EXPORT EXPANSION: CAN THE UNITED STATES By Daniel L. Goldy I. THE CONTEXT OF THE PROBLEM. II. U.S. EXPORT EXPANSION I. THE CONTEXT OF THE PROBLEM A. The U.S. Trade surplus after rising to $7 billion in 1964—the highest level in modern times-has been declining almost steadily. Currently we would probably have no trade surplus if allowance was made for AID Public Law 480 shipments and other types of governmentsubsidized programs. B. The gradual disappearance of our trade surplus has been accompanied by a rise in protectionist attitudes. 1. A growing number of industry groups have developed the feeling that U.S. producers cannot compete for foreign markets and therefore we might as well turn inward and protect the domestic markets we have. 2. Other industry groups have experienced growing frustrations over continuing trade barriers barring entry into the EEC, and particularly into Japan. 3. Organized labor has switched its position to favor quotas in the face of rising unemployment at home and a growing concern about overseas investments by U.S. multinational corporations, which labor contends serve to export jobs. C. Congress has predictably responded to these protectionist pressures by enacting (in the House) a trade bill which could reverse the trend toward freer international trade, which has characterized the post-World War II period, and could conceivably usher in a trade war. D. One of the basic assumptions of the Congressmen sponsoring the legislation, and of the protectionist groups whose attitudes they are reflecting, is that the U.S. cannot compete effectively for world markets. The basic question is whether this assumption is correct, or whether the U.S. could compete effectively provided the private sector were backed by the proper government policies and programs. Daniel L. Goldy is the President of International Systems and Controls Corporation, Houston, Texas. E. Another way of stating the issue is whether the U.S.-armed with effective institutional arrangements comparable with those of other industrialized nations can increase its trade surplus significantly, and thereby cope with its persistent balance-of-payments problem. II. U.S. EXPORT EXPANSION PROGRAMS—A A. Generally speaking the problem of export expansion in the U.S. is that it has, since 1965, been viewed in terms that are too narrow and restricted. This represents a reversal of the programs and approach pursued from 1961 through 1964, which resulted in a constantly increasing trade surplus. The decline in the trade surplus began in 1965 with the adoption of policies that curbed U.S. exports, followed later by actions which dismantled some aspects of the export expansion program. B. A successful export expansion program for the U.S. must involve measures to facilitate the capability of U.S. business to obtain, by all reasonable means, market position abroad, and then to retain such position in the face of growing competition. Export expansion, therefore, involves more than exports per se. It also encompasses measures to encourage and assist overseas investments in production and marketing facilities, the establishment of joint ventures abroad, licensing of U.S. technology, and the freedom to use any or all the tools and techniques necessary for effective penetration of foreign markets. It is probably true that multinational U.S. corporations represent the most effective approach by private business toward achieving these objectives. C. Viewed in this broader context, what are the essential elements of a succesful export expansion program? 1. Export Finance.-The U.S. must have an export finance program that is fully competitive with those of the other developed countries of the world. At the present time, the U.S. does not have a fully competitive system. Moreover, the Federal Reserve Board has placed ceilings on the export credits which can be provided by private commercial banks. This had the initial effect of making export credit scarce and expensive. In addition, the U.S. is the only developed country which does not have a rediscount system under which export credit rates are insulated from the gyrations of domestic interest rates. No matter what other measures are taken, until the U.S. recognizes the vital importance of export finance and adopts an effective and fully competitive finance system, there can be no successful export expansion program. The details of what is wrong with our present export finance arrangements are contained in a critique prepared by a Special Task Force set up by the International Committee of the U.S. Chamber of Commerce. A government-private business roundtable discussion of this report was held Wednesday, January 20. 2. Foreign Direct Investment.-One of the essential tools for obtaining market position abroad is freedom to invest in production and/or marketing facilities. This is not an alternative to exporting, but in some instances is a logical outgrowth of exporting, and in other instances such investments make exports possible. It has been estimated that about one-fourth of U.S. exports are to foreign subsidiaries of U.S. companies. Nevertheless the U.S. has flown in the face of these obvious truths, and has imposed controls on direct foreign investment. Moreover, where such investments already exist, the U.S. has sometimes made it impossible for U.S. companies to export components and other items to their foreign subsidiaries through the administration of its tax laws. 3. Tax Policy.-Taxes, and how they are administered, can have a significant effect on expanding or contracting a country's exports. The issue of taxes, however, cannot be viewed from the standpoint of one country's system alone, but rather must be viewed in the context of the tax systems of competing countries. Most developed nations have a tax system that encourages exports, and to some extent discourages imports. The most widely utilized of these systems is the turn over or value added tax-normally referred to as the TVA. This tax is applied to the landed cost of imports, and is rebated for the country's exports, thereby providing its business with a significant export incentive and subsidy. Less well known are incentives geared to corporate income taxes wherein accelerated write-offs are permitted for investments in plants and facilities to companies devoting a significant percentage of their resources to exports. In Japan, for example, a formula is used that relates the rate of accelerated write-offs to the percentage that exports bear to total production. Other tax incentives are geared to special treatment for export promotion expenses and deferral of tax payments. The U.S., and other outside countries, will in all probability be confronted shortly with a situation in which the border taxes of the EEC will be harmonized upwards to levels which serve as an effective barrier against market penetration through imports. The U.S. should mount an all-out offensive on the present GATT rule that permits the rebate of indirect taxes but no direct taxes. At the time the rule was adopted, the U.S. was concerned about balance-of-payments surpluses instead of deficits. Moreover, it was never contemplated that the TVA would become the base for a country's whole tax structure rather than a minor part of it. The only other effective counter would appear to be U.S. adoption of tax provisions that offset these barriers, or tax arrangements which can be traded off for more reasonable treatment by the EEC. The Administration's proposal for special tax treatment for Domestic International Sales Corporations (DISC) is an attempt to accomplish this objective. In my view the DISC proposal may be more important as trading stock in dealing with the export tax preferences of other countries than as a stimulant to U.S. exports. Not that tax incentives would not be helpful in stimulating interest in exporting, but until the U.S. deals effectively with the other problems outlined herein, the ability of U.S. business to export on a competitive basis-rather than interest in the export potentials-will be the major limiting factor. To the extent that the DISC proposal actually improves the economics of exporting as against manufacturing and selling abroad or concentrating on the U.S. domestic market, it could have some effect on overall levels of exports. But it would probably be a more effective use of resources to put the equivalent amounts into an improvement of our export finance program. Another tax issue worthy of note is that the investment tax credit adopted in 1962 to help U.S. companies undertake the modernization of their plants and equipment so as to compete effectively for world markets has been repealed as an anti-inflation measure. The countries which compete with us for foreign markets have not dismantled their incentives for modernization of plant and equipment. 4. Tariff and Nontariff Trade Barriers.-Traditional tariff and nontariff barriers to trade have been regarded as the principal impediment to a country's export programs. Substantial progress was made in reducing tariff barriers between the developed countries in the Kennedy Round which was authorized by the Trade Expansion Act of 1962. Not all tariffs were removed, however, and little progress was made in dealing with the non-tariff trade barriers. These latter have become more important since the end of the Kennedy Round. Moreover, unless a way can be found to make progress in dealing with the nontariff barriers, they are likely to become more burdensome and restrictive as time goes on. Worthy of special note in this connection is the closed system practiced by Japan under which they have absolute control over imports so that no foreigner can compete for any part of the Japanese market without a decision having been made to allow it to happen. Measures taken by the Japanese under the label of trade liberalization, including reduction of tariffs and elimination of quotas, are essentially meaningless in view of the built-in defense in depth which their system provides. An effective U.S. export expansion program must include some approach to the problem of eliminating these trade barriers. 5. Wage Price Stability.—An important factor in the U.S. ability to compete for foreign markets is the existence or lack of it-of wage price stability at home. The maintenance of wage price stability from 1961 to 1964 was an important factor in increasing the U.S. trade surplus during that period. The average annual price increase in that four-year period was only 1.2% per year. The Administration accomplished this degree of stability through the voluntary cooperation of labor and management, working together in a White House Committee which formulated and established wage price guidelines. There has been a tendency to ascribe the rapid deterioration of the U.S. trade surplus after 1964 to the inflation that occurred beginning in 1965. It was in January 1965 that the White House Labor Management Committee, and the wage price guidelines which they supported, were scrapped. While those administrative acts were clearly mistakes and the resulting inflation was indeed a national misfortune, I believe that it is an exaggeration to say this is the primary or only reason for the declines that took place in the U.S. trade surplus. Inflation was also occurring during that period in the countries with whom we compete for foreign markets. While I believe that the inflation issue has been somewhat exaggerated, the maintenance of a reasonable degree of wage price stability is clearly an important ingredient in a successful export expansion program. 6. Transportation Costs.-A significant factor in the landed costs of exported goods are freight rates. The U.S. has been less than diligent in seeing to it that it is not discriminated against in ocean freight rates. Despite an effort launched in 1964, and continued by the MC over a three-year period, to eliminate freight rate disparities, many still exist. In effect the U.S. has allowed steamship conferences, which set their own rates, to establish significantly higher tariffs on items being exported from the U.S. than on those which the conference ships carry on their way to the U.S. Within the U.S. itself, the ICC has permitted discriminatory railroad freight rates to be established (notably in coal) which in effect levy higher rates on items destined for export than on the same items traveling between the same points that are destined for domestic use. 7. U.S. Overseas Commercial Services.-While many efforts have been made beginning in 1961 to improve substantially the caliber of the commercial services provided abroad through the U.S. Embassies, we doubt that anyone would contend that the U.S. services match those of our more aggressive foreign competitors. Given the other limitations of the U.S. export expansion effort, it is understandable that our overseas commercial services tend to have their functions limited primarily to the collection and dissemination of commercial intelligence. Moreover, such intelligence tends to be somewhat academic because of a lack of interplay between private business and government in a way that would serve to sharpen the awareness of embassy officers. 8. Government Support of Its Commercial Interests.-The U.S. Government has shown a reluctance to support vigorously the overseas interests of private U.S. business, not only with respect to the provision of effective overseas commercial services, but in all other aspects of foreign commercial policy. In part this stems from a long tradition of Government non-interference with business, and a business aversion to any hint of intervention by government in its affairs. In the international sphere, however, where private business must deal with the sovereign powers of other countries, it must have the most intimate relationships with its own government. Witness the enormously effective relationships. between MITI in Japan and the Japanese private business community— which is so intimate that outsiders cannot ascertain which party is really making the decisions. Or compare it with situations in which German, French or British businessmen are sometimes represented in negotia |