President Donald Trump’s trade deals are finally here. Japan, the European Union, the United Kingdom, and others seem ready to sign. At this point, it’s hard to tell if trade will be expanded or reduced overall. The United States is raising tariffs while other countries are reducing them, and the details are still lacking.
But we can be certain of one thing about the pay-to-play spin on capitalism: It will determine who, what, when, and how much capital is invested by major U.S. trading partners.
Trump seems to see himself as Colossus, standing at the nation’s entry points and rattling the keys to the kingdom. He will take care of those who pay the U.S.’s entry price and deny those who will not. In such a world, politics tends to trump free-market forces.
In some cases, the outcome looks better than what might have happened. Threatened tariffs have been reduced, and foreign markets have been widened for U.S. goods. For example, tariffs on Japan’s cars have fallen from a threatened 30% to 15%, and U.S. auto and rice producers will have improved access to the Japanese economy.
But with the major country trade deals so far, Trump is positioned to personally direct investments of hundreds of billions of dollars made by the trading partner. For Japan, the number is $550 billion; for the EU, it’s $600 billion; for South Korea, it’s $350 billion. And while the fine print is yet to be seen, Trump has indicated that in some cases, the U.S. will share in the profits earned on the partners’ new investment. America, Inc. arises!
It should be noted that large forthcoming U.S. investments and the purchase of American goods would have occurred anyway. That’s what countries do with the dollars that accumulate from exports to the U.S. It is the prospective use of the green pieces of paper that gives them value. What differs here is that the expenditures and investments will be guided by a sitting president, not by the overall market forces.
Almost from the nation’s beginning, America has flirted with national planning and favoring one industry over another. In 1791, Alexander Hamilton famously called for protecting infant industries until they were fit and ready to deal with the hard realities of free-market competition. There were constant and sometimes fierce 19th-century tensions between Northeastern textile manufacturers, who wanted tariff protection, and Southern cotton producers who wanted unfettered access to world markets.
Wars and the Great Depression brought government ownership of industries and extensive regulation. Even under the relatively free-market Reagan administration, when “Japan, Inc.” was viewed as an existential threat for the computer chip industry, the U.S. engaged in a version of industrial planning. But generally speaking, the heavy hand of government has relaxed somewhat (though never completely) with the passing of the emergencies that inspired it.
There is no way for us to know if Trump’s version of pay-to-play capitalism will redefine how the American economy works in the long run. He seems at heart to be a negotiator who doesn’t show all his cards.
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But in the short run, we can be certain that with large international investment being managed and tailored by the White House, at the margin, the capability to lobby and get along with the boss will grow in importance — at the expense of the capability to invent new products and extend one’s own market appeal.
In a word, the Trump approach centralizes economic decision-making both in the U.S. and with its trading partners. There have been and will be wins associated with it. Cartelization and the hardening of America’s economic arteries are the results to fear.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.