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OCT. 24, 2008 -- The trouble today with the United States economy is that the U.S. refuses to compete in the globalized economy, even though, as The Economist magazine reported recently, "Business these days is all about competing with everyone from everywhere for everything."

In globalization, the so-called "comparative advantage" is no longer God-given or determined by the weather, as was the case, two centuries ago, with David Ricardo's English woolens and Portuguese wine. Now commercial success is largely created, or not, by government policies, and the United States government refuses to compete for such success. In fact, our high standard of living has become a "comparative disadvantage."

In the United States we rightly require manufacturers, beyond competing, to comply with: clean air, clean water, labor rights, a minimum wage, Social Security, Medicare, a safe working place, safe machinery, plant closing notices, parental leave, etc. China requires none of this, and China, Japan, and Korea compete in international trade for market share, by closing or controlling their markets, trading at cost, and making up the profit in closed markets. Is it any wonder that Toyota is now the #1 automobile manufacturer as GM, Ford and Chrysler struggle just to survive?

We need to compete, to trade.

When I was in the Senate, I worked with Corporate America to keep our textile industry strong by passing a protectionist trade bill in 1968. President Lyndon Johnson, however, had Wilbur Mills, the powerful Chairman of the House Ways & Means Committee, block the measure.

Again with the assistance of Corporate America, I helped pass four protectionist trade bills through both Houses of Congress only to see each of them vetoed - one by President Jimmy Carter, two by President Ronald Reagan, and one by President George H. W. Bush.

As Sir James Goldsmith testified before the Committee of Commerce in the United States Senate in 1994:

"It must surely be a mistake to adopt an economic policy which makes you rich if you eliminate your national workforce and transfer your production abroad, and which bankrupts you if you continue to employ your own people."

But sadly, that's our policy today.

Denied protection by Democratic and Republican administrations, Corporate America began outsourcing and offshoring. Now Corporate America opposes our government competing in globalization with chants of "free trade," "protectionism," "don't start a trade war." Our nation's business leaders and their economists, use every trick in the book to mislead on "protectionism." They form organizations like The Trilateral Commission and The Business Roundtable, and promote books like "The World is Flat" to warn against protectionism. Even Time magazine joins the conspiracy by rating the United States #1 in the global-competitiveness race. The truth is globalization has become nothing more than a trade war, with the U.S. AWOL.

The irony is that we started the United States with protectionism. In his very first message to the first Congress in 1789, President George Washington counseled: "A free people should promote such manufactories as tend to render them independent on others for essential, particularly military, supplies." And the first bill to pass Congress, on July 4, 1789, was a 50% tariff on numerous articles. We financed and built the United States of America almost entirely with tariffs for more than a century. We didn't adopt a federal income tax until 1913.

Edmund Morris, in his remarkable book "Theodore Rex" about President Teddy Roosevelt, describes the United States winning the trade war with England. Roosevelt exclaimed at the time, "Thank God I am not a free trader."
Yet as jobs and production hemorrhage in this century, rather than stopping the outsourcing, the President and Congress shortsightedly stimulate the economy over and over again - to the tune of over $4 trillion in the past eight years. And it is not just jobs and production we are offshoring, but also research and development, high-end services and critical military materiel.

Congress must vigorously (re)assume its responsibility under Article I, Section 8, of the Constitution for regulating trade. It must protect our important production and standard of living. It must make it profitable to invest and produce in the United States.

As Paul Krugman suggests, we must "engage in some serious infrastructure spending." But a value added tax is in order, long overdue. Every industrialized country except the United States has a value added tax, which is levied on all imports and rebated to manufacturers whenever they export. Today, however, imports into the United States come without any taxes being imposed on them, and U.S. manufacturers not only must pay all corporate taxes but the VAT on their exports.

A U.S. VAT would immediately remove a tremendous disadvantage to production in the United States and begin to deter outsourcing, and the revenues from it would help eliminate both our massive fiscal and trade deficits. Since it would take a year for business and the Internal Revenue Service to gear up for a VAT, in the meantime, we should institute a 10% surcharge on imports as President Nixon did so successfully in 1971.

We must also activate the Commerce Secretary's list of materials critical to our national security. By placing tariffs or quotas on items necessary to our national security and producing them in-country, we will not only be better prepared to defend ourselves but we can put American workers back to work. In 1991, Admiral William Crowe, who was then Chairman of the Joint Chiefs of Staff, warned against the outsourcing of military supplies. In Desert Storm we had to await Japanese flat-panel displays before invading Kuwait. We had to await Swiss crystals before invading Iraq. Now we can't produce planes unless we get certain parts from India, and helicopters unless we get parts from Turkey. This nonsense has got to stop.
As President Lincoln said: "As our case is new, we must think anew and act anew. We must disenthrall ourselves … and then we shall save our country.

Ernest F. Hollings served as governor of South Carolina from 1959 to 1963 and as a United States senator for the state of South Carolina from 1966 to 2005. He is the author of Making Government Work (2008).

© 2008, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

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