Prime Minister Abe economic planners in Japan have figured out how to do fiscal devaluation just like he does currency devaluation.  With fiscal devaluation, you raise consumption taxes and keep the benefits inside the economy.  The consumption taxes are charged on imports and domestic goods.  But you concentrate the benefits internally through (1) lowering other employer/domestic taxes; (2) avoiding a domestic tax increase that otherwise would have occurred and/or (3) spend the money domestically for increased competitiveness.

“Mr. Abe told leaders of the governing coalition that he would raise the tax rate to 8 percent from 5 percent in April 2014. … [B]y returning most of the revenue to businesses and individuals he will show that his government is still focused on triggering sustainable growth.”

This is a fiscal devaluation because it raises the prices of imports in relation to domestically produced goods.  The key is in the differential impact on imports vs. domestic goods… just like in all trade rules or issues.  If you raise money from imports and domestic goods, then concentrate the benefits locally, you get your competitive differential (which can be weaker or stronger depending upon how you do it).

Its a really good idea for Abe to raise a consumption tax in Japan.  But the zombie export only crowd (those that don’t think net trade is important) in the U.S. think consumption taxes are trade neutral and refuse to take them into account during trade negotiations.  And the Congressional tax geniuses debate high vs. low taxes without talking about the tax mix… i.e. we need a U.S. consumption tax of about 12% to massively lower reliance on non-border adjustable taxes like income taxes (while maintaining progressivity) and substantially increase trade competitiveness.

We’ve seen this movie before.  Mexico and Canada had no border adjustable consumption tax prior to NAFTA.  But they enacted one during negotiations.  NAFTA was passed, tariffs across the board went down, and Mexico’s border taxes rose by 15%.  CAFTA countries had not consumption tax until CAFTA was negotiated, when they implemented a shiny new 12% consumption tax that we pay when sending goods there.  The zombie export only crowd is really surprised to hear these facts because their blinders have obscured that information.

What good are trade agreements?  Really.  On the numbers.  Our trade deficits have become the worst ever.  They refuse to deal with currency devaluation, fiscal devaluation (consumption taxes), state owned enterprises so other countries do a bait and switch.  The import penetration to Japan’s market is the same percentage in 2013 as it was in the 1980′s.

The U.S. needs a national strategy to balance trade.  And a national production strategy.  The trade negotiators and trade related committees in Congress are simply screwing up.

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