WTO helping China Loot Caterpillar

Caterpillar is one excellent company. It is building new factories now in Texas, Arkansas, and North Carolina, from which it will export products made by American workers all around the world. Its excellent worldwide parts distribution network gives its used equipment a very high resale value. But on September 29 Caterpillar announced it is building its twelfth factory in China -- this one to produce mini-excavators.

Why can’t Caterpillar make a profit exporting mini-excavators to China? The answer is simple: China has a 30% tariff on all excavators. In fact it has a similar high tariff on just about every vehicle, be it a Ford car, a GMC truck, a Harley Davidson motorcycle, or a giant mining machine made by Bucyrus International.

When President Obama’s economic adviser Larry Summers was Secretary of the Treasury under President Clinton, he oversaw China’s entry to the WTO (World Trade Organization), and he let China declare all these vehicles as a “strategic sector” entitled to high protective tariffs. This error, by itself, should have disqualified Summers from ever again holding a responsible position in the United States government.

Summers, like nearly all economists, does not worry about such trivial things as unfair tariffs imposed by our trading partners. In his ivory tower, trade is always assumed to be in balance. Thus, when China puts a tariff on one of its imports, it causes the exchange rate of its currency to go up in value, which hurts the competitiveness of its exports. However, China easily found a way out of the ivory tower assumptions. It simply manipulates currency exchange rates to make its exports attractive and to keep imports expensive, thus perpetuating and increasing its trade surplus.

The Chinese government has long used these tariffs as a lever in order to loot American companies of their technology. First it forces vehicle-making companies to locate their factories in China if they want to sell to the growing Chinese market. Then it forces them to “share” their proprietary technologies with Chinese competitors. Caterpillar already has 11 factories in China. It also has two Chinese competitors – Liugong and Sany – that are producing what one expert describes as “knockoffs” of Caterpillar models, and they are exporting them to the world.

Similarly General Motors Co., as a condition for producing vehicles in China, has to share its technology with China's SAIC Motor Corporation. At first SAIC just shared production and profits with GM on GM brands produced in China. Now SAIC competes directly with GM by selling its own models in China using GM's technology. Last year, Bloomberg reported:

SAIC and other Chinese carmakers that work with overseas companies are introducing their own models to boost margins in a country set to become the world's biggest auto market this year. Foreign automakers typically have no remedy because Chinese law forces them to work with a local partner.

Some progressives are pleased that Chinese technology looting helps redistribute wealth from the rich Americans to the deserving Chinese. But they ignore the effect that this looting will have on future world growth. Recently China told foreign car companies that are already manufacturing in China that they will have to share any electric car technologies that they develop with their Chinese competitors! Just how much will car companies spend on developing more efficient vehicles when they know that they will have to “share” whatever they develop?

China’s self-created trade imbalances have given it a 10% growth rate while its victims’ economies stagnate (exports stimulate growth). China is now using its rapid growth as a lever for demanding that high tech and pharmaceutical companies move their R&D laboratories and patents to China in order to continue selling to China’s growing market.

In Ayn Rand’s book Atlas Shrugged, looters seize control of the United States economy. They stifle economic growth by forcing creators to give up their inventions to the state. We are seeing just that sort of looting on a worldwide scale right now. China is looting western companies of their technology under cover of WTO rules that let them do it.

But buried deep within the WTO rules is a solution, a rule that lets trade deficit countries impose import duties or limitations in order to bring trade into reasonable balance. We could take the profit out of protective tariffs and currency manipulation simply by imposing a scaled tariff on the goods produced by any country with which trade is chronically out of balance. A scaled tariff is one whose rate goes up when our trade deficit with a country goes up, goes down when our trade deficit goes down, and disappears when trade moves into balance.

Such a tariff would force the currency manipulating countries to open up their markets to our exports or else they would lose their access to our markets. American companies would no longer have to let China loot their technology as the price of admission to China’s markets; they would be able to produce in the United States and still sell to China.

So is the WTO worth saving? On the surface, the answer is “No.”  WTO rules permit China to place 30% tariffs on vehicles. WTO rules let China manipulate currency exchange rates in order to keep its trade out of balance. WTO rules let China loot western companies of their technologies.

But there is one special WTO rule that could make the whole system work. It allows a country experiencing trade deficits to impose duties or other limitations on imports in order to bring trade into balance. It’s time that we started to take advantage of it.

The authors maintain a blog at www.idealtaxes.com, and co-authored the 2008 book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
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