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, Hoover’s economic strategy didn’t turn out so well — either for the nation or for the GOP.
Does Trump aspire to be a 21st-century Hoover, with a modernized platform of the 1930 Smoot-Hawley tariff, which collapsed the banking system and helped send the U.S. and the world economy into a decade-long depression?
We can’t help wondering whether the recent panic in world financial markets is in part a result of the Trump assault on free trade.
Trump is also running full throttle on an anti-immigration platform that could hurt growth as well as alienate the GOP from the ethnic voters it needs to win in 2016.
We call this the Trump Fortress America platform. He clearly sees international trade and immigration as negative-sum games for American workers.
Trump recently announced that as president he would prohibit American companies such as Ford from building plants in Mexico. He moans pessimistically that “China is eating our lunch” and “sucking the blood out of the U.S.”
But following the anti-business, rule-making assault from Obama, strategic tax cuts and regulatory relief — not trade and immigration barriers — are the solution to America’s competitiveness deficit.
In his latest policy manifesto, Trump writes, “Decades of disastrous trade deals and immigration policies have destroyed our middle class.” 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.”
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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. Immigrants 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 U.S. 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 (between 1983 and 2005).
When Washington gets the macroeconomic policies right — on taxes, trade, regulation, and the dollar — economic opportunity flourishes.
Free trade is a building block of prosperity, and Trump’s call for tariffs as high as 35 percent is worrisome in the extreme.
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 rises, incomes for all Mexicans go up. These same Mexicans then go out and spend their new money — not just on domestic products, but on U.S. goods and services available on the market, thus building 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 would hurt America at least as much as Beijing. The same is true for rolling back Reagan’s NAFTA — a great success. Mexico is now our second-largest export market. China is our third.
And China is our number-one import market, with Canada second and Mexico third. Do we really want to pick an economic war with them?
The U.S is the hub of the global trading system, so any lurch toward protectionism in America would give other nations an easy excuse to erect higher trade barriers. The ensuing domino effect could shut down the global trading system. No wonder financial markets are so jittery.
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Trump’s idea of a 35 percent tariff on imported goods would represent the biggest tax increase on U.S. consumers in modern times. This won’t help the poor. Consider that Walmart has been one of the greatest anti-poverty programs in world history, achieving the “everyday low prices” that greatly benefit the poor and middle class in part through low-cost imports.
But trade is also 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 poverty and deprivation in the world’s 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.
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Hundreds of millions have moved upward into the middle class, primarily in China, India, broader Asia, parts of Latin America, and sub-Saharan Africa. It’s 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 sourced principally to Washington, D.C., not Beijing or Mexico City.
Finally, we need a strong and stable dollar policy that ensures that the value of tomorrow’s greenback will be the same as it is today. The collapse of the dollar in the 1970s and 2000s led directly to the collapse of the economy. Right now, the unstable dollar is a huge deterrent to future investment from abroad and at home. Ideally, Fed monetary policy should aim at a commodity-price rule bolstered by forward-looking, inflation-sensitive market prices.
The solution begins with substantially cutting or even eliminating the corporate tax. After that, policymakers should stop the double taxation of multinational profits by moving to a territorial system, like everyone else in the world. Also, we need to shift to full cash expensing for new investment in plants, equipment, and building structures.
The personal tax code should then be reformed by lowering the rates, getting rid of corporate-cronyist deductions, simplifying the whole system, and ripping out tens of thousands of regulatory pages from the IRS code. In general, we prefer a flat-tax structure.
We have seen firsthand how companies from Medtronics to Burger King have fled the U.S. for lower-tax nations like China, Canada, and Ireland because U.S. tax rates are 10 and even 20 percentage points higher. 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, we need a pro-America energy policy that expands the North American shale-oil and gas revolution, ends the war on coal states, builds pipelines, allows drilling on federal lands, and greenlights the export of our vast oil and gas sources — all of which will create millions of new jobs. In other words, we need the precise opposite of the Obama energy strategy.
After that we can tackle America’s massive regulatory burden — think Obamacare, Sarbanes-Oxley, Dodd-Frank, the Consumer Financial Protection Bureau, the EPA, and the National Labor Relations Board — which under Republicans and Democrats has expanded exponentially the incredible maze of licenses and regulatory codes that pose a huge barrier to small new-business startups.
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 Trump’s draft economic plan contains variations on most of these ideas.
And they are ideas that have worked. When they have been in place, growth has exploded. It happened under Republican Reagan and Democrat Clinton, both of whom were free traders who favored legal immigration.
– Stephen Moore and Larry Kudlow are co-founders with Arthur Laffer and Steve Forbes of the Committee to Unleash Prosperity. A version of this article originally appeared in Investor’s Business Daily on August 25, 2015.