In the early 1960s, one of my clients was a Japanese producer of fishing nets. Their Los Angeles subsidiary imported from the parent company in Japan and sold the nets throughout the Western hemisphere. The U.S. subsidiary never seemed to earn a profit, despite growing sales and high prices for their imported nets.
On one visit to the parent company in western Japan, I was shown financial statements that revealed all profits from exports to the U.S. sales subsidiary were not taxed in Japan.This incentive was accomplished through "transfer pricing" - the parent export price was set high so that all profits were earned in Japan and the U.S. subsidiary managed only to break even. Needless to say, the U.S. subsidiary did not pay U.S. taxes.
As time passed, many profitable U.S. companies were forced out of business due to aggressive pricing and credit practices of Japanese trading companies.
Repeated appeals and complaints seemed to fall on deaf ears of government officials. Finally, one official spoke frankly in telling us that our government not only looked benignly upon the predatory practices of the Japanese, but encouraged increased imports from Japan and other countries in the Orient.
He implied that greater imports would tie the Japanese to the United States and the free enterprise system.
The disclosure sharpened my focus on the price being paid in California to promote foreign policy in Japan. Local importers and wholesalers that were going out of business, and had previously been profitable, no longer would pay U.S. and California corporate income and other taxes. Employees of these companies had been taxpayers and contributors to Social Security.
The Japanese firms that were supplanting local companies were not profitable (due to transfer pricing) and were consequently not paying U.S. taxes. All top jobs were staffed by Japanese who presumably were paid minimal salaries in California, the excess being paid to their personal accounts in Japan.
They hired Americans to handle clerical and some sales functions. Bottom line - virtually no corporate and less personal taxes, as opposed to those of U.S. companies they were replacing.
On the other hand, those services that were needed to support the local economy were growing - highways, police, airports, harbors, fire departments, city/county and state government, schools, etc.
Since the Japanese enjoyed these services but were not paying for them, who was paying? Obviously, it was other U.S. taxpayers - corporate and personal.
There is almost universal agreement in the free world that their and our collective economic and political well-being is dependent on a strong United States.
There is less of a consensus, however, on how to maintain or restore America to this desired condition of prosperity and stability. Everyone seems to want the other fellow to make the sacrifices. This is certainly true with our trading partners overseas.
We have been bombarded for the past decade with a laissezfaire argument that our standard of living is dependent on getting cheaper products from abroad.
I will admit that we can often get a better auto, stereo or TV from foreign producers. But are these foreign manufacturers paying our taxes or employing our workers, who pay taxes and buy American products? I am sure they are not, anymore than my fishing net customer was a generation ago.
So, would you be willing to pay more for American products of quality, so that more taxes would be paid by U.S. manufacturers and workers? Is it important that Americans retain know-how and expertise in advanced technologies, as well as in basic industries, to become or remain independent?
Through import quotas, a segment of the market for various products and services should be preserved for American companies and persons. The need is both economic and strategic.
It is economic because the U.S. manufacturers and workers will earn profits/wages and pay taxes. It is strategic because our nation must maintain the technology and capacity to remain strong and independent.
The western European nations have long pursued this practice, limiting imports from the Orient to a certain segment of the local market.
I suspect that the lower prices on current imports may not compensate for the higher taxes needed to maintain a given standard of living.
For example, an imported car sells for $10,000 and a comparable U.S. car is priced at $12,000. All of the labor and materials in the U.S. car are supplied by Americans, creating jobs and profits, which generate taxes to pay for government and other costs.
The taxes paid by corporations and individuals for the American-made cars should far exceed the $2,000 price differential. Taxable income will be generated by companies (and their employees) supplying the steel, plastic, fabric, glass, electronics, etc., going back to the iron ore and coal mines, oil wells, and cotton farms where the raw materials are sourced.
The only way to allocate the U.S. market to American producers, Latin-American products/imports and to Asia/Europe is through import quotas.
Imports from Asia-Europe would be decreased gradually, while the Latin American quota would be increased yearly, likewise for U.S. production.
With these precise quotas known to everyone, production facilities and trade channels could be established in an orderly and dependable manner, thus minimizing U.S. and foreign hardships and adjustments.
Needless to say, greater U.S. production will improve government revenues, reduce both budgetary and balance of payments deficits, strengthen our currency and slow down the growing acquisitions of U.S. companies and property by foreigners.
If the value of the U.S. dollar continues to fall due to the huge deficits in our federal budget and international balance of payments, our resources built up over the past 200 years may be soon bought cheaply by foreigners who have accumulated our dollars from exporting their products to us in just a decade.
We cannot tolerate such a condition and still be free and independent.
(I. Barry Thompson is vice president and manager of Continental Bank.)