“You gotta know when to hold ‘em, know when to fold ‘em.”
Congress and the Bush administration should heed the wisdom from this Kenny Rogers hit as they react to a ruling made public this week by a World Trade Organization panel.
The panel found that the continues to violate WTO rules against export subsidies by allowing U.S. companies to get tax breaks for income earned outside the country if they set up subsidiaries abroad, called foreign sales corporations.
It’s a potential blow to some marquee U.S. firms. But a prudent response will benefit U.S. households at a time when the economy starts to soften. And it will benefit many businesses—including some major Minnesota firms–in the long run.
There are two good reasons for folding on this one.
First, while the sales corporations clearly benefits companies like Boeing and Microsoft, which are large enough to take advantage of them, they do nothing for the well-being of the country as a whole. Second, with most of the world’s economies slowing together, as they have not done for decades, this is a particularly bad time to start a trade war with Europe.
Let’s start with a bit of background on the issue. Years ago, Congress decided to allow U.S. corporations to set up shell subsidiaries, called foreign sales corporations, in places like the Bahamas or the Cayman Islands. Firms that did so could book profits on export sales through these subsidiaries and not pay U.S. corporate income tax.
Classic corporate welfare, you may respond. Why should profits on goods sold in the U.S. be taxed, but not those sold abroad? That’s precisely the point. Politics, not economics, shaped this law. The old “level playing field” argument prevailed. Europe pours public money into its homegrown Airbus, subsidy advocates argued, so the U.S. should come to the aid of Boeing.
Although such trade meddling only damages an economy, it’s hard for politicians to resist. When it comes to trade, especially in products such as airplanes—which invoke national pride—no self-inflicted wound will fail to find champions in Congress. Members from a state affected by some other nation’s unfair trade policy call for stiff measures. Liberal Democrats, who enjoy union support and whose instincts are anti-trade, quickly sign on. So do isolationist Republicans of the Jesse Helms variety.
The U.S. did have a legitimate argument that other nations’ subsidies distorted trade. And under the old GATT framework, we had little legal recourse. That changed with the birth of the WTO a decade ago. Now it is much harder for a nation to block an unfair-trade judgement.
The U.S. brought unfair-trade actions against the EU on several products, including bananas and beef, and won. But the EU challenged the U.S. foreign sales corporations, arguing that they constituted an illegal subsidy, and they won. The U.S. rewrote its law, making some cosmetic changes. Those changes failed to sway the WTO panel.
The U.S. can appeal, or simply refuse to abolish the corporations. But the EU would likely retaliate. Trade would be squeezed; neither side would benefit.
Although some U.S. corporations that reap tax gains from the current systems will argue for a sharp response, we don’t have a legal leg to stand on under the rules of a treaty we agreed to. We should concede this battle, and fight the war on other fronts.
Everyone in the world could be hurt by trade war brinkmanship at a time when the global economy is so fragile. And in the longer run, many more U.S. businesses and workers will benefit from growing world trade. Locally 3M, Medtronics, St. Jude Medical, ADC Telecommunications and many smaller firms stand to lose more from a trade fight than they ever will gain from special tax treatment for foreign sales.
George W. Bush and the cooler heads in Congress should realize that this is a good time to walk away.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.