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.Increasinglythe goods being sold by our top mass merchandisers are made inChina, while we are going into debt to China to finance our federalbudget deficits.The Bush administration has followed the theory that allowingChina free and open access to penetrate (and perhaps dominate)the North American marketplace will engage the Chinese such thattheir political allegiance to the United States is more firmly se-cured.But several key military developments in the past decadesuggest the Chinese are engaged in a military buildup,30 whichwould increase their leverage over the United States.China's Military BuildupChina has devoted much of its newly found economic strengthto building one of the most modern armies in the world.In 2006,the U.S.intelligence community acknowledged that China hasdeveloped and deployed a series of missiles that would give162 THE USA IN TWILIGHTthem second-strike capability in any nuclear confrontation withthe United States.Specifically, China has now equipped andlaunched their first Type 94 nuclear powered submarines, eachof which carry sixteen JL-2 (DF-31) ballistic missiles, with arange of eight thousand kilometers.This capability allows Chi-nese submarines to target large portions of the continentalUnited States from areas near the Chinese coast.As late as May2004, the Pentagon had argued that the Type 94 submarinewould not be operational until 2010.31Second-strike capability means that the Chinese mainlandcould absorb a U.S.nuclear attack, but China could still retaliateagainst the United States.In other words, the Chinese couldlaunch a nuclear ballistic missile from the ocean, even if all ballis-tic missiles on the Chinese mainland were destroyed.Possessingsecond-strike capability provides China more dangerous optionsin any military or political showdown with the United States.In December 2006, at a meeting of delegates to a CommunistParty conference on the navy, Chinese president and commander-in-chief Hu Jintao urged building a powerful, modern Chinesenavy that would be prepared for military struggle "at any time."32In comments that were published in the PRCs People's Daily andPeople's Liberation Army Daily newspapers, Hu Jintau said: "Weshould strive to build a powerful navy that adapts to the needs ofou^-milit&ryVhrstoric mission in this new century and this newstage." A strong ocean-going Chinese navy would secure China'sinternational trade and energy routes and present a strong chal-lenge to the United States over Taiwan.China has consistentlymaintained that it would attack Taiwan if the island dared to for-mally proclaim its independence.A United States strapped by historically large and growingtrade and budget deficits will be increasingly hard-pressed tocompete militarily with China, especially as the United States re-mains militarily engaged in the Middle East.Allowing China toexert an increasing role in North American trade, with a tradebalance constantly flowing in China's favor, is risky policy.Whatassurance do we have that China will remain a friend and ally ofthe United States?163 THE LATE GREAT USAThe VAT MenaceAdvocates of "free trade" have hailed treaties such as NAFTAand the WTO.Yet, because most of our "free trade" partners usea value added tax (VAT), America has been placed at a severedisadvantage.The United States, virtually alone among theworld's major international trading countries, does not use aVAT."Free trade" is certainly not "fair trade" when VAT struc-tural advantages stack the deck against the United States beforeany cards are dealt.The impact of the value added tax (VAT) on internationaltrade is complicated.Yet it may be the most important variablein explaining our expanding trade deficits.The average U.S.citizen can no longer afford not to understand the VAT, espe-cially in an era where free trade agreements dominate our inter-national trade agenda.The modern VAT was created by French economist MauriceLaure in the 1950s.The basic concept is that a "value added" taxis imposed at each stage in the chain of production of a good orservice.In a sense, this hides the tax from the consumer.The pro-ducer builds the price of the tax into his selling price, whichpasses the tax along to the consumer at the point of sale.Theamount of the VAT, then, is included as a percentage of the finalvalue of the good or service.The VAT is not reimbursed to theconsumer, so at the final point of purchase, the government getsto keep the VAT once and for all.A VAT and a sales tax are both "indirect" taxes, in that theconsumer, rather than the producer, pays them.Income taxes, incontrast, are "direct" taxes in that the tax cannot be shifted tosomeone else other than the person producing the income.Themain difference between a VAT and a sales tax is that the VAT isapplied at each stage of production, whereas sales taxes are usu-ally imposed once, at the final point of sale.In international trade, countries do not treat indirect taxes anddirect taxes the same, and that differential puts the United States ata decided disadvantage.The United States does not use a VAT sys-tem.Some 137 countries, including the EU countries, China, Can-'t 64 THE USA IN TWILIGHTada, and Mexico, have VAT systems.A simplified example mayclarify how VAT systems disadvantage American goods.On the one hand, an American made car that sells for $23,000in the United States includes profit for the company and coversthe various tax obligations and expenses for the company.Whenthe manufacturer exports that car to Germany, the German gov-ernment adds 16 percent VAT to the $23,000 price, meaning thatthe car will be sold in Germany for $26,680.On the other hand, consider a German car that is sold inGermany for $23,000 after the 16 percent VAT is imposed.Whenthe German manufacturer exports that car to the United States,Germany rebates the 16 percent VAT to the manufacturer, allowingthe export value of the car to be $19,827.59.Moreover, when theGerman car is imported to the United States, the U.S.governmentdoes not assess any comparable tax, so the car is allowed to enterthe U.S.market at a price under $20,000.The system disadvantages U.S.producers two ways.Whenexported, the U.S.car starts off with a disadvantage of $3,680 inGermany because of the VAT.At the same time, the German car,which sells at home for the same price as the American car sellsin America, sells in America for $3,172.41 less than the U.S.car.Inthis example, the total disadvantage American car companies faceis $6,852.41.In effect, the rebate of the VAT to German exporters serves asa German subsidy for exports, while the imposition of a VAT onAmerican imports serves as a German tariff.Still, free tradeagreements do not define the VAT as either a subsidy or a tariff,even though the system demonstrably disadvantages U.S.manu-facturers both in exporting to VAT countries and in competingwith other countries' exports in the U.S.market.Here are the crucial points:" Companies operating in VAT countries enjoy rebates ofVAT taxes on the goods they export.Companies that manu-facture goods in the United States get no refunds of the stateand federal taxes they pay on the goods they export." Imports into VAT countries are subjected to VAT at the bor-der, while imports into the United States are not taxed at theborder.165 THE LATE GREAT USA" As a result, U.S
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