Trump’s 35 Percent Internal-Tariff is Economic Fools’ Gold

As is his passion, President-elect Donald Trump on Sunday fired off some tweets. He promised a 35 percent internal-tariff on U.S. manufacturing companies that relocate jobs abroad.

It’s good politics, to be sure. Riding high from his deal with air-conditioning manufacturer Carrier to retain U.S.-based jobs, Trump is pushing his central campaign narrative that too many jobs are being lost abroad.

On that basic idea, Trump is correct. Travel to cities like Reading in Berks County Pennsylvania, for example, and the destitution is evident. In such places, the globalized economy is not simply disliked, it is detested. It’s no surprise that Trump increased the Republican victory margin in Berks County by nearly 10 percent.

But populism is not the right measure of an effective presidency. If enacted, a 35 percent tariff would hurt the U.S. economy. It’s functionally infeasible and economically illiterate.

Trump’s proposal assumes American companies would have no choice but to accept his mandate. On the contrary, if the tariff came in, the first action of many companies would be to incorporate in a different nation. How do we know this? Because that’s exactly what companies have been doing for the last few years.

Facing increasing regulations and comparatively high corporate taxes, many U.S. businesses have relocated their tax domicile abroad. Others have merged with or been sold to foreign owners. And while the Obama administration has tried hard to crack down on these practices, it has had little success. Private companies have an imperative interest to mitigate costs and maximize profits.

If Trump were to introduce his 35 percent import-tariff, he would simply encourage more U.S. companies to pursue foreign relocation. That would spark an exodus of jobs, investment and tax revenue from the United States. It would achieve exactly the opposite of Trump’s intent. With time, the U.S. economy would suffer noticeably. We know this because Ireland’s economy, home to hundreds of recent U.S. inversions, is flourishing. Attracting investment with low-tax rates, the Irish government’s latest tax receipts are also outperforming expectations. They have realized that the best way to create jobs is to welcome investment.

Still, let us assume that some U.S. companies abided by Trump’s plan. Unable to mitigate personnel costs, many businesses would close down or cut staff. Speak to any small business owner and you’ll hear how difficult it is to manage costs. These companies are not moving jobs overseas because they would rather employ foreigners. They are moving jobs overseas because that is how they remain competitive. The same rationale explains why companies like McDonald’s cannot pay a $15 minimum wage. Doing so would render them uncompetitive. Even in the best-case scenario, any afflicted U.S. businesses would have to transfer costs to consumers in increased prices.

Trump says he can reduce these challenges by reducing corporate taxes and regulations alongside his tariff. Unfortunately, the 35 percent tariff would outweigh those benefits. The reason that manufacturers are relocating jobs overseas is long-term business planning. Facing competition from foreign manufacturers who offer Americans cheap goods at lower prices, higher U.S. wages disadvantage U.S. companies producing low-value goods.

While reducing corporate taxes and regulations would support greater hiring and investment in the economy, it would not address the challenge that U.S. manufacturing faces: structural uncompetitiveness. Unless the United States was to shut its borders to all imports, Americans would continue to choose cheaper foreign goods. Doing so would remain in their economic interest.

And that speaks to something else. Trump’s internal-tariff proposal would hurt millions of American families. As I’ve explained, Americans benefit by the fact that many cheap goods — such as t-shirts — are now manufactured abroad. If we forced companies to make low value t-shirts at home, we would quickly see big hikes in the price of those shirts.

Don’t misread me. We must not ignore the decline of manufacturing. We must ensure, for example, that displaced workers receive far stronger re-training opportunities. And as a nation, we must revive the prestige of and opportunities in trade careers. Being a plumber must not be looked down on. Most plumbers make very good livings!

Ultimately, Trump’s zeal for his tariff agenda is understandable. His supporters put great trust in him to fix what they see as a broken economy. Those who have lost manufacturing jobs are right to expect something better. Yet internal-tariffs aren’t the solution. Lower taxes, fewer regulations, and greater innovation are.

That last point is the key. As people around the world grow wealthier, they will seek out higher-value goods. And whether its airplane engines or high-tech software such as that in iPhones, America leads the world. That’s where we should fight to revive U.S. manufacturing.