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March 27th, 2017

Insight

Trump's crazy tariffs

Charles Lane

By Charles Lane

Published Oct. 22, 2015

All right, let's take Donald Trump seriously. Instead of ridiculing his hair, judge the man on his ideas, especially his business-oriented plans for rekindling the U.S. economy.

One of Trump's top proposals, emblematic of a wider protectionist approach, is to stop Ford Motor Co.'s construction of a plant in Mexico, by threatening the Michigan company with tariffs on goods it might build south of the border.

"Let me give you the bad news: Every car, every truck and every part manufactured in this plant that comes across the border, we're going to charge you a 35 percent tax - okay? - and that tax is going to be paid simultaneously with the transaction," Trump said in June, playacting a phone call with Ford's chief executive.

It's a remarkable take on capitalism for a Republican, this vision of the president thuggishly telling private business managers what they can and cannot do with their property. And he calls Bernie Sanders a communist!

Such a tariff would violate the North American Free Trade Agreement, which, like it or not, is the law of the land - not to mention the Constitution, unless Trump is relying on some little-known codicil that empowers the president, not Congress, to levy tariffs.

Never mind all that: Trump's idea would be terrible even if feasible. For reasons familiar to all Economics 101 students, blunt-force protectionism destroys jobs, probably many more than it "saves."

In the simplest terms, Trump's approach amounts to an increase in the regulatory and tax burden on U.S.-based businesses. Other things being equal, the heavier that burden, the less likely businesses would be to invest in the United States, and the fewer jobs would be created.

Investors might get especially skittish if policy can change at the whim of a White House wheeler-dealer who relishes dissing CEOs by phone - and who told Fox News's Chris Wallace on Sunday that, in negotiations, "I want to be unpredictable, because, you know, we need unpredictability. Everything is so predictable with our country." So much for a stable business climate.

Perhaps, cowed by Trump, Ford would keep its old plant in Michigan. But it would darn sure think twice about building the next one there, knowing that ultimate control belonged to the Trump regime. Come to think of it, the safest bet for Ford, and others, would be to build all plants in Mexico - or pretty much any other country that appreciates free enterprise.

Trump was therefore also wrong to tell Wallace that "When Ford moves their massive plant to Mexico, we get nothing. We lose all of these jobs." Actually, what we get are the benefits of a dynamic, efficient economy, with robust property rights, in which resources flow to their most productive use.

The Michigan plant in question builds small cars, but gas prices are low, so consumers have been switching to larger models. The company can't operate it profitably given the weak demand and high union labor costs.

Unless some big wage cut is also part of Trump's plan, forcing Ford to keep operating in Michigan would be a waste of capital, rendering Ford less able to hire people at plants that make popular vehicles.

What if every country in the world imitated Trump? German workers can't be pleased that BMW, attracted by the favorable U.S. business climate, employs 8,000 people in the early-primary state of South Carolina. Maybe German Chancellor Angela Merkel should threaten BMW with a 35 percent tax.

She doesn't do so, because she's smart - though her calculus could change if Trump kicks off a global trade war.

Think a domino effect is far-fetched? When he discusses trade, Trump casually brackets adversaries such as China with friends such as South Korea, which, he gripes, "we defend . . . for practically nothing." More talk like that, and Seoul could come under pressure from its own populists to bring home the 2,500 car-building jobs Kia created in Georgia, or the 5,000 Hyundai created in three other states.

Trump's simplistic, authoritarian views on this issue may seem difficult to reconcile with a career spent in business. Actually, they're perfectly consistent. (Remember, we're taking him seriously, on the generous assumption he's not being consciously cynical.)

Compared with other businesses, real estate development has a strong zero-sum aspect; it's about being first to the best spot - location, location, location - then exploiting that exclusive position.

There's a lot of not-particularly-transparent politics involved. Mayors and other morons - sorry, government officials! - can screw up a deal with the stroke of a pen.

You can see how a lifetime in that milieu could have instilled in Trump a certain knowing contempt for free markets, and for principled thinking about economic issues. It's harder to see how it prepared him for the presidency.

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Previously:
10/15/15 A bipartisan marijuana myth

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