Combatting the Exportation of American Jobs with Foreign Exchange Controls vs. Import Tariffs

[solutions]

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---------------------------- Original Message -----------------------------
Subject: The Email Campaign to Pres. Obama Re Executive Order 11387 vs. Tariffs
From: Solutions
Date: Fri, September 15, 2023 10:41 am PDT
To: ReadingLiberally-SaltLake@johnkarls.com
Attachment:
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Dear John,

I read with interest your posting earlier this morning on “Halting the 1993-2016 Exportation of American Jobs to China et al. with the Imposition of Tariffs à la 2017-2020.”

However, I do not understand how foreign exchange controls (such as produced by Executive Order 11387 which our 2/12/2014 Six Degrees of Separation Email Campaign to President Obama requested him to revive) increase the value of workers.

Could you please elaborate?

Your friend,

Solutions


---------------------------- Original Message -----------------------------
Subject: Foreign Exchange Controls (e.g. via 1968 Executive Order 11387) vs. Import Tariffs
From: ReadingLiberally-SaltLake@johnkarls.com
Date: Fri, September 15, 2023 4:43 pm MDT
To: Solutions
Attachment:
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Dear Solutions,

Thank you for your query.

Though if you post my response IAW your normal modus operandi, IMHO it is really “getting into the weeds” for purposes of our discussion of Prof. Desmond’s book.

Yes, our 2/12/2014 E-mail Campaign to President Obama requested him to REVIVE the “Foreign Direct Investment Program” of 1968 Executive Order 11387 which would have REVIVED strict foreign exchange controls in order to benefit American workers whose jobs were being exported.


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The Classic Example of Brazil

For economists (including Yours Truly who only majored in Economics for under-grad before law school), the case of Brazil best illustrates the effects of foreign-exchange controls.

A half-century ago, Brazil decided to enable its citizens to prosper by imposing virtually-confiscatory withholding taxes on dividends, interest, fees, etc., paid directly or indirectly to foreign shareholders.

Taking the “Big 3” (as of that time) automobile manufacturers (GMC, Ford & Chrysler), each made reasonable profits on marketing in Brazil cars manufactured in the U.S. – just like making reasonable profits on marketing U.S.-manufactured cars in any other country.

HOWEVER, in virtually all other foreign countries, the repatriation of dividends, interest, etc., was subject to a modest “withholding tax” of, e.g., 10% - 15%. – which the U.S. shareholder could credit against the U.S. income tax on its foreign-source income.

[Pres. Trump’s 2017 Tax Act exempted foreign-source income from U.S. tax, so any withholding taxes on repatriations to the U.S. became a bottom-line tax burden.]

BTW, U.S. withholding taxes on dividends/interest/etc. paid to foreigners was generally 30% - which provided an incentive for foreign countries to enter into tax treaties with the U.S. pursuant to which each country would mutually reduce or eliminate their withholding taxes on repatriations to the other country.

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So what did Brazil do???

I’ve forgotten how high the Brazilian withholding taxes were – but it would not surprise me if they came close to 100%!!!

And Brazil was careful to police every possible method for extracting profits, such as management fees, leasing arrangements, etc.

And shunned negotiating any tax treaties that would reduce them.

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Foreign-shareholder reaction???

OK, we made a “reasonable profit” on marketing in Brazil our American-manufactured cars but if we try to bring the profits home, they will be taxed into oblivion!!!

So let’s instead re-invest those profits into car-assembly plants to which we ship Detroit-made auto components.

And when we still have more profits piling up, lets re-invest them in plants that manufacture the components that our older plants are assembling.

Etc., etc.

INDEED, QUITE A FEW AMERICAN-OWNED SUBSIDIARIES IN BRAZIL WERE USING THE PROFITS THAT HAD PILED UP IN EXCESS OF MANUFACTURING FOR THE BRAZILIAN MARKET – TO EXPAND IN ORDER TO MANUFACTURE FOR SHIPPING TO OTHER COUNTRIES!!!

THEREBY DISPLACING AMERICAN EXPORTS TO WHEREVER WITH BRAZILIAN-SUBSIDIARY EXPORTS TO WHEREVER!!!

NB: Under “Generally-Accepted Accounting Principles” (“GAAP”), repatriation taxes on earnings that are “permanently reinvested” do NOT have to be recorded or disclosed – so we can pretend that the Brazilian profits are “free and clear” of any future taxes such as would be imposed if we ever tried to bring them home.

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Benefit to Brazilian citizens???

Now they are NOT merely needed for marketing the American cars.

They are needed for manufacturing them!!!

Increased demand for labor!!!

And increased demand for SKILLED labor, at that!!!

Just imagine what happens to wages when workers are in demand!!!


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Additional Observations

In retrospect, I’m not surprised that our last Six Degrees of Separation E-mail Campaign was our 2/12/2014 request for Pres. Obama to halt the Exportation of American Jobs by REVIVING foreign-exchange controls.

After all, less than 3 years later Donald Trump had assumed office and was combatting the Exportation of American Jobs with tariffs.

And, no, I don’t want to “get into the weeds” of how tariffs make imports more expensive and domestic supplies more attractive.

And into the DEEPER weeds of whether tariffs are borne entirely by the American public or whether the foreign manufacturer is forced to reduce prices to salvage market share which means the tax “incidence” (a term used by economists to describe who bears the economic burden of a tax vs. on whom it is formally imposed) was, per the economic literature on Pres. Trump’s import tariffs, largely borne by China.

HOWEVER, I’m not surprised that Pres. Obama spurned our request to REVIVE foreign-exchange controls.

AFTER ALL, we have often observed that America has “the best government money can buy”!!!

Your friend,

John K.