I’ve seen hundreds of articles on President Donald Trump and trade, but the real significance of the Trump economic revolution—for better or worse—is a focus on investment. There is no coordinating mastermind, but if you consider the intersection between what the Trumpian nationalists want and what a Republican Congress will deliver, it’s this: wanting to make the U.S. a new and dominant center for investment, including at the expense of other nations.
The Republican tax bill that passed the U.S. Senate early Saturday morning reflects a near-obsessive drive to lower the rate of corporate tax to 20 percent. This will very likely attract a significant amount of foreign investment. If fracking is making the U.S. the next Saudi Arabia, this tax cut will push the U.S. in the direction of being the next Ireland, at much larger scale. The underlying belief is that more investment will do so much economic good that it will offset the direct tax increase for many Americans.
In essence, a new kind of supply-side economics has been invented. The theory of the 1980s focused mainly on individuals, and lowering the tax rates they faced on labor income and capital gains. Cutting these rates was supposed to mobilize the power of those individuals, through more work or more investment. The idea today is that the real power of mobilization comes through corporate associations. Assuming the tax bill passes, that theory is about to get a major test.
Strikingly, the tax bill and the trade policies of the Trump administration can be viewed as having a similar underlying philosophy, whether entirely intended or not. One of the president’s first official acts was to withdrawal from the Trans-Pacific Partnership. Although I favored that agreement, as did most other economists, it’s worth considering what the most intelligent nationalist case against the TPP looks like. It’s not about trade, because the deal wouldn’t have affected tariff rates faced by Americans very much (exports of beef to Japan aside). Rather, the TPP would have given American certification to Vietnam, Malaysia and eventually other emerging economies as stable repositories of foreign investment from multinationals. That could in turn draw investment away from the U.S.
Or consider the Trump administration approach to the North American Free Trade Agreement. It doesn’t look as if Nafta will be jettisoned—the talks will drag on, and the level of background uncertainty will rise. The tariff rates probably won’t ever go up, but the status of Mexico as a haven for foreign direct investment will increasingly fall under question. That may push some of that investment into the U.S.
Again, the core theme behind the policies is boosting investment into this country, not encouraging exports. In fact, as we know from international trade economics, the balancing of accounts means that policies boosting foreign investment into the U.S. also must be associated with higher trade deficits. That is a strange secondary consequence, given Trump’s campaign promises.
The Trump administration is likely to bring some trade complaints against China soon. But in the longer run, the more important decisions are how much we will let China invest in the American economy, including in such sensitive sectors as semiconductors and artificial intelligence.
Is there a case for the new Trumpian approach? Well, partially. Rates of growth for U.S. investment has been sluggish or declining for decades, sometimes known as the “investment drought.” Supercharging investment might help build clusters of excellence, boosting innovation, wages and eventually tax revenue. And as the Asian savings glut disappears with changing demographics, the fight to attract foreign investment might become more intense, necessitating more dramatic measures.
That said, these Republican policies are not selecting the best paths to attract investment. More investment in human capital and the deregulation of building in America’s major economic regions, such as the San Francisco Bay Area, would likely do the most to boost investment, but those plans are not on the table. Furthermore, the U.S. might attract more investment as a member of a healthy and thriving Nafta, rather than belonging to a limping regional trade agreement. Although I favor cutting the rate of corporate tax, it should be accompanied by a good plan for fiscal sustainability.
Most of all, I still believe in the postwar project of building a mutually advantageous global trading order, led by the U.S. but benefiting most nations, with the U.S. reaping reciprocal advantage in turn. The Trump administration has been moving away from that vision.
But make no mistake about it: Whether Trump himself gets all the details of the new approach, there is a revolution in economic policy before us. We neglect it at our peril.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.