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Sen. Fritz Hollings Headshot

Eureka!

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Finally, at last, an important business magazine, The Economist, (1/21-27/12) recognizes the trade war that has ensued for sixty years. The cover article: "The Rise of State Capitalism," acts as if this is a recent phenomenon, concluding "The invisible hand of the market is giving way to the visible, and often authoritarian hand of state capitalism." But earlier stated:

State capitalism can claim the world's most successful big economy for its camp. Over the past 30 years China's GDP has grown at an average rate of 9.5 percent a year and its international trade by 18 percent in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion. China has taken over from Japan as the world's second-biggest economy and from America as the world's biggest market for many consumer goods.

After World War II, Japan started a trade war by closing its market, subsidizing its manufacture, selling its exports at cost and making up the profit in the closed market. Now, China adopts the ultimate of state capitalism by controlling its market, trade, research, technology, techniques, production, jobs -- its economy. I've been fighting state capitalism over fifty years. In 1968, I passed a protectionist bill in the U.S. Senate against Japan's state capitalism which was blocked in the House by President Lyndon Johnson. Then we passed four more of my protectionist bills through both Houses of Congress, only to be vetoed, one by President Carter, two by President Reagan, one by President George H. W. Bush.

Working with Corporate America, we were constantly thwarted by administrations calling for "free trade," "don't start a trade war." Now that the war is about to overtake us, Corporate America and the U. S. Chamber of Commerce call for "free trade," "don't start a trade war." Corporate America, Wall Street, the big banks, are making out like gangbusters with the easy off-shore profits. They don't have to worry about labor, safety or the environment. If a profit is made, no income tax; just reinvest for more off-shore profits. If no profit, walk away with no legacy cost.

When President Clinton gave China "permanent normal trade relations," off-shoring hemorrhaged. In 2006, the Princeton economist Alan Blinder estimated that a potential 42 to 56 million jobs could be off-shored, and we're still off-shoring more jobs than we are creating. All countries struggle to maintain and build their economies while the U. S. awaits an economic rebound from a recession that has been over for 2 ½ years. It's not a lack of demand, it's a lack of money. We're off-shoring payrolls.

The Economist never mentions the principal reason for China's success -- Corporate America. Corporate America is the fifth column in this trade war, and it won't be easy to get it reinvesting in the United States. For example, Corporate America needs certainty. With Washington running trillion dollar deficits, revenues will have to be increased. Corporate America withholds investing, awaiting the president and Congress to determine the increase. Corporate America needs protection for its investment. Take-over artists anxiously wait for a U. S. startup to succeed. Once an investment is up and making a profit, it's easy to go to China and take over the U. S. investment, unless it is protected. Corporate America must be assured that the government will retaliate against predatory practices; that the president will enforce our trade laws. Finally, Corporate America needs an incentive to come back home.

All we need to do is take the tax benefit to off-shore jobs and give it to Corporate America to on-shore jobs -- replace the corporate tax with a 6 percent VAT. In 2010, the corporate tax produced revenues of $194.1 billion. A 6 percent VAT in 2010 would have produced $700 billion. Since the poor spend most of their income on food, housing, and health, exemptions are in order. The VAT is on consumption -- the more you spend, the more you pay. This is the way to tax the rich. This tax cut releases $1.2 trillion in off-shore profits for Corporate America to repatriate tax free and create millions of jobs. This tax cut promotes exports, but it has no loopholes, which puts the tax lobbyists out of business. The tax lobbyists will howl: "We can't have a 6 percent national sales tax." Replacing the 35 percent corporate tax with a 6 percent VAT is a tax cut -- not a national sales tax. And don't tell me how everybody in Congress is against it. Submit it and let them filibuster. They will be filibustering a tax cut that downsizes government, gives instant tax reform, produces billions to pay down the debt and creates millions of jobs. You can easily break the filibuster.

To compete in globalization; to fight in this trade war; to survive state capitalism, the president and Congress will have to level with the American people. Stop the pollster politics about "big government" and "fairness." Tell the people the need for government; how we've got to retaliate against state capitalism to survive; how we've got to protect businesses' investment; how we have to enforce our trade laws.

If the president would campaign on competing in globalization, on fighting in this trade war, he not only could save his reelection, he could save the country.