In the wake of the deal reached with Carrier last week to keep 800 jobs in Indiana, the incoming administration of President-elect Donald Trump has been expanding its message of economic nationalism. The goal of Trump’s economic policies are to bring jobs back from overseas. He sees these jobs as having been lost because of bad trade deals and other economic policies enacted over the past 80 years.
Last weekend, we saw further indicators as to how a Trump administration will view the economy, including outright hostility to free-market economics that’s on par with most Democratic administrations. The New York Times recorded the following exchange this weekend between Trump and Vice President-elect Mike Pence: “’The free market has been sorting it out and America’s been losing,’ Mr. Pence added, as Mr. Trump interjected, ‘Every time, every time.’”
Trump then took to Twitter to describe the consequences for companies that dare manufacture things outside of the United States:
It’s easy to picture Donald Trump and Mike Pence strutting around like the leaders of a third-world banana republic, wearing military uniforms with medals all the way down to their waists and issuing decrees to private companies, telling them how they can do business. “You can’t build a factory in Mexico,” they tell Carrier. “You have to build iPhones in the U.S.,” they tell Apple.
But businesses like predictability and if the standards of intervention are going change on a “day by day” basis, companies will not feel reassured. In fact, they may decide to hold off on expanding in the United States.
Furthermore, if Trump does impose tariffs, they will not be paid by big companies, but by American consumers. The 35 percent hit Trump is threatening will be added to the price of goods as they are imported. The costs will fall disproportionately on lower-income Americans, as do all other consumption taxes, hurting their abilities to improve their living standards by buying cheap imports that enhance their quality of life.
The thinking behind imposing tariffs is that they would incentivize American manufacturing and production, creating jobs in the United States. This is called “import substitution industrialization,” but it has been a failure in most places where it has been tried, resulting in higher costs, more debt, and a lower quality of life.
Government interventions like the Carrier agreement are always bad deals in the long-run. Businesses that are forced to stay in the United States only end up cutting costs elsewhere, as David Kelly at Forbes points out:
Plus, there is a larger impact on companies, which decide on job migration, plant closures, and capital investment based on a number of factors that all collect at the bottom line on a quarterly basis. Adds Hopp: “Bullying won’t work in the long run. A company like Carrier may give up $65M in savings in return for $7M in incentives to avoid bad publicity in the short term. But they will be looking for other ways to save money. So don’t be surprised to see other job cuts or, even more likely, salary cuts in the future. A very likely outcome of using threats to keep jobs in the US is that those jobs will become lower and lower paying over time.
Trumpian protectionism will also discourage foreign investment in the United States. An example of that is the expansion of manufacturing in the U.S. by Honda that was announced this summer. The Japanese company will spend $45 million and create 250 jobs in South Carolina. Imagine if Japan’s prime minister had gone tit-for-tat with Trump and told Honda they couldn’t expand in the U.S.
America is prosperous because of free markets. In order to expand our economy, we need to cut taxes and regulations. We also need to reform occupational licensing and make it easier to start businesses. Both the “economic patriotism” of socialist buffoons like Bernie Sanders and the “economic nationalism” of Donald Trump will make America poorer and decrease American living standards.