Donald J. Trump. What can I say about him? He managed to break the record of becoming the most unpopular president among majority, he did it in just 10 days in the office.
His goal of making America great again by Border Adjustment Tax and other protectionist measures has send the US stock markets sky-rocketing. But it might be just temporary and become down crashing and burning very soon. Republicans are against protectionism and they support free-trade. Yet their candidate tries to make America great again by protectionist measures. Does this make any sense?
Let us consider the first thesis: By protectionism, Trump aims to protect domestic employment. Some industries, so called "sunset industries", are declining and facing challenges in competing with the foreign competition. This can be clearly seen as a lower prices for the foreign goods and higher prices for the domestic goods.
We might argue the effectiveness of protectionism in this case. If an industry has been declining for a while, it is likely to continue declining. In this case, protectionism against foreign competition might just prolong the process and prevent the employment to be employed into more efficient industries. Competition would diminish if foreign firms are kept out of a country, and so domestic firms may become inefficient without the incentive to minimize costs.
Also the consumers and the producers would face higher prices for the imported goods and raw-materials. It also leads to a loss of choice for the consumers.
Another argument is protection against low-cost labour. For example, the US clothing industry has faced the demand to protect the domestic clothing industry against the cheap imports from Asia, where wages are much lower. When the firms cannot compete with the low-cost labour and the wages are sticky, the firms may need to lay off employees and to create job insecurity in the particular industry.
However, this argument goes against the whole fundamental of international trade. It goes against the concept of comparative advantage, which is the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. This would bean that the domestic consumers would pay higher prices than they should and the production in the economy would stay on an inefficient level, even though the domestic goods seem to be more cheaper compared to the taxed imports.
The country's amount of exports would decline as a result from decreased trade and the increased prices in the domestic goods. If the domestic prices are high, the US exports become more expensive and less demanded in the countries where they are being exported.
One goal of the Border Adjustment Tax, that would create a tax-rate of 20 % for the imported goods, which would in theory increase the government revenue. As a large importer, the United States could try to benefit from the so called "terms of trade-effect" of tariffs, where the decreased demand for imports would make the price of world's imports lower, thus benefiting the United States Economy. However, we must remember that tariffs like the Border Adjustment Tax is a tax on the consumers in the country who are buying the imports.
Higher prices for the consumers, higher prices for the domestic producers, less choice for the consumers, inefficiency and decreased innovation. It is quite hard for me to see, how these protectionist measures are creating wealth, prosperity and economic growth in the United States. The stock markets are booming currently for some reason, and analysts around the world think that it could end any time soon in an ugly way if Trump keeps on going with his manifest
Even though Donald J. Trump has a degree in Economics, I think he either missed a couple of crucial lectures during his studies or he tries to make the magic-trick of the Century.
Text: SW
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