America Should Give Tax Breaks to U.S. Businesses in China

The U.S. government should give tax breaks to U.S. businesses operating in China to facilitate the migration of their workers back to the U.S., provided they move back a minimum percentage of their workers. Luxury brands will be given larger tax breaks since their products are more coveted among the Chinese. 

The gap between the value of what the U.S. imports to China versus the value that it exports increased to about $295,465.5 million in 2011, the largest trade imbalance that the U.S. has ever had with another country. This gap has been growing since the late 1980s, when the U.S. first faced a bilateral trade deficit with China. The U.S. cannot continue to sustain this deficit. The consequences on foreign policy of having an overly dependent economy will detract from U.S. power. China uses its trade surpluses to purchase U.S. treasury securities; as a result the U.S. is growing increasingly reliant on China to finance its debt. As of September 2011, China owns $1.15 trillion in treasury securities, more than 25 percent of the total amount of securities in circulation today. If the U.S. wants to maintain an impactful foreign policy, it needs an economy that is not overly reliant on any of its trading partners. Certain economists believe that the trade imbalance may not be as large a problem as it is made out to be, but considering the trajectory of China’s growth, it still has the potential to be a significant threat. With the current increase in Chinese wages, which rose 69 percent between 2005 and 2010, the U.S. finally has an opportunity to attract U.S. businesses back home and reduce imports from China. 

Analysis 

This plan calls for the U.S. government to provide tax breaks to U.S. businesses currently operating in China. With the ongoing increase in Chinese wages and shipping costs, certain U.S. businesses whose major component of sales are to American customers are already relocating back to the U.S.4 The U.S. government should incentivize businesses to continue to move back with these tax breaks. Companies should be required to move back a minimum of 10 percent of their Chinese  workforce to the U.S. as jobs for Americans in order to be eligible for this tax break. Once this stipulation is met, they will receive $5,000 per worker in tax credits. With the relocation of manufacturing to the U.S., overall GDP will rise. While the U.S. government will have to increase its deficit spending to draw these companies back in, the income lost will be regained after the implementation of this plan, primarily because of multiplier effects. There is empirical evidence that tax rate reductions increase real GDP5 and the tax multiplier of a job tax credit is estimated to be 1.3.6 The increased number of employed workers in the U.S. would also lead to the collection of more taxes from workers. The current unemployment rate has meant that the U.S. government pays transfer benefits in the form of unemployment benefits to a large number of people, so the benefits of reducing those transfer payments through these tax credits also justifies the initial cost. 

Luxury brands, which will be defined by their status as goods that have a much higher consumption rate with a significant increase in income, will be given larger tax credits of $6,000 due to the benefit of exporting these goods. This benefit comes from the progressive spending growth of the Chinese middle class based on the coupled trends of the Chinese government anticipating minimum wage increases of 13 to 15 percent over the next five years and the younger Chinese generation spending much more of its money on discretionary items than previous genera- tions, which have led to increased purchases of luxury items. Moving these goods back to the U.S. will not only increase GDP, but also net exports due to the stronger market for these goods. Although the U.S. may not have the necessary supplier base or infrastructure for all industries to move back immediately, a gradual movement would create a foundation so that eventually the U.S. will have the ability to produce materials cheaply.

Next Steps 

Congress must pass legislation for the tax breaks that it will issue to U.S. businesses in China. It must include strict measures to ensure that a minimum percentage of the workforce must migrate to the U.S. before a business becomes eligible for the tax break. The government should advertise companies that have already began moving workers back, such as Caterpillar, Sauder, and NCR.4 When other companies in similar industries see the profits that these companies continue to sustain and the reasoning for their move back to the U.S., they will have a concrete model for migration.

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Nikita Shamdasani

First-year at the University of North Carolina at Chapel Hill. Double majoring in International Studies and Political Science, minoring in Business.

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