Trump is wrong on trade

The vast preponderance of recent news coverage on Donald Trump has been on his remarks about Mexican illegal aliens, but he also made statements on outsourcing jobs, saying that if he were president, those U.S. automakers who move their manufacturing facilities south of the border would be slapped with a 35-percent tariff on every vehicle they import into the U.S.

But in my view, the best way to prevent manufacturing jobs from going elsewhere is not to build a tariff fence around the United States.  The best way is to examine the forces that make it so much cheaper to manufacture elsewhere.  It's not just labor costs.  Germany has higher labor costs than we do, but a 2011 Time Magazine article says this:

Something pretty incredible is going on in Germany. While the U.S. and much of the rest of the developed world is suffering not only with high unemployment, but also stubborn unemployment, Germany has been heading in the exact opposite direction. Defying the odds, Germany’s unemployment rate has been declining during the Great Recession...Germany experienced a giant surge in exports (up 18.5% in 2010) and that is driving the economy. And those exports to a great degree are industrial goods churned out by German factories. Germany specializes in machinery and other heavy equipment – it’s not sexy stuff that grabs headlines, but it sure is good business.

And a 2012 U.S. News article tells us:

Along with the billions spent on stimulus programs have come hundreds of new regulations that make it harder for businesses to grow and propel economic recovery. As one hand gives, the other takes away; and recently, it's taking a lot more. The trouble with regulation is that more is added every year, but very few government mandates are ever repealed. The combined weight of all the rules that have accumulated are crushing the economy—a death by a thousand cuts.

Last year alone, federal agencies issued 3,807 final rules according to data compiled by Wayne Crews of the Competitive Enterprise Institute. A good way to measure the extent and complexity of the regulatory environment is how many pages it takes to explain what all the regulations mean. Last year, for example, the Federal Register spanned more than 81,000 pages. That's enough to make a stack of paper as high as a three-story building...

More disturbing is the explosion of economically significant rules, those with an impact of more than $100 million...

That is just regulations.  Then there are lawsuits.  A company such as Ford, which decided to builtd a new plant in Mexico rather than Michigan, has to worry about lawsuits by American employees who might feel that more women should be employed in some branch, or class action lawsuits, in addition of course to lawsuits about mechanical issues.  In most countries, the loser of a suit pays the costs.  In this country this is not the case, which is one reason for our plethora of lawsuits.  We also have juries in some states that don't seem to know the difference between a punishment of a million and a billion.

The Institute for Legal Reform tells us this:

The United States is the world leader in lawsuits, which cost the U.S. economy $264 billion per year – or about $850 per year for every man, woman and child in the United States.  That hurts families, businesses, local communities – and America’s ability to compete in the global economy.

America has the world’s costliest legal system.  As a percentage of our economy, U.S. legal liability costs are double those of the UK (and Germany), three times higher than those in France and five times higher than those in Japan.  Our nation’s litigation addiction harms America’s ability to compete for jobs and investment in a  global economy.

Just as important, lawsuit abuse harms workers and communities across the United States. Consider:  Litigation costs small businesses in America over $100 billion per year.  One in three small business owners report that they have been sued or threatened with a lawsuit...

A July 13 Wall Street Journal editorial gave another reason for jobs disappearing:

The combined federal-state rate on corporate income of 39.1% is 14.5 percentage points higher than the average across the 34 OECD countries—31 of which have cut corporate taxes since 2000. The U.S. is alone in taxing foreign earnings when they are brought home.

The predictable result of this double taxation is that companies are stockpiling overseas the cash on which they’ve already paid foreign taxes. Economists call this a lock-out effect, and about $2.1 trillion in deferred income has accumulated overseas that could pay a dividend, build a factory, raise wages or reinvest in U.S. Jobs.

We learn from that more than 600,000 U.S. manufacturing jobs sit vacant because there aren’t enough qualified candidates to fill them.  (And the lack of qualified candidates shows up in other ways: for instance, thirty percent of high school graduates can’t pass the U.S. military entrance exam, which is focused on basic reading and math skills.)

In 35 U.S. states, it pays more to accept welfare than for a college graduate to work an entry-level job.  This surprising fact is based on a study done by the Cato Institute titled "The Work vs. Welfare Trade-Off."  For instance, Pennsylvania has citizens pulling in almost $30,000 before taxes in public assistance.  The article states that "[w]elfare pays and pays well," since in most states recipients end up making more than retail clerks and fast food employees.

There is also our bureaucracy.  I remember hearing on a radio show one American entrepreneur say that after waiting endlessly for permits here for his factory, he went to China, shook hands with the appropriate people, and in two weeks, ground was being broken on a factory.  It's hard to believe that we are more bureaucratic than a former Communist state that still pays lip-service to Socialism.  But we are.

Then there is the environmental movement.  Because of the (misplaced) concern about global warming, we pay more for energy that we would otherwise.  Hidden in our electric bill are the hikes we pay for windmills and for solar.  This increases costs for businesses, because such renewables cannot compete by price with oil or gas.  Here we should learn from Germany, again, but on what not to do.  Because renewables do not supply a steady reliable amount of energy, various German companies are thinking of manufacturing abroad, especially companies whose factory processes can be thrown off by even a small spike or drop in energy input.  In fact, Germany is building coal plants, because after deciding to shut down their nuclear plants, they need coal, and also because the renewables need a coal backup when the sun doesn't shine or the wind doesn't blow.  So there is a double negative for the economy; carbon dioxide still gets released into the atmosphere, and jobs go away.  (See Business Insider for more on this.)

Israel is discussing a free trade agreement with China.  Instead of putting tariffs up, this agreement would remove them.  And Israel's economy is doing pretty well, though it just shot itself in the foot by populist and leftist opposition to a deal negotiated with Noble Energy, an American company that discovered huge gas reserves in the sea off Israel.

We do so much economic damage to ourselves, so it is not surprising that manufacturing jobs go elsewhere.  If we want the jobs to come back, we have to be a safe and predictable place where businesses of all sizes can thrive.  And if we want to be an export-oriented country like Germany, we have to realize that putting up tariff walls is a two-way street.  Donald Trump wants to build the wrong fence.