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US Agriculture Has Failed To Benefit From Korean Free Trade Agreement

KORUS has not been good for US agriculture shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Trade Daily, Imports/Exports, International Trade

US Agriculture Has Failed To Benefit From Korean Free Trade Agreement

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A major reason the US Congress and Obama administration approved the US-Korea (KORUS) free-trade agreement in 2011 was the expected benefits to US agricultural exports.

Six years later, it’s now clear those benefits have not materialized. US agricultural exports to South Korea have fallen nine percent since 2011, coming in at $6.9 billion last year. To add insult to injury, South Korean agricultural exports to the US have surged under KORUS, up 62 percent to $748 million last year.

It’s all part of the larger picture of a trade agreement that has been a dismal disappointment for the US economy (and a big success for the Korean economy). Our trade deficit with Korea has doubled in just five years, reaching $27 billion last year. This disappointing result makes it clear that our trade agreement with Korea must be fundamentally revised or discarded. Below we offer some suggestions on how it could be revised to deliver positive results for the US.

Our largest agricultural export to South Korea has traditionally been corn. Yet since the advent of KORUS, US corn exports to Korea have fallen 52 percent, reaching $870 million last year, just 13 percent of all our agricultural exports to Korea. Pork and pork products have also fallen, by 27 percent to $360 million. Poultry exports have cratered by 86  percent, to just $19 million last year. On the positive side of the ledger, beef and beef products have risen substantially, up 56  percent to $1.06 billion, while fruit and vegetable exports have risen 42 percent to $672 million.

Corn is the biggest disappointment of KORUS. Corn prices have declined for years, due to five big worldwide harvests in a row, from 2013 through to this year. In addition, large and growing harvests from other nations, including Brazil, Argentina, and even Thailand and Mexico, are making the market more competitive, depressing prices and reducing US market share.

But Korean domestic policies have also played a role. In the 1950s, South Korea was one of the world’s poorest countries, a near-subsistence agrarian victim of Japanese colonialism. Today it is one of the world’s more affluent nations, with GDP per head of $27,633, ranking it ahead of Spain and Saudi Arabia. It’s likely to surpass many other mid-sized nations soon and, as we pointed out in July, there is every chance Korean GDP per head will surpass the US in 14 years.

The Korean economic miracle was achieved with strong state support for exports and restrictions on imports. Those policies are still in effect. For the Korean government, KORUS was simply another opportunity to further the success of their export-led growth model. Korea has run a trade surplus every year since 1998, finishing up last year with a surplus of $102.8 billion (7.3 percent of GDP).  In the agricultural sector, Korea keeps a tight control over its export and import markets. Earlier this year, the government approved a fivefold increase in the use of domestic rice stocks as feed, up to 500,000 tons, which helps to hold down corn imports.

Another policy issue in South Korea last year was bird flu. After an outbreak of bird flu, the government banned US imports of poultry and egg products in March 2016. The ban was rescinded in August, but the effect was to decimate our exports of poultry to Korea.

Still another example of Korean policy unfavorable to US exporters is the tariff schedule on beef. Many Americans assume that a free-trade agreement means just that: free trade, with no tariffs. In fact, while US negotiators are always keen to cut our already-low tariffs to zero wherever they can, foreign negotiators play a cagier game. So Korean tariffs on US beef imports are today at 24 percent. That’s better than the pre-KORUS level, but it is still a significant inhibitor on US sales into that market.

Korean tariffs are compounded by Korea’s value added tax (VAT), which is 10 percent and applied to all imports (on top of any tariff). On top of that, Korea has an excise tax, levied on certain luxury goods. Compare that to US rules on imports for, say, autos. In KORUS, we cut our tariff on Korean auto imports from 2.5 percent to zero. We do not have a national consumption tax. So it’s no wonder that sales of Korean autos in the US market have soared.

All these Korean policies aimed at furthering Korea’s export surplus expose the fundamental flaw of KORUS: the US government views trade agreements as foreign policy tools and seeks to open our market to build better political relationships, while many of our trading counterparties view the agreements as opportunities to further the growth of their economies. US farmers, workers, and manufacturing business owners pay the price for this excessive emphasis on foreign policy.

The solution is to renegotiate KORUS with a clear focus on our own economy, which is ailing, and not just in agriculture. We should not demand that South Korea buy more of any specific product. Instead, we should set out a goal of eliminating that $27 billion bilateral trade deficit over, say, five years. That would put the onus on the Korean government to develop a strategy to buy more American products of their choice. We expect that their solution would be to increase their purchases of US agricultural and industrial products.

The US has the most desirable consumer market in the world. If South Korea wants to keep selling cars, washing machines and its other exports here, it needs to find ways to boost its US imports. Note that such an agreement would have no bearing on our political and security cooperation. The US and South Korea share common defense interests and must remain close allies.

Free-trade economists often argue that bilateral deficits need not be zero between every pair of countries. As a general statement, that’s valid. But South Korea has a five-decade record of using unfair trade practices to support its own exports. The pretense that the US can negotiate a truly free trade agreement with such a country is ridiculous. So if there is to be any trade agreement, it should be one that provides the South Korean government with incentives to support US exports as the price for free entry into the US market. If South Korea won’t agree to such an evenhanded approach, then we are better off without a trade agreement.

Jeff Ferry is research director at the Coalition for a Prosperous America.

Tax proposal impacts companies with shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, In The News, International Trade

The Missing Trillion Dollars in Republican Tax Reform Plan

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The Republican tax reform plan is suffering from a shortage of funds. Paul Ryan and his colleagues are trying to give the American people a substantial tax cut as their signature achievement of 2017.

However, they are constrained by Congressional rules that limit increases in the federal budget deficit to just $1.4 trillion over 10 years. As a result, the plan is peppered with small-bore cutbacks to tax deductions and other maneuvers that make the plan seem small-minded and miserly.

Thankfully, there is one potentially large tax reform that could bring in a whopping $1 trillion, and empower the Ways and Means Committee to be truly generous with the American middle class.

There is a move toward sales factor apportionment (SFA) on the corporate income tax. The current Republican plan (also known as TCJA—the Tax Cuts and Jobs Act) sounds bold because it is slashing the top corporate income tax rate from 35 percent to 20 percent. Yet aside from that change on the corporate side, TCJA is basically a nip and tuck job. It fixes a few loopholes, but keeps most corporate loopholes, deductions, and exclusions in place—leaving us with one of the leakiest corporate tax systems in the world. Billions of dollars in corporate profit will continue to escape the IRS because they will be hidden in offshore subsidiaries or other tax structures that exempt funds from US taxation. This is called base erosion, since the tax base of corporate profits earned by US-based corporations escapes the IRS through clever tax planning.

SFA corporate income tax would be truly fundamental reform. SFA taxes corporations based on the portion of their profit that corresponds to their US sales. If they make half of their sales in the US market, then they pay tax on half of their global profits; it doesn’t matter if they use clever accounting to attribute profit to an offshore tax haven; it doesn’t matter if the consumer buys the product from a subsidiary in a tax haven. The data the IRS needs to calculate tax liability under SFA is much more readily available and much harder to fudge than the data used under the present system.

In an article to be published later this month in Tax Notes, we estimate that a move to SFA taxation would raise US corporate income tax revenue by a whopping 34 percent a year. That 34-percent uplift comes mainly because there are so many large corporations paying far below headline tax rates today. Just by requiring them to pay the headline rate on their US-destination profits raises the tax take substantially.

Here are the numbers: According to estimates from the Congressional Budget Office, the current tax system is set to generate $3.9 trillion in corporate income tax revenue over the 10 years from 2018-2027. Corporate tax cuts in the TCJA (mainly the rate cut from 35 percent to 20 percent) slice $847 billion off that total. A switch to SFA taxation, while maintaining the 20 percent rate, would add an estimated $1.04 trillion to the 10-year tax take. In 2018 alone, a move to SFA would add $68 billion to the corporate tax take.

That extra trillion dollars would make many other tax cuts feasible, in particular on the individual tax side. For example, the current plan to eliminate the deductibility of state and local tax payments could be dropped; the cap on mortgage interest deductibility could be raised or eliminated; and, most fundamentally, income tax rates for the middle class could be lowered further, making the tax package unarguably a “middle class tax cut.”

The Republicans claim they are attacking the erosion of the corporate tax base with their proposed 20 percent excise tax on payments by US corporations to foreign-based affiliates. But only days after lobbyists found out about the excise tax, the Republicans have reportedly added new exceptions that reduce its revenue by as much as 95 percent. This only makes a complex, inefficient system even more complex. It’s a sure bet that, within a short space of time, clever corporate accountants will find new ways to avoid what remains of the excise tax. In fact, you could almost rename the corporate side of this act the Tax Cuts and Jobs for Accountants Act.

There are other advantages to SFA taxation, such as greater fairness, greater predictability of future revenue, and benefits for small companies. So why haven’t the Republicans embraced it? The answer is that too many huge corporations paying little or no tax have been lobbying behind the scenes for months to prevent fundamental reform of today’s corporate tax system. It’s time for Congress to face up to the vested interests and consider some fundamental corporate tax reform.

Jeff Ferry is research director at the Coalition for a Prosperous America.

Outsourcing did not help IBM increase shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Logistics, Global Trade Daily, International Trade

IBM Offshores to India and Business Still Shrinks

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Technology giant IBM reported its third quarter results on October 17, and extended a stunningly long losing streak with its twenty-second consecutive quarter of declining sales. In four years, quarterly revenue has dropped 18 percent. As they say on Twitter: Sad! The problems at the computer giant are due mostly to the transition in the corporate world from onsite facilities to cloud computing, in other words shifting their computing needs to centralized operators like Amazon Web Services. IBM is a laggard in that business.

However in another area of the US technology business, IBM is the world leader. That area is shifting jobs to India. According to a recent report in The New York Times, IBM is now one of the few US technology companies with more employees in India than the US. IBM stopped disclosing employee numbers by location a few years ago, but according to the Times, Big Blue employs some 130,000 people in India now, compared to less than 100,000 in the US. IBM’s total employee base is 380,000. Each year it lays off thousands of people, and hires thousands more. But more and more of those new hires are in low-wage countries like India.

The Indians, who are good engineers and hard-working people, take a humorous eye to the American outsourcing trend,. The illustration below shows what Indians think of the US: “they export jobs”.

IBM says it’s trying to hire more people in the US. But even this claim is more public relations than reality. A recent story in the Greater Baton Rouge Business Report documented how IBM has picked up state and local government handouts for commitments to help cities in Louisiana, Missouri, and Iowa build up their local tech industries. But IBM has failed to live up to its hiring commitments in all three cities. A city councilor from Columbia, Missouri told the newspaper that IBM was falling short on hiring—and refusing to disclose figures.

“Nobody ever want to talk about any numbers and I toured the building one time and the place inside was virtually empty,” city councilor Karl Skala told the newspaper.

Cloudy Future

IBM’s core problem is that cloud computing, often presented as a technology revolution, is not that at all. It is mainly a business organization revolution, where corporate America (and the world) has discovered that it’s just too expensive and complex to manage the ever-proliferating number of software packages onsite, and instead outsourcing them to low-cost operators like Amazon. IBM is at the heart of the expensive, complex onsite software, services, and support business. Until a decade ago, this was a license for IBM to print money. Look at the example of a payroll system for the Canadian government. In 2011, IBM won a deal to install a new onsite payroll system with a bid of $4.62 million. Six years, and three dozen bid revisions later, the price for this project is up to $150 million and, according to The Register, a British tech publication, the payroll systems remain “a mess” and the project is “a boondoggle.”

The payroll system comes from Oracle. Now that Oracle has built its own successful cloud business, who in his right mind would manage their own payroll system? They can turn the entire headache over to Oracle to build, manage—and provide performance guarantees!

So business for the IBM army of software engineers is evaporating. Other companies that are successfully making the transition to the cloud like Oracle, Microsoft, Salesforce, or Dell-EMC have one or more franchise technology platforms that customers cannot do without. IBM lacks that. It tries to present its artificial intelligence platform that way, but this is too small and too young to carry an $80 billion giant.

So IBM tries to lower costs by eliminating workers in the US and western Europe and hiring new employees in low-wage areas. History shows that tech companies that try to make the transition to a new wave of technology by merely cutting costs rarely succeed.

US financial analysts and the US technology press generally buy the IBM hype about its leadership in buzzword technologies like “artificial intelligence” and “blockchain.” The British press is more realistic. A recent Financial Times article pointed out two things about IBM. First, if it does show its first revenue growth in more than five years next quarter, it will be because of a new mainframe computer product introduction. Second, at current stock prices, CEO Ginny Rometty’s stock options are worth $30 million.

Meanwhile, the Watching IBM Facebook page, which gathers information from laid off and retiring IBM veterans, is full of posts from folks with 15 or 20 years’ service at Big Blue. These employees are scrambling to get their just desserts in terms of health care coverage, pensions, and other benefits.

In the final analysis, it’s up to the US government to consider whether IBM’s lucrative government contracts should be more closely tied to IBM’s support for the US economy and employees.

Jeff Ferry is research director at the Coalition for a Prosperous America.

A positive balance in US shipments of export cargo and import cargo in international trade would lead to more US investments abroad.
Archives, Commentary, Global Trade Daily, Imports/Exports, International Trade

Don’t Believe What They Tell You About Foreign Investment

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We often hear of state and federal officials chasing after foreign investment dollars, trying to bring money into the United States.

Recently a dozen CEO’s of foreign companies met with the Trump administration to make the case that foreign investment is an unabashed good for America. Only a few days ago, Chinese President Xi Jinping reportedly told President Trump that one solution to the huge US trade deficit with China would be to allow China to buy more American companies.

The basic rule is that bigger trade deficits give rise to net incoming foreign investment. If we had a trade surplus, the US would be a net investor in other countries. America should strive to be both a net exporter of goods and a net exporter of investment dollars. Unfortunately, we are a net importer of both.

While a small fraction of foreign investments into the US are for genuinely new physical plant and equipment that create jobs, most of these investments are purely paper transactions and actually hurt our economy. Despite what investment bankers and local officials may say, foreign direct investment (FDI) is a poisoned chalice. Rather than a gift, it’s simply part of a global financial system that sustains our huge trade deficit and deprives the US of jobs and productive industry.

Ninety seven percent of foreign direct investment (FDI) represents the purchase by foreigners of US existing businesses with no net job creation. Federal data show that greenfield plants and physical expansion of plants account for only three percent of FDI. The transfer of assets to foreigners soaks up the excess supply of US dollars in the world market, keeps the dollar artificially high, and keeps us on the downward path to de-industrialization.

The sale of goods to foreigners (i.e. exports) reduces our trade deficit and creates jobs and income for Americans. When the US had trade surpluses, we were not only a net seller of goods but we were a net buyer of foreign assets. Today, as a trade deficit country, the basic economic math results in America being a net seller of our assets to other countries.

For the last 41 years, we’ve been running a trade deficit. That means we’ve been pumping dollars out into the world to purchase goods. As those dollars pile up in the bank accounts of foreign companies, individuals, and governments, they use some of those dollars to buy American goods. But some of our largest trading counterparties (especially China and Germany) run their economies with such a tight grip on consumer spending that they don’t buy a sufficient volume of goods. They restrain domestic consumption through fiscal, monetary, and other policies while ensuring that corporate profits rise. This enables them to produce more than they consume, export the difference, and rely excessively upon US consumers for their economic growth.

When they buy fewer US goods than they sell to us, what are they doing with the rest of their dollars? The answer is that they buy our assets.

That has two negative consequences for the US. First, it creates debts or liabilities that we will have to pay back at some point in the future. We pay dividends or interest payments on those debts before they come due.

Second, and more importantly, by buying US businesses and other assets with those dollars, they keep the dollar’s value high. Instead of selling goods, which would create jobs and prosperity here at home, we sell pieces of paper that represent a claim on the future of American companies or taxpayers. In effect, those foreign governments are exporting their unemployment to us. And whatever conventional mainstream economists may say, there is no mechanism to push our economies towards an equilibrium that would eliminate our deficit and other countries’ surpluses. As long as surplus countries find other uses for their dollars (and some governments will even hold dollars at zero interest, although most prefer investments like profitable US companies), we can remain in deficit indefinitely.

How significant is this phenomenon? According to United Nations data, last year foreign direct investment into the US totaled $385 billion. That’s about 75 percent of our trade deficit! If instead of buying up US assets, foreigners had spent that money on American goods, it could have wiped out 75 percent of our trade deficit and created at least 1.9 million jobs. (That’s based on rough estimates we published earlier this year that every $1 billion improvement in our trade deficit creates around 5,000 jobs.)

So while it might feel nice to hear that foreigners find American assets desirable, in reality, it is the result of global imbalances, including our problematic trade deficit and excessive surpluses in other countries. They deploy their excess dollars in a way that perpetuates the imbalances, with little or no economic benefit to the US.

China’s argument that the US should let them purchase more assets is exactly the opposite of the direction we ought to go. We need to make it more difficult, not easier, for China to invest its dollars here in the US. We need to use every tool in our arsenal to encourage China to buy more American goods.

Jeff Ferry is research director at the Coalition for a Prosperous America.