Note: I’ve been writing this in fits and starts over the past couple of weeks. It doesn’t reflect whatever agreement the US and China made over the past weekend. (More on that as/when details become available.) But I’m realizing that it’s better to write something that’s less than perfect instead of nothing at all.. I think the administration’s economic plan, if that’s the right word for a string of ad hoc actions revealed by tweet, will have crucial impacts–mostly negative–for the US and for multinational corporations located here. I’ll post about that in a day or two.
On the plus side, Mr. Trump has been able to get the corporate income tax rate in the US reduced from 35% to 21%, stemming the outflow of US industry to lower tax-rate jurisdictions (meaning just about anyplace else in the world). Even that has a minus attached, though, since he failed to make good on his campaign pledge to eliminate the carried interest tax dodge that private equity uses. The tax bill also contained new tax reductions for the ultra-wealthy and left pork-barrel tax relief for politically powerful businesses untouched.
At its core, international Trumponomics revolves around the imposition of import duties on other countries in the name of “national security,” on the dubious rationale that anything that increases GDP is a national security matter and that tariffs are an effective mechanism to force other countries to do what we want. (Oddly, if this is correct, one of Mr. Trump’s first moves was to withdraw the US from the Trans-Pacific Partnership, thereby triggering an escalating series of new tariffs on farm exports to Japan by our “Patriot Farmers,” many of whom voted for Mr. Trump. I assume he didn’t know.)
If the Trump tariff policy has a coherent purpose, it seems to me to be:
–to encourage primary industry (like smelting) and manual labor-intensive manufacturing now being done in developing countries to relocate to the US (fat chance, except for strip mining and factories run by robots)
–to encourage advanced manufacturing businesses abroad that serve US customers to build new operations in the US, and
–to retard the development of Chinese tech manufacturing by denying those companies access to US-made components.
The results so far:
–the portion of tariffs on imported goods (paid by US importers to the US customs authorities) passed on to consumers has offset (for all but the ultra-wealthy) the extra income from the 2017 tax cuts
–the arbitrary timing and nature of the tariffs Trump is imposing seems to be doing the expected —discouraging industry, foreign and domestic, from building new plants in the US. BMW, for example, had been planning on building all its luxury cars for export to China here, because US labor costs less than EU labor. The threat of retaliatory tariffs by China for those imposed by the US made this a non-starter.
–Huawei. This story is just beginning. It has a chance of turning really ugly. For the moment, inferior US snd EU products become more attractive. Typically, such protection also slows new product development rather than accelerating it. (Look at the US auto industry of the mid-1970s, a tragic example of this phenomenon.) US-based tech component suppliers are doing what companies always do in this situation: they’re finding ways around the ban: selling to foreign middlemen who resell to Huawei, or supplying from their non-US factories. Even if such loopholes remain open, Mr. Trump is establishing that the US can’t be relied on as a tech supplier. Two consequences: much greater urgency for China to create local substitutes for US products; greater motivation for US-based multinationals to locate intellectual property and manufacturing outside the US.