The mainstream argument is that exchange rates adjust to wash away all tax advantages, whether legal or illegal.
Not being a trade person, the best argument I can think of goes like this: If you want to buy US goods, you need dollars to pay for them. A cost reduction in said goods increases demand for dollars relative to other currencies, cost of dollar (and good, in importer's currency) go up, cost advantage disappears. I'm not familiar with the Grossman paper. If you have less faith in the flexibility of the price system, you would favor the position that cost savings improve U.S. competitiveness, so there are indeed tax subsidies, relative to tax systems with no special concessions for exports. In the latter sense, the VAT and the CIT both subsidize exports. The U.S. problem is that the latter is GATT illegal, and now thanks to the WTO, the U.S. faces the prospect of actually facing up to the dictum that crime doesn't pay. The fun part comes when the free trade maniacs in Congress are confronted with a breach of U.S. sovereignty (something they claimed couldn't happen), in the form of instructions from commie-pinko Europeans to change our red-white-and-blue tax system. It's kind of sweet. max > > > Jagdish Bhagwati has an op-ed in yesterday's FT where he says the US > Congress's objections to that huge WTO ruling last month that declared we > are unfairly subsidizing our exports to the tune of $4 billion are > hypocritical, nationalistic and wrong. No argument from me there. But he > makes one argument I can't follow: >
