From EconomicPopulistForum, a good read if you care to see how we are actualy being represented:
The Peru Free Trade Agreement is nearing a vote in Congress. There are some points worth mentioning.
*Peruvian Labor leaders have urged the U.S. Congress to reject the agreement.
*Peruvian Labor leaders stressed that if it was passed, at least remove the requirement that Peru privatize its Social Security.
*Peru is NOT required to remove its 19% Value-Added-Tax (VAT) This was discussed at some length by the bill’s opponents, including Republican Duncan Hunter of California. Peru adds a VAT on goods it produces and sells in Peru. But when it exports those same goods to the United States, the VAT is removed. This functions as a 19% subsidy on Peruvian exports to the United States.
But that’s only half of it. When American goods are imported by Peru, they have this 19% added to their price. In effect, there is a 19% export subsidy on Peruvian exports, and a 19% import duty/tariff on imports. This VAT policy will remain in place even after the Peruvian FTA is implemented.
*Enforcement of labor regulations is exclusively at the discretion of President Bush. They are not binding or mandatory.
*Nothing has been done to eliminate or restrict Peru from being a tax haven for Corporate America.
The usual pro-Globalist lies and propaganda were spewed by members of both parties in support of the bill. “Opening up markets” and “knocking down barriers” to U.S. exports was the major lie regurgitated. However, the facts largely refute the pro-Globalist arguments. The potential Peruvian consumer market for American goods is almost non-existent. To demonstrate just how minuscule their market is, some basic facts and calculations are noteworthy. The basic information below is from the CIA’s country site.
PERU:
Population:
28,674,757 (July 2007 est.)
GDP (official exchange rate):
$77.14 billion (2006 est.)
Per Cap Income (Total Population)
$2,690/year.
Household income or consumption by % share:
lowest. 10%: 0.8%
highest 10%: 37.2% (2000)
If the highest 10% earn 37.2% of GDP/Income, then the lower 90% earn only 62.8% of GDP/Income.
(100% – 37.2% = 62.8%)
Thus, the per capita income of the lower 90% would be much lower than $2,690/year.
Calculating per capita income for the lower 90%:
28,674,757 people X 90% = 25,807,281 people
Thus, 25,807,281 people have 62.8% of GDP
62.8% (0.628) X $77.14 billion = $48.4 billion
Thus, 25,807,281 people (the lower 90%) have $48.4 billion of the GDP
$48.4 billion divided by 25,807,281 people = $1,877
Per Capita GDP (lower 90% of Population)
$1,877/year.
(In contrast, per capita US GDP is :$43,800)
However, even this per capita number is still higher than Personal Income.
Peru devotes 19% of GDP to Gross Private Investment. Thus at most, Peruvians have only 81% of their GDP remaining for purchasing goods (Even this amount is an overstatement, as Government expenditures have not been subtracted.)
81% of the lower 90%’s Per Capita Income would be only $1,520/year.
(Compared to US. per capita Personal Income of $39,000/year)
54% of Peru’s population is below the poverty line.
Adding this all together, Peru has little potential as a market for U.S. goods. How much American production can a $1,520/year income buy? How much can they purchase when 54% are below the poverty line?
On the other hand, how much can Corporate America save in labor costs by replacing American workers with Peruvian workers? How much will Corporate America have to pay Peruvian workers, when 90% of the population has a per capita income of $1,520/year? How much labor cost can be saved by replacing workers from a country with $39,000/year income with those with a $1,520/year income?
A lot. In fact, Peru has tremendous potential as a cheap labor source for Corporate America, allowing them to replace higher-cost American labor with impoverished cheap labor from Peru. Peru has a population of 28.6 million–25.807 million with an average per capita income of only $1,520/year, and 54% of whom are below the poverty line. Peru’s real potential is as a source of cheap labor–putting still more Americans out of work, and driving down wages of Americans still employed.
The Peru Free Trade Agreement is just another sellout of America and American workers. As with ALL such agreements, it increases Corporate profits by reducing labor costs–replacing higher-paid American workers with lower-paid Peruvian workers.
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Peru adds a VAT on goods it produces and sells in Peru. But when it exports those same goods to the United States, the VAT is removed. This functions as a 19% subsidy on Peruvian exports to the United States.
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The removal of the VAT on goods (and services) that are exported is not uncommon among any of the countries that levy VATs, including those in Europe. The Canadian GST (goods&services tax), which is basically a VAT tax, is also removed on goods and services that are exported. The VAT and the GST are basically sales taxes, and the goods and services would be subject to the sales taxes that the importing country wants to impose.
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Subsidy? No. I am not sure, but I would almost be willing to bet that goods that are exported from Massachusetts manufacturers are free of MA sales taxes.
Raj;
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You say:
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“I would almost be willing to bet that goods that are exported from Massachusetts manufacturers are free of MA sales taxes.”
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Maybe I am a bit out of the loop but my understanding is that outside of exporting the means of production, which has largely already been completed, we no longer export anything but capital.
The strange thing about this Peruvian trade deal is that in the face of all its misguided predecesors, it is almost meaningless to us.
I have heard scuttlebutt that a number of our great corporate citizens are becoming displeased with the haughty Mexicans demands of late (like wanting nearly 2$ per hour for labor) so this latest trade deal would likely produce a BOOM in Mexican Exports as American companies pack up their goodies and move them to Peru from Mexico.
Slash and Burn Capitalism rolls on.
..it might surprise you to learn that more than a few things are produced in Massachusetts. Subsidiaries of European companies such as BASF (German: Badische Analin und Soda Fabrik) and some drug companies from Switzerland and Sweden have facilities here.
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More than a few of the genetic engineering companies have headquarters and research facilities here.
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There are a number of small software companies headquartered here.
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Apparently, you are unfamiliar with the way a VAT actually works. The VAT is levied at every level of production, including the research, the development, the manufacture, and the sale. It all averages out to the same: what is essentially the “sales tax” rate, which, in many cases is 19%.
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BTW, you might believe that to be high as a sales tax, but I’ve had experience with the VAT in Germany. It’s odd, but the fact seems to be that the quality of goods and services is superior, for the same price, as that in the US.
do the Badisch Analin and Soda Fabricators still have in Massachusetts. My mother and father worked at BASF, in their magnetic tape division for 20 years and 10 years respectively until they shut the plant and moved it to Brazil in 1992.
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What other plants do they have here now?
is also involved in herbicides. Do a search on the Internet.
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Quite frankly, if I were they, I would have gotten rid of magnetic tape altogether. It was a dying technology, given recordable CDs and DVDs. Or are you suggesting that the buggy whip manufacturers should be expected to still be manufacturing buggy whips?
Yeah, I guess you can name a few exceptions to the trade rule. Too bad though that there wasnt an actual statistic like “STATE trade imbalance” or it would be very telling IMO.
The closest figure that the state releases is in the form of employment reports and when you throw away the headline numbers from those along with all the magical adjustments and just look at one thing,
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the WORKFORCE PARTICIPATION RATE
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it tells a whole ‘nuther tale.
Here in Essex Co. the participation rate is below 50%, more than half of the working age population has VOLUNTARILY LEFT THE WORK FORCE TO PURSUE OTHER OPPORTUNITY.
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Love that free trade stuff myself .. just sayin’
The idea that not charging a domestic sales tax is somehow an export subsidy makes no sense. A subsidy would be if the Peruvian government was actually giving money to the Peruvian companies so that they could sell their products for less than they cost to make.
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As to the idea that Peru has more to gain from this agreement than the U.S.: what’s the problem with that? As long as it benefits us at all, we’re in a better position than we would be without the legislation. If the impoverished workers of Peru have a chance to make a living as well, so much the better. They are people too. This argument is like cutting off one’s nose to spite one’s face.
Do you actualy believe that THIS time around Peruvians will benifit one iota from this?
I suppose this will be nothing at all like the Mexicans (Nafta) Hondurans (Cafta) or Hatians (Caribean Pact) before them?
Ah what the heck, lets pass it so we can hear how your heart will bleed for the wave of Peruvian economic refugees that will follow.
Subsidy. The American government essentially financed the design of the Boeing 747 and the McDonald-Douglas L-1011. That was as part of the US Air Force’s C-5 cargo plane development. The US government also essentially fiananced the design of more than a few other Boeing planes.
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Counter: Airbus. After that consortium was developed, Airbus complained that US government’s subsidies to, by then, Boeing, put it at a competitive disadvantage. And they were right.
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Equal playing field: Peru (and other countries) not charging VAT on exported products. Strikes me that that that places the Peruvian manufacterers on an even playing field with American ones. American taxing jurisdictions are free to charge whatever VAT, excise, import duties and/or sales taxes they wish on goods imported from Peru or Timbuktu. It’s amazing that you cannot understand that.
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This isn’t politics, it’s tax policy and statute and is pretty black-and-white:
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US exports are subject to Peru VAT and also subject to US taxation on US profits.
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Peru exports are not subject to Peru VAT, nor are they subject to US tax.
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The ‘differential taxation’ is a defined term by the WTO, and by definition is a barrier to free trade, which generates the potential for legitimate WTO complaints.
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As you say, the US is free to assess duties, tariffs, etc…but, such action would potentially create WTO defined barriers.
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Yeah.
This isn’t politics…
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Apparently it missed your attention that I didn’t say that it was
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…it’s tax policy
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Well, duh, that’s exactly what I wrote that it was. And, moreover, I wrote it was exactly what was done by other countries that levy VAT, GST and sales taxes.
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If you really have a tax background, which I doubt, you would know that
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US exports are subject to Peru VAT and also subject to US taxation on US profits.
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Well of course. Just as Peruvian exports are subject to US taxation.
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Peru exports are not subject to Peru VAT, nor are they subject to US tax.
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Incorrect. They are subject to US tax if they are sold into the US (sales tax, you know, which is a bit different than VAT), but if they are then trans-shipped to other destinations, they would not be subject to US import duties OR sales tax.
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The ‘differential taxation’ is a defined term by the WTO…
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That’s of minor interest. Tell me why the VATs imposed by most VAT countries are on the order of 19%. The primary issue regarding VAT is the percentage that is eventually charged to the local population. If the percentage is the same for any good or service from anywhere, it seems to me that there would be no discrimination. And that is the entire reason for GATT.
Sales tax is not a US/national tax; VAT is a National tax. A state’s treatment is not very often relevant to the WTO because a state’s sales tax usually treats all goods, whereever sourced identically.
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An example or 3.
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1. I build a widget in the US at cost of $1.00. I sell it to someone in Peru for its value of, say, $1.50. I incur US income tax of about 17.5 cents. Peru company buys it for $1.50 and pays VAT of about 27.5 cents. The seller of the widget in Peru must sell the US good for more than $1.775 to profit.
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2. Peru guy builds a widget at a cost of $1.00. Sells it to US company for $1.50. Pays no VAT tax on the $1.50 export value. US guy can buy Peruvian widgets or US widgets for $1.50.
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3. Peru guy builds a widget at a cost of $1.00. Sells it in Peru plus VAT of about 12 cents. He must charge over $1.12 to profit.
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Question: From whom will people in Peru buy their widgets–all widgets being equal–if the local Peruvian manufacturer can sell them for some at minimum $1.12 and must sell the US brand for at least $1.77 ?
a misplaced “close italics” tag
gary @ Thu Nov 08, 2007 at 11:56:03 AM EST
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Re No. 1. I build a widget in the US at cost of $1.00. I sell it to someone in Peru for its value of, say, $1.50. I incur US income tax of about 17.5 cents. Peru company buys it for $1.50 and pays VAT of about 27.5 cents. The seller of the widget in Peru must sell the US good for more than $1.775 to profit.
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Apparently you know nothing of the concept of burdened cost. The US$1.00 would include an allocation for the income tax, so it is somewhat fraudulent to add that to the cost of the widget sold by the US manufacturer into Peru.
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Re No. 2. Pays no VAT tax on the $1.50 export value. US guy can buy Peruvian widgets or US widgets for $1.50.
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Well, the obvious solution is to increase the sales tax in the US, right? I’m sure that Americans would want to have a “sales tax” on the order of 19%.
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Re No. 3. That makes no sense at all. 19% of US$ is not twelve cents.
To clarify the VAT subsidy. Exports from VAT countries into the US VAT tax rebates from home countries. But, exports from the U.S. to VAT nations are taxed twice: US tax on profits plus the US goods are subject to VAT in the country of destination.
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So differential taxation takes place, which is by WTO definition, a nontariff barrier to free trade.
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To retaliate, the U.S. introduced the Foreign Sales Corporation (FSC) to allowing U.S. producers tax exemption on a certain percentage of export income. Then EU countered with a complaint re: FSC to the WTO. The WTO ruled that the EU was authorized to impose countermeasures to the FSC by an amount up to $4 billion.
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That’s all history.
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To the narrow point that nomad raises, his point is legitimate. Peru is VAT exempt for exports to US; US is taxed twice on exports to Peru. It’s country welfare, which may be a matter of policy, but it’s appropriate to call it what it is.
It’s been a while since I took tax law, but several rather obscure but very important points
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One, it is clear beyond peradventure that there is differential taxation as among different taxing jurisdictions. One question, though, would you prefer that the US be required by the WTO to impose a VAT-like tax at 19%? It is difficult to believe how a federal VAT-like tax would be constitutional, but you may be able to persuade me that it would be. I’ve asked the question on more than a few web sites, liberal and conservative and nobody has even suggested an answer.
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Two, I’m not familiar with the Foreign Sales Corporation tax exemption. I presume that it is an exemption from normal income tax that would normally be allocable to and payable by corporate activities in the US. In general, a tax jurisdiction such as the US can assess an income tax on corporate activities that are performed in the US, even if the profit is ultimately obtained by sales abroad. I’m sure that you are familiar with that. Now, if the US forgives tax for profits due to foreign sales that would otherwise be taxed if the sales were domestic, that, indeed, would be a US gov’t subsidy.
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Finally, nomad’s point is not legitimate. As I have described above and need not repeat.
With all your nit picking you miss the point. WHAT THE HELL DO YOU THINK THAT THE US IS GOING TO EXPORT TO PERU? Per capita income is @1500$ a year. Thats half of what Mexicans made and they never bought anything either.
Hasnt 20 years of NAFTA taught you anything.
Your beloved Euro zone was a merger of equals but whoa did they europeans scream loud and clear when the baltics tried to join, Romania? No way.
Here we are sold this crap time and again by these “NEW democrats” and you still bite.
Amazing