By Stephen D. Slifer
Donald Trump believes that China and Mexico have been stealing factory jobs as U.S. firms shift their operations to those countries to take advantage of low wages. He has talked about imposing duties on any U.S. company that chooses to shift its headquarters overseas; slapping a steep tariff on many Chinese goods that are shipped to the United States; pulling out of or renegotiating the North American Free Trade Agreement, and choosing not to join the Trans-Pacific Partnership.
We believe such policies are ill-advised. Fortunately, there is a better way to keep U.S. jobs in the United States — incentives.
Trade is unambiguously positive for every country involved. Economists may not agree on much but they are unanimous in their opposition to trade barriers. By trading with each other, countries are able to purchase a greater variety of goods and services at lower cost.
We would suggest that factory jobs are disappearing largely because of improvements in technology, not as the result of trade agreements. In the long run, that is a good thing; but in the short-term, somebody has lost a job. That job is never coming back. That person needs to be retrained for some other position.
Fair enough. But this phenomenon has been going on forever. Buggy drivers were not happy when automobiles came along. Farmers were upset when higher-paying factory jobs in the big city lured their sons and daughters away from the family farm. But eventually the buggy drivers and farmers adapted and the economy was better off as a result.
Numerous articles today talk about how robots will eventually replace everybody’s job. That is a scary-sounding scenario. But we would suggest that other jobs — that none of us can even imagine today — will replace them. Remember that many of today’s tech sector jobs simply did not exist 20 years ago.
While Trump’s suggested trade measures have a populist appeal, we would suggest that there is a better way to save manufacturing jobs. Rather than restrict free trade, provide incentives for U.S. firms to remain in the United States. By doing so, factory jobs would not disappear in the first place. Here’s how:
Cut the corporate income tax rate. Business leaders have long complained about the 35% corporate tax rate in the United States versus an average 23% tax rate available elsewhere in the world. The lower tax rates overseas create a strong incentive for U.S. firms to relocate. Trump has suggested that he intends to lower the corporate tax rate from 35% to 15%. Such action would not only encourage U.S. firms to remain here but would also cause foreign firms to consider bringing their business to the United States.
Reduce stifling regulatory burden. Every business large and small has complained about the onerous regulatory environment. The Federal Register today is more than 80,000 pages. Large firms hire an army of lawyers to determine whether they are in compliance. Small firms are at a disadvantage because they cannot afford to do so. Trump has indicated that he intends to eliminate every unnecessary, needlessly complex, and overlapping regulation. Furthermore, for every new federal regulation that is introduced, two existing regulations must be eliminated. With a friendlier regulatory environment, U.S. firms are more likely to stay and foreign firms will be encouraged to relocate to the United States
Repatriate overseas earnings. The United States should adopt a “territorial” system of corporate taxation whereby a corporate entity gets taxed in the country in which it does business but is exempt from tax in its home country. German firms that do business in the U.S, for example, pay taxes in the United States but pay no taxes at home. U.S. firms that do business in Germany pay taxes in Germany, and if those profits are brought back to the United States they are taxed again by U.S. authorities. As a result, those corporate profits never return to the United States. Estimates are that anywhere between $2.5 trillion and $4 trillion of past corporate earnings are effectively locked overseas. Trump has proposed a favorable 10% tax rate on those unrepatriated corporate earnings. As funds that are currently held overseas return to the United States, there would be an avalanche of investment spending which would create a wave of new jobs.
As we see it, Trump could create a significant number of new jobs — in the manufacturing sector and elsewhere — if he were to adopt the measures described above and, indeed, those three initiatives appear to be a central part of his objectives for his first 100 days in office.
If he can make the United States a friendlier environment for U.S. firms, jobs would not go overseas in the first place. Simultaneously, foreign firms might be encouraged to relocate to the United States, which would create still more jobs.
Trade barriers may sound attractive, but they are not. There is a better way to achieve the same objective.
Stephen D. Slifer is a Charleston-based economist. Reach him at email@example.com.