoral issue, or rather, a campaign finance issue. It would evaporate with public campaign finance. Current fundraising is the biggest obstacle to real tax reform. Until a candidate focuses on tax reform the way that Governor Huckabee senior focused on the Fair Tax, bipartisan corruption will continue and the working class will continue to lose ground. 

As usual, we have included an attachment on how trade would occur in a VAT-based system. Goods and services taxes would fund general government and what was the employer contribution to Social Security (which would from then on be credited on an equal dollar basis rather than a dollar-for-dollar match). A subtraction VAT on employer labor and profit will fund services to employees and their families (health care and the child tax credit federally, education and social welfare at the state level). 

As part of American entry into modern taxation as practiced by the rest of the Organization for Economic Cooperation and Development, we can negotiate which taxes are used to fund which activities on a global basis. No member state should try to push all of its social costs onto importers because some of these costs benefit worker families - which is part of doing business in a just economy. The importer benefits from such systems and should pay for them. Discretionary spending and retirement taxation, however, can be shed at the border.

To make sure that taxes are collected in the digital economy when due, especially regarding the use of Big Data in marketing and manufacturing, those who purchase or use it must be required to buy a license to do so. This will allow for investigation of how such data is used or misused and whether it is taxed correctly. In a VAT based system, imported data that arrives as a product rather than a component would be taxed on entry, but not as enterprise data.

Corporate income taxes would be abolished in this system. This will end all of the concerns about taxing intellectual property within an enterprise. As long as goods and services are taxed appropriately when consumed (both by invoice and subtraction VAT), the United States can be agnostic on where patents are held.  The recently enacted corporate minimum tax would thus be repealed. Sadly, the current opposition was party politics and ignored the fact that this tax was enacted as part of a larger agreement by the OECD. We signed it, we ratified it and repealing it must be international.

Please see the second attachment regarding our Asset Value Added Tax proposal, which comes from our usual tax reform attachment and comments provided to the revenue committees in their consideration of the Treasury Department Budget earlier this year.  Note that there have been updates to proposed rates based on recent analyses and the need for compromise due to the recent election.

Instead of negotiated minimum tax agreements in the OECD, agreements would be negotiated on Asset VAT rates. These should be uniform to prevent market shopping and revenues could be dedicated to such items as common defense (including the United States Navy, etc.) and international debt forgiveness (to square the circle drawn in the first section on Africa).

The AFL-CIO’s comments are not to be taken lightly, although playing catch up does not seem to be working well. It is time to shift from adversarial bargaining to the kind of representation that would take place where unions and professional organizations in a company hold the voting proxies of their members at shareholder meetings of employee-owned companies. Such meetings will replace unitary boards of directors. 

Our second and third attachments from June 2022 and July 2019 provide detail on the advantages of employee-ownership, both here and abroad. In brief, employee-owned firms would expand their ownership structures to overseas subsidiaries and to its current supply chain.  Transfer pricing would be based on a common market basket of employee-purchased goods rather than currency arbitrage.

This would likely require some modification to laws on both trade and fiduciary rules. Taft-Hartley limitations on how much of an employing firm a union pension fund can own must also be revised.  Zero rating asset VAT sales to broad based ESOP and cooperative enterprises is also necessary to end cross-border worker exploitation.

Aside from retention of capitalistic management structures, rather than cooperative ones, a big reason that ESOPs have not been more widely sought is the lack of additional cash and prizes. In the United States, such firms rarely challenge the implicit assumption that household consumption and finance is left to the household rather than provided cooperatively. (This is not the case with some overseas trade unions or cooperatives such as Mondragon).

Not asking the question of whether common consumption, housing and finance systems should be considered is its own answer.  If the question were actually asked, after informing employee owners of what is possible, the free market will have workers flock to these firms - especially in our post-COVID, broken supply chain world. If your company sells you housing where you can grow your own vegetables and lab-grown protein, prices never go up.

One advantage of employee and cooperative ownership would deal with the problem of “Big Data.” Employee-controlled financial and consumption systems will not sell their data or let their suppliers do so. Solving these issues will also defuse our constant arguments on economics and on which party is “winning.” We can begin to live together again as neighbors and friends, rather than being manipulated by an increasing hostile social media space.

Attachment: Trade Policy Video

Attachment: Asset VAT Video

Attachment: Employee Ownership