[Congressional Record (Bound Edition), Volume 154 (2008), Part 18]
[Senate]
[Pages 24760-24762]
[From the U.S. Government Publishing Office, www.gpo.gov]




                  U.S. TRADE AND MANUFACTURING POLICY

  Mr. REID. Madam President, my good friend Senator Ernest Hollings 
contacted me and asked if I could have printed in the Record a 
statement he has written about U.S. trade and manufacturing policy. It 
is my pleasure to do so.
  Senator Hollings was a longtime chair of the Senate Commerce 
Committee and a champion of American manufacturing. His statement 
contains some insightful and provocative thoughts of his and I 
encourage all of my colleagues to read it.
  Madam President. I ask unanimous ocnsent to have printed in the 
Record Senator Hollings' statement.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                       Economists and Free Trade

             (By former Senator Ernest F. Hollings (D-SC))

       The trouble with the economy is too often the economists 
     who advise, oversee and, in some cases, even manipulate it.
       This is the crowd that advised on and overly embraced sub-
     prime mortgages, derivatives and credit default swaps. The 
     crowd that advised on deregulating the financial industry. 
     And the crowd that, after over stimulating the economy for 
     the past eight years to the tune of $5 trillion of deficit 
     spending, is now calling for, you guessed it, even more 
     financial stimulus!
       According to the Congressional Budget Office, last year's 
     deficit or financial stimulus was $1.035 trillion. And as the 
     economists try to decide on the amount of stimulus sufficient 
     to jolt our clearly broken economy, we have already spent 
     $691 [12/5/08] billion on additional financial stimulus just 
     since October 1st--and it is not working.
       To really prime the pump of the economy, it should be 
     ``billions for immediate infrastructure--and not much more 
     for financial stimulus.''
       The need now is to create jobs and to stop increasing the 
     interest costs on the federal debt, costs that already 
     exceeds $500 billion a year--$500 billion which we should be 
     spending on universal health care and not on economic 
     steroids. More of the wrong kind of stimulus will only serve 
     to stimulate more production in China, at the expense of more 
     jobs being lost here at home.
       Of course, the economists for the global financial 
     institutions and the big multinational corporations know 
     this, but because their loyalties are more to their 
     institutions and less to our nation, they continue their 
     calls for ever more ``free trade'' and for continuing U.S. 
     trade and current account deficits.
       The irony is that economists learn in their very first 
     class in school that it was a trade war which brought us our 
     initial freedom as

[[Page 24761]]

     a country, and that semi-protectionism later helped build the 
     United States. England started a ``trade war'' with the 
     Colonies by adopting the Navigation Act of 1651 that required 
     all trade be carried in British vessels. Manufacturing was 
     forbidden in the Colonies, even the printing of the Bible, 
     and then the Townsend Acts drafted by Adam Smith placed heavy 
     import duties on a wide range of items. All of this 
     precipitated the Boston Tea Party that started the 
     Revolution.
       While we obtained our freedom in 1776, it wasn't until 1787 
     that we empowered Congress, in Article I, Section 8, of the 
     Constitution, to regulate commerce, both domestic and 
     foreign. President George Washington's first message to the 
     first Congress in 1789 warned that, ``A free people should 
     promote manufactories to render them independent of 
     essential, particularly military, supplies.'' Thereafter, the 
     United States was financed and built for 100 years with semi-
     protectionism, and we didn't even pass the income tax until 
     1913. At the advent of the Transcontinental Railroad, it was 
     suggested that the needed steel be obtained from England--but 
     President Abraham Lincoln strongly objected and required the 
     steel to be produced in the United States. And Edmund Morris, 
     describes how the U.S. won the trade war with England in his 
     remarkable book ``Theodore Rex'' about President Teddy 
     Roosevelt. President Roosevelt exclaimed at the time, ``Thank 
     God I am not a free trader.''
       Under the new phenomenon called ``globalization'', the so-
     called ``comparative advantage'' which underpinned the early 
     centuries 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, even though, as The Economist magazine reported 
     recently, ``Business these days is all about competing with 
     everyone from everywhere for everything.''
       Right after World War II, Japan started its trade war by 
     competing in international trade for market share rather than 
     profit. Japan closed its domestic market and sold its exports 
     at cost, making up the profit in its closed market. It 
     subsidized production and targeted certain items in trade--
     first textiles, then electronics, machine tools, robots and, 
     finally, automobiles. As a consequence, Toyota is today #1 as 
     General Motors, Chrysler and Ford struggle just to survive.
       China's post-WWII trade war began when it closed its 
     domestic market to articles domestically produced, but opened 
     it to foreign production in exchange for research and 
     technology. General Motors, Intel and Microsoft, among 
     others, have established major research facilities in China, 
     and the U.S. is now running well more than a $1 billion per 
     month trade deficit with China in just advanced technology 
     products. China has accumulated dollar reserves in excess of 
     $1.3 trillion, and it is now far and away the world's 
     superpower in trade.
       These behaviors by Japan, China, India and others are 
     manifest in almost all of America's imports, but they are 
     most manifest in automobiles, where the focus and the 
     consequences are crystal clear.
       The United States Congress looks at the BMW plant in South 
     Carolina, my home State, and the Nissan plant in Mississippi 
     as examples of relative success and wonders what's the matter 
     with Detroit?
       Yet BMW received a tax deferral benefit of $100 million to 
     locate in South Carolina and Nissan received over $300 
     million to locate in Mississippi. And all Detroit got--Ford, 
     GM and Chrysler alike--was tax incentives to leave the United 
     States and offshore its jobs and production.
       The supervisory personnel from Germany and Japan who run 
     BMW's and Nissan's plants have health care and retirement 
     benefits paid for by Germany and Japan. Detroit has to pay 
     for the health care and retirement benefits of its 
     supervisory personnel.
       BMW and Nissan have deductible health care for its 
     employees. Detroit has to pay full health costs on its 
     employees.
       BMW and Nissan hire forty-five year olds and under in order 
     to minimize health costs. Detroit has a lot of senior people 
     and legacy costs.
       The major parts that BMW and Nissan use to assemble cars in 
     the United States are produced 19% cheaper in Germany and 5% 
     cheaper in Japan because BMW's and Nissan's VAT taxes are 
     rebated when parts are shipped for assembly in the United 
     States. Detroit pays all local, state and federal taxes on 
     its parts.
       Nissan, with a largely closed domestic market, does not 
     have to make a profit, and thus located in the United States 
     for market share. Detroit needs to make profits.
       BMW and Nissan high-ball the costs of their imported parts 
     so as to minimize profits and taxes to the United States. 
     Detroit has to pay taxes on its profits.
       And now, no surprise, the U.S. has a net deficit of $10 
     billion a month in foreign car imports, or more than $1 
     trillion in the last eight years, all because of highly and 
     in some cases illegally subsidized competition with Detroit.
       And yet some influential economists still call this ``free 
     trade''.
       Senate Majority Leader Harry Reid charged Ford, General 
     Motors and Chrysler ``to get their act together [and] to come 
     up with something.'' But Detroit can't do it alone. The new 
     President and Congress must come up with something at the 
     same time for Detroit to recover long-range. Using his 
     authority to protect our national security, President John F. 
     Kennedy instituted his seven-point policy of protection for 
     textiles in 1961. Under Section 201 of the Trade Act, 
     President Ronald Reagan threatened quotas on automobile 
     imports in order to get Voluntary Restraint Agreements from 
     Japan. So clearly the authority is there for President-elect 
     Obama and Congress to impose quotas on imported cars so that 
     Detroit can recover long-term long-range.
       Of course, it is not just jobs and production we are 
     offshoring, but also research and development, high-end 
     services and critical military materials.
       Thus, Congress must also vigorously (re)assume its 
     responsibility under Article I, Section 8, of the 
     Constitution for regulating trade in general. It must protect 
     our important production and standard of living. And it must 
     make it profitable to invest and produce in the United 
     States.
       A value added tax is in order, and long overdue in fact. 
     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.
       Of course for years economists have told us not to worry 
     about the loss of manufacturing jobs, because the United 
     States would simply and easily become a high-end service 
     economy. But as Robyn Meredith writes in her wonderful book 
     ``The Elephant and the Dragon'': ``As China has famously 
     become the factory to the world, India is becoming the 
     world's back office . . . As many as 300,000 American jobs 
     each year will move overseas [to India] for the next thirty 
     years--nine million jobs in all.''
       So then the economists told us to ``educate.'' But if they 
     are referring to skills, South Carolina instituted a skilled 
     training program forty-seven years ago, and BMW in 
     Spartanburg, S.C. is now producing a better quality car than 
     BMW produces in Munich, Germany. And South Carolina's 
     technical training program is now being mimicked by Intel in 
     Ireland. But no State and not the United States can educate 
     their way out of unfair competition.
       Then there was NAFTA. I voted for NAFTA with Canada because 
     Canada has a free market. A country must have a free market 
     to have free trade. Mexico doesn't have a free market. I 
     counseled the trade policy of the European Union. The EU 
     requires that, before being admitted to the European Union, a 
     country must have developed the entities of a free market 
     like property rights, labor rights, a minimum wage, anti-
     trust provisions, an independent judiciary, etc. Countries of 
     the European Union taxed themselves $5 billion for five years 
     to develop a free market in Greece and Portugal before 
     admitting them to the EU. Mexico still doesn't have labor 
     rights. U.S. corporations are known to sign up for a union 
     before locating in Mexico, but only pro forma--no business 
     agent at the Mexican facility, and the Mexican workers never 
     hear of having a union. Under Mexican law, if one tries to 
     organize a plant that already has a union, you're fired. On a 
     visit to Tijuana I met with 12 workers who were fired because 
     they tried to organize a union not knowing the plant had one. 
     NAFTA superimposed U.S. subsidized corn on two million small 
     scale Mexican corn farmers putting them out of business. The 
     Mexican farmers headed for the border for work. NAFTA not 
     only exacerbated immigration, but the United States lost jobs 
     and Mexico's workers are paid less today than before NAFTA. 
     We still ought to try the European Union approach in Mexico. 
     With the money we spend on fences, Border

[[Page 24762]]

     Patrol, immigration, prosecutors, courts, jails, deportation, 
     etc., a mini Marshall Plan for Mexico could clean up the 
     corruption and drug problem and develop a free market in 
     Mexico. This will help solve our immigration problem.
       As a last stand, the economists raise the specter of Smoot-
     Hawley. The late Senator John Heinz of Pennsylvania ``belled 
     that buzzard'', passing a protectionist trade bill in the 
     United States Senate twenty years ago. Smoot-Hawley 
     restricting imports did not cause the depression. It was 
     enacted eight months after the crash. At the time, 1930, 
     international trade amounted to only 1.3% of our economy. 
     Cordell Hull had us back with a plus balance of trade in 1933 
     with his famous reciprocal free trade policy. The economists' 
     free trade policy (without reciprocity) has caused a 
     hemorrhaging of American jobs, production, research, 
     technology, investment and development to China and India.
       Henry Ford not only developed mass production of 
     automobiles, but he also greatly contributed to the 
     development of the middle class in America, which is the 
     strength of our democracy. Ford doubled the minimum wage and 
     provided health care and retirement benefits for labor. He 
     strengthened communities with the Ford Foundation, and 
     business was diligent to keep America's economy strong. And 
     we in Congress got in the habit of following business's lead 
     on the economy, adopting Corporate America's suggestions for 
     production, marketing and competition.
       But in globalization, Corporate America's leadership for 
     trade and a strong economy has been ``outsourced.'' The 
     industrial icon, Jack Welch, once announced at GE's annual 
     meeting that GE suppliers had to move to Mexico to produce a 
     less-costly product or no longer be considered a GE supplier.
       Well, I worked with Corporate America to protect America's 
     investment and production.
       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.
       Presidents back then were anxious that capitalism defeat 
     communism in the Cold War and weren't worried about our 
     economy. 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.'' Now, 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, they promote books like ``The World is Flat'' to 
     warn against protectionism, and even the U.S. Chamber of 
     Commerce is more interested in commerce on Main Street, 
     Shanghai than on Main Street, Spartanburg. The truth is 
     globalization has become nothing more than a trade war, with 
     the U.S. AWOL. And all the while, some major economists 
     oppose any measure to protect our domestic production and 
     economy, and they have become a ``fifth column'' in the trade 
     war.
       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. Only the President and 
     Congress can change it!
       As President Lincoln said: ``As our case is new, we must 
     think anew and act anew. We must disenthrall ourselves [from 
     free trade economists] and then we shall save our country.''

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