When Donald Trump isn’t railing against illegal immigration, he’s tapping into the populist anger over jobs leaving the U.S. From Trump’s Alabama rally:
You know Mexico is the new China. The other day Nabisco, Nabisco…Oreos right Oreos. I love Oreos, I’ll never eat them again. K? Never eat ’em again. Nabisco closes a plant, they just announced a couple days ago, in Chicago and they’re moving the plant to Mexico. Now why? Why? Why? Have you heard my favorite story is Ford…So Ford…they’re building a $2.5B car factory in Mexico. Now they’re closing up places in the United States…they’re gonna go in they’re gonna build this plant, they’re sell cars, they’re gonna sell them back to us. Where does that help us? Explain. Explain. There’s not tax. There’s no nothing, there’s no nothing. So we’re closing plants here, they’re building this massive plant in Mexico.
Trump is purposefully misdirecting people here. He’s trying to get them mad at the companies who are leaving, instead of at the U.S. government for its exorbitant corporate tax rate, which is one of the highest in the entire world. Here’s the Tax Foundation’s table on Top Marginal Corporate Tax Rates in 2014.
There are some tax deductions which allow corporations to pay around 35% (if both Marco Rubio and Rand Paul’s websites are correct). But Mexico and China’s tax rates aren’t even close. Here’s Mexico’s:
Here’s China’s via pwchk.com
Corporate income tax (“CIT”) – standard tax rate is 25%, but the tax rate could be reduced to 15% for qualified enterprises which are engaged in industries encouraged by the China government (e.g. New/high Tech Enterprises and certain integrated circuits production enterprises). Tax holiday is also offered to enterprises engaged in encouraged industries. Other CIT incentives are also available for tax resident enterprises in China.
So if China’s tax rate is 25% and Mexico’s is 30%, is there any wonder why companies are moving production outside of the U.S.? Remember when people got mad at Burger King for merging with Tim Hortons? Canada’s corporate tax rate is 26%. It’s no wonder why companies are leaving the U.S. This is where Trump is being disingenuous. He’s trying to get people mad at the big businesses, when the problem is the government itself.
The same is true of almost all economic questions.
You may say, “Here is a machine that has put thirty workmen out on the street.”
Or, “Here is a spendthrift whose behavior encourages every branch of industry.
Or, again, “The conquest of Algiers has doubled the trade of Marseilles.”
Or, finally, “Government expenditures provide a living for a hundred thousand families.”
Everyone will understand you, for your propositions are lucid, simple, and self-evident. You may go further, and deduce the following principles from them:
Machinery is an evil.
Extravagance, conquests, and heavy taxes are all good.
And your theory will be all the more widely accepted because you will be able to support it with undeniable facts.
But, for our part, we cannot limit ourselves to the consideration of a single cause and its immediate effect.
We know that this effect itself becomes in its turn a cause. In order to pass judgment on a measure, we must, then, trace it through the whole chain of its effects to its final result. In other words, we are reduced, quite frankly, to an appeal to reason.
But at once we find ourselves assailed by the familiar clamor: You are theorists, metaphysicians, ideologists, utopians, and doctrinaires; and all the prejudices of the public are roused against us.
What, then, are we to do? We must invoke the patience and good will of the reader, and, if we can, present our conclusions in so clear a light that truth and error show themselves plainly; so that once and for all the victory will go to either protectionism or free trade.
See, this is the the key part. What Trump is doing is going right into the “cause and effect” and skipping everything else. Lowering the corporate tax rate isn’t going to immediately solve the problem. It’s going to take a several years (maybe even longer) for the economic results to come in and people to start getting their jobs back. But this is thinking long-term, not short term, and people are going to have to be patient.
There’s another part of Trump’s protectionist rantings which aren’t 100% true. He went after China for their tariff policy vs. the U.S.’s.
What China has done to the United States is the greatest single theft in the history of the world. It’s an interesting statement. We’ve rebuilt China. We’ve rebuilt China. So, you know, we have free trade. The problem with free trade is when you have free trade, very important, you need competent leaders. I liked free trade, I’m a free trader. The problem is you need great negotiators and great leaders. We don’t have that. So we’re getting killed by everybody…A friend of mine is a manufacturer and he’s trying to do business in China…He said it’s impossible I can’t get my product. Finally he gets the product in there, and they charge him a massive tax, which they call a tariff because it sounds a little more sophisticated, right?
Here’s where Trump isn’t telling the whole truth. China had to slash its tariffs because of how sluggish its economy is. From Financial Times in June:
China slashed tariffs on selected consumer goods by half on Monday, its latest attempt to spur consumption and rebalance the economy from its traditional reliance on debt-funded investment.
The cuts, first flagged by the State Council in April, will reduce average import duties on clothing from 18.5 per cent to 8.5 per cent, shoes from 23 per cent to 12 per cent and skincare products from 5 per cent to 2 per cent.
What does Bastiat have to say on this (emphasis the author’s)?
There is a fundamental antagonism between the seller and the buyer.
The former wants the goods on the market to be scarce, in short supply, and expensive.
The latter wants them abundant, in plentiful supply, and cheap.
Our laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.
They operate, if not intentionally, at least logically, on the assumption that a nation is rich when it is lacking in everything.
For they say it is the producer who must be favored, by being assured a good market for his product. To achieve this end, it is necessary to raise its price; to raise its price, it is necessary to limit the supply; and to limit the supply is to create scarcity.
This is why China’s economy is tanking. The high tariffs are hurting China’s bottom line because nothing is coming in and everything is going out. This is where Trump would take the U.S. if he were to become president. It won’t happen immediately, but it would happen eventually. Remember, the Smoot-Hawley Tariff Act helped cause the Great Depression because no one was interested in sending goods into the U.S. America’s economy would suffer if Trump got his way and installed high tariffs on goods coming from Mexico and China. In reality, what the U.S should do is reduce the corporate tax from 39% to somewhere close to 10%, and cut spending and regulations to go along with it. This way, companies would bring their jobs back to the U.S.
Punishing companies for moving isn’t the way to go. Trump claims to be the smartest guy in the room, so he should know better. Of course, that may be why he’s not talking about reducing regulations and taxes. By focusing on the anger about the current economic state, he can stay in the front of the polls. This is where reason and logic have to take over. This is where actually free traders need to explain why protectionists like Trump and Bernie Sanders are wrong. It isn’t easy because of how angry people are. It just all boils down to messaging and hooking people in before they get onto the crazy protectionist train and ride it into another economic ditch.