This column was co-written with Stephen Moore.
Here’s a historical fact that Donald Trump, and many voters attracted to him, may not know: The last American president who was a trade protectionist was Republican Herbert Hoover. Obviously that economic strategy didn’t turn out so well — either for the nation or the GOP.
Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?
We can’t help wondering whether the panic in world financial markets is in part a result of the Trump assault on free trade.
Trump is also now running full throttle on an anti-immigration platform that could hurt growth as well and alienate Republicans from ethnic voters that the GOP needs if it is going to win in 2016.
We call this the Trump Fortress America platform. He clearly sees international trade and immigration as a negative sum game for American workers.
He recently announced that as president he would prohibit American companies like Ford from building plants in Mexico. He moans pessimistically that “China is eating our lunch” and is “sucking the blood out of the U.S.?”
But strategic tax cuts and regulatory relief after the anti-business rule-making assault by Obama, not trade and immigration barriers, are the solution to America’s competitiveness deficit.
A draft of Trump’s 14-point economic manifesto promises that, as president, he would “modify or cancel any business, or trade agreement that hinders American business development, or is shown to create an unfair trading relationship with a foreign entity.”
His immigration stance would not just deport illegal immigrants, but even lock the golden doors to those who come lawfully for opportunity, freedom and jobs. This could hardly be further from the Reaganite vision of America as a “shining city on a hill.”
“Decades of disastrous trade deals and immigration policies have destroyed our middle class,” Trump writes in his latest policy manifesto. This “influx of foreign workers,” he continues, “holds down salaries, keeps unemployment high and makes it difficult for poor and working class Americans — including immigrants themselves and their children — to earn a middle-class wage.”
There’s some evidence that competition for jobs in very low-skilled occupations holds down wages, but for the most part immigrants fill niches in the labor market that natives can’t or won’t fill. They add to the overall productivity of the labor force while starting new businesses, and thus are net creators of jobs.
Tech CEOs will tell you there might not be a Silicon Valley were it not for foreign talent and brainpower.
In the 1980s and ’90s the United States admitted nearly 20 million new legal immigrants — one of the largest waves of newcomers in our nation’s history. Over that time period, the U.S. created nearly 40 million new jobs, the unemployment rate plunged by half, and the middle class saw living standards rise by almost one-third (from 1983-2005).
When Washington gets the macroeconomic policies right — on taxes, trade, regulation and the dollar — economic opportunity flourishes.
Free trade is also one of these prosperity building blocks, and Trump’s call for tariffs as high as 35% are worrisome in the extreme. We want Americans and workers all over the world to have access to the best-quality products at the lowest possible price. This is the centuries-long economic law of comparative advantage first taught to us by David Ricardo.
Take the Ford plant in Mexico. If it’s more profitable for Ford to produce trucks in Mexico, fine. As the supply of Mexican trucks goes up, this creates higher income for all Mexicans who then go out and spend the new money, not just at home, but in purchasing U.S. goods and services available on the market. And the purchase of American goods and services builds up the U.S. economy. It’s win-win.
Trump is correct that there are unfair trading practices around the world. We know, for example, that China pirates U.S. technologies and patents. They counterfeit our goods.
But slapping Trump’s punitive tariff on imported Chinese goods will hurt America at least as much as it does Beijing. The same is true for rolling back the Reaganite NAFTA — a great success. Mexico is now our second-largest export market. China is No. 3.
China is our No. 1 import market, with Canada second and Mexico third. Those three countries together lead our total trade. Do we really want to pick an economic war with them?
Because the U.S is the hub of the global trading system, a lurch toward protectionism in America would give other nations an easy excuse to erect higher trade barriers and the domino effect could shut down the global trading system. No wonder financial markets are so jittery.
Trump’s idea of a 35 percent tariff on imported goods would be the biggest tax increase on U.S. consumers in modern times. This won’t help the poor. Wal-Mart has been one of the greatest anti-poverty programs in world history, and it has achieved the “everyday low prices” that greatly benefit the poor and middle class in part through low-cost imports.
But trade is also surprisingly vital to American jobs. A Heritage Foundation study finds that “international trade has boosted annual U.S. income by at least 10 percentage points of GDP relative to what it would have been without global trade, which translates into an aggregate gain of at least $1.7 trillion in 2013, or an average gain of more than $13,600 per U.S. household per year.”
Free trade is also the greatest antidote to world poverty and deprivation in world history. Over the past three decades, according to the World Bank and other sources, the spread of free trade has lowered abject, dollar-a-day poverty by nearly 1 billion people.
Hundreds of millions have moved into the middle class primarily in China, India and elsewhere in Asia, in parts of Latin America and in sub-Saharan Africa — a phenomenal achievement, underscoring the benefits of free trade and open markets.
To his credit, Trump accurately recites many of the terrible problems afflicting the American economy:
“Today, nearly 40 percent of black teenagers are unemployed. Nearly 30 percent of Hispanic teenagers are unemployed. For black Americans without high school diplomas, the bottom has fallen out: more than 70 percent were employed in 1960, compared to less than 40 percent in 2000. Across the economy, the percentage of adults in the labor force has collapsed to a level not experienced in generations.”
But the American problems that Trump complains about — stagnant growth and wages and slow job growth — can be found principally in Washington, D.C., not Beijing or Mexico City.
Start with substantially cutting or even eliminating the corporate tax. Then stop the double tax on multinational profits by moving to a territorial system, like everyone else in the world. Also, shift to full cash expensing for new investment in plants, equipment and building structures.
Then reform the personal tax code by lowering the rates, getting rid of corporate cronyist deductions, simplify the whole system and rip out tens of thousands of regulatory pages from the IRS code. We prefer a flat tax structure.
We have seen firsthand companies from Medtronics to Burger King flee the U.S. for lower tax nations because our tax rates are 10 and even 20 percentage points higher than nations like China, Canada and Ireland.
This is like imposing a tariff on our own goods and services. The real victims, according to a study by the American Enterprise Institute, are American workers who earn lower wages and find fewer jobs.
Next, a pro-America energy policy that expands the North American shale oil and gas revolution, ends the war on coal states, builds pipelines, drills on federal lands and allows the export of our vast oil and gas sources — in other words, the precise opposite of the Obama energy strategy — will create millions of new jobs.
Then tackle America’s massive regulatory burden, which under Republicans and Democrats has expanded exponentially — ObamaCare, Sarbanes-Oxley, Dodd-Frank, the Consumer Financial Protection Bureau, EPA and the National Labor Relations Board — the incredible maze of licenses and regulatory codes that pose a huge barrier to small new-business startups.
Finally, a strong and stable dollar policy that ensures that the value of tomorrow’s greenback will be the same as today. In the 1970s and 2000s, the collapse of the dollar led directly to the collapse of the economy. Right now, the unstable dollar is a huge deterrent of future investment from abroad or at home.
Ideally, Fed monetary policy should aim at a commodity price rule bolstered by forward-looking inflation-sensitive market prices.
Trump says his goal is a pro-business policy that rewards companies that “invest in America, return to America, or stay and thrive in America.” Let us add, “create in America.” The good news is that the draft 14-plank economic plan that we have seen from Mr. Trump contains variations on most of these ideas. They worked. Growth exploded.
That happened under Republican Reagan and Democrat Clinton. And both were free traders who favored legal immigration.
Moore and Kudlow are co-founders with Arthur Laffer and Steve Forbes of The Committee to Unleash Prosperity