Why Trump’s Industrial Policy Will Fail

Issue Briefs | Economy

No. 208
Tuesday, May 09, 2017
by Richard B. McKenzie

President Trump appears set to press for a mixed bag of fiscal and trade policies that will likely have contradictory effects. In addition to taking pages from President Ronald Reagan’s agenda to lower corporate and personal tax rates, trim government spending and deregulate business, President Trump also seems committed to pushing a version of the Democrats’ 1980s “New Industrial Policy” agenda. The 1984 Democratic candidate for president proposed an array of tax and trade policies to mitigate the ongoing loss of middle-class jobs and income by slowing the movement of manufacturing plants to lowerwage countries around the globe, most notably to Mexico and China. [See the sidebar, “New Industrial Policy.”] Similarly:

  • President Trump has signaled a willingness to impose a tariff of up to 35 percent on goods imported by U.S. firms that close their domestic plants only to open new ones abroad to achieve production-cost (and profit) advantages.
  • He also supports some form of the House Republicans’ proposed “border-adjusted corporate tax,” which would provide a significant corporate tax advantage to U.S. firms that export goods (such as Boeing), and penalize those that import goods and parts produced abroad (such as Walmart).

President Trump has not yet proposed adoption of the Democrats’ full industrial policy agenda. However, as Democrats proposed in the 1980s, Trump has indicated his intention to use state and federal treasuries to pay firms not to close their U.S. plants and move production abroad. Even before inauguration, Trump and Vice President Pence used a $7 million payout from the State of Indiana to persuade Carrier to cancel plans to move production of air conditioners to Mexico.

The logic undergirding Trump’s policy agenda appears to be primitive: The United States will prosper under federal policy “sticks” (such as import restrictions) and/or “carrots” (such as subsidies), because any reduction in U.S. imports will translate into corresponding increases in U.S. jobs, production and real income.

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