Phil Gramm and Michael Solon shed some useful light on America’s trade problems in their December 2 Wall Street Journal op-ed. For one thing, they write: “The largest source of unfairness in world trade today is currency manipulation, which distorts exchange rates and trade patterns, cheating producers and consumers.” Bravo!

They also write: “After the U.S. entered the North American Free Trade Agreement, Mexican taxes on U.S. imports fell from roughly 12/5% to zero and Canadian taxes on U.S. goods dropped from roughly 4.2% to zero.” By treating tariffs as “taxes,” Gramm and Solon follow the practice of the Obama administration in advocating for the Trans-Pacific Partnership deal.

But they ignore the application of the Mexican value added tax and the Canadian tax of goods and services. These taxes – introduced or increased during the NAFTA negotiations – apparently are not taxes. Gramm and Solon ignore them, even though the new border taxes are often higher than the tariffs eliminated by the trade agreements.

The writers did not explain their curious usage. Others have asserted that the imposition of foreign consumption taxes on US exports should be ignored because the same taxes are applied on domestically produced goods sold in that country. That assertion ignores two crucial points:

  • Frequently, foreign governments – including almost every one of America’s 20 free trade partners — reduce their corporate taxes as they establish or increase their consumption taxes. In such cases, trade flows are distorted to the detriment of American exporters.
  • In almost all cases, foreign governments also rebate their consumption taxes on export. Usually, the importing country imposes its own consumption tax at the border. Almost uniquely the United States does not, resulting in a subsidy on nearly all imports into this country.

Currency manipulation is unfair and illegal under IMF Article 4. Our mismatched tax system is just plain dumb, a self-inflicted wound disadvantaging American trade in both directions. Small wonder we have chronic trade deficits and burgeoning foreign debt.