Should Trump hike tariffs on companies that offshore?

December 13, 2016

“There will be a tax on our soon to be strong border of 35 percent for these companies wanting to sell their product, cars, A.C. units etc., back across the border,” Trump tweeted last week. Can he do that?

The Very Smart People use to tell us that it was inevitable, indeed good, for companies to offshore their operations. Many Democrats like Rep. Louise Slaughter and Sen. Sherrod Brown criticized offshoring, but they often were lonely voices. "Giant sucking sound" Ross Perot was considered a joke.

Remember Jeffrey Immelt, CEO of GE? He was the chair of Obama's Council on Jobs and Competitiveness. Sen. Bernie Sanders justly criticized Immelt for his core company offshoring strategy, using Immelt's own words.

When I talk to GE managers, I talk China, China, China, China, China. (Sanders holds up his hand and says, ‘five Chinas.’) You need to be there. You need to change the way people talk about it and how they get there. I am a nut on China.Outsourcing from China is going to grow to five billion. We are building a tech center in China. Every discussion today has to center on China. The cost basis is extremely attractive. You can take an 18 cubic foot refrigerator, make it in China, land it in the United States and land it for less than we can make an 18 cubic foot refrigerator today ourselves.

Now Trump is changing the conversation. His intervention in Carrier was a modest jobs result. We certainly cannot bribe every company considering offshoring. Now, it is no longer OK to move jobs to another country and still benefit from the US consumer market.

Free trade orthodoxy folks' heads are exploding. Obama, Bush and Clinton never saw anything wrong with offshoring. But voters did.

Can Trump hike tariffs on one company? He can raise tariffs under US law, but probably cannot target a specific company. He could target an industry or a country.  Remember that Nixon imposed a 10% surcharge tariff in 1971. The legal authority used by Nixon still exists.

But trade deals, like the World Trade Organization (WTO) agreement, allow other countries to challenge the US in the event Trump raises tariffs to violate those agreements.  There would be WTO litigation and we could lose. Would Trump then pull out of those agreements? Who knows?

His unpredictability is a feature, not a bug. Foreign diplomats don't know when he is serious or when he will do crazy-ish things. Trump uses threats as a negotiating tool to open space for later settlement. Or he could just press on and not settle the matter. We will know when it happens.

The mere deterrent effect of Trump's tariff threats may keep US companies here, because if they offshore they do not want to risk US tariff walls to get their products back in. If tariffs were hiked, foreign parts and products would be more expensive. US producers could be cheaper, sell more, hire more people and gain market share.

But what if other countries respond with tariff hikes? Our export loss could easily be small in relation to the gain from grabbing market share from reduced import competition. Because the US is the biggest consumer market in the world, there is more money here than in any other country. So a hypothetical tit for tat "trade war" may be a net gain for our country, because we gain more with more jobs and plant capacity to supply our domestic market.  Export losses to smaller countries may not fully offset our domestic market gains.

Other countries usually target politically sensitive products when responding with a tariff hike. That's been the case in past WTO disputes. For example, if there is a foreign retaliatory tariff on pork, the pork industry would lobby Congress to lower the US tariff so that the foreign country does the same. The pork lobby would probably win in Congress because even the anti-trade agreement congressional members cannot stomach foreign tariff hikes.

But as a matter of math, a foreign pork tariff would likely not change a result where the US economy is better off as a whole by gaining more domestic market share than it loses in exports.

Would President Trump cave to a single industry lobby? Who knows. His "craziness" was initially considered disqualifying for his candidacy.  But enough voters liked the craziness to elect him. 

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