President-elect Donald Trump will be sworn into office Friday on an economic sugar rush. The markets have soared since his election, and companies are falling over themselves to curry his favor by announcing new plans to expand in the United States. “I will be the greatest jobs producer that God ever created,” he said at press conference last week. Trump is particularly fond of manufacturing investment and jobs, having launched a running Twitter war with large manufacturers, including Ford, General Motors and Toyota, to pressure them into expanding investment in the U.S. rather than Mexico.
Trump has made it very clear what he wants for the American economy: more investment and more jobs. The goal is a laudable one and one that helped him carry voters in the Rust Belt states that decided the election. Over the last two decades, the U.S. has seen a sharp fall in its share of global investment, its share of global exports and the number of Americans working in manufacturing. Slowing or even reversing those trends as much as possible should rightly be a priority for the new administration.
But Trump’s goal is at odds with his tactics. Boosting investment in the U.S. will require not only working with Congress to reform tax laws. It will also require working closely with other countries to shape fairer rules so that competition for investment does not become a zero-sum race to the bottom.
There are no rules that prevent countries from showering subsidies on companies to persuade them to invest.
The U.S. was slow to wake up to the global competition for investment. Confident that its large market and relatively favorable business environment would continue to entice companies, the U.S has for decades done little to actually lure investors here. Following the Reagan tax reform in 1986, the U.S. had one of the lowest corporate tax rates of any advanced economy. But 30 years later, as other countries slashed taxes to attract investment, the top U.S. corporate tax rate of 35 percent is now the highest of the advanced economies. Ireland’s tax rate of 12.5 percent is barely more than one-third the U.S. rate.
Until the last decade, the U.S. did not even take the simple step of advertising itself to the world. Nearly every country has long had a national “investment promotion” agency. The U.S. did not create one until 2007, and it has remained underfunded. The Obama administration tried to fill the hole by launching the annual “Select USA” summits, but the impact has been modest.
Trump’s goal is to put investment promotion on steroids. He wants to persuade Congress to cut the top corporate tax rate to 15 percent. He appears to favor a House Republican plan to create a new “border adjustable” tax that would raise the cost of imports and lower the cost of exports, again to encourage companies to invest in the U.S. And he is promising to slash regulations and overhaul U.S. ports, rail lines and bridges to make the U.S. economy more competitive.
The result of zero-sum competition is fine for corporations but lousy for the world.
Many of these approaches make sense but they do not address the fundamental problem ― in a world of mobile companies, other countries will respond in kind by further slashing their taxes and doing yet more to compete for scarce investment dollars. Such zero-sum competitions can be very damaging, undermining the tax base for governments and raising pressure to hold down wages or weaken environmental and consumer regulations. That is fine for the corporations, but lousy for the world.
It was a similar recognition that led the U.S., back in the 1930s, to begin developing global rules for trade. If one country raises tariffs on imports, it may well boost its local industries. But if all countries do it, the result will be a contraction of global trade, and countries will harm each other even as they are trying to help themselves. The same is true with investment. If one country slashes taxes or regulations to attract investment, they may benefit; but if most countries do it, the result is a harmful race to the bottom. Ireland, for example, went so far as to basically eliminate Apple’s corporate tax bill to entice the company to create its European headquarters in Cork. The U.S. should not emulate such behavior.
Instead, the Trump administration should respond by mixing its unilateral efforts to boost investment in the U.S. with a new initiative to develop global rules for investment competition. As I argue in my new book, Failure to Adjust, the lack of global rules restricting tax incentives and other subsidies for investment is “the hole in the global rules.” There are plenty of rules that make it illegal for countries to seize private investments or to harm companies with new discriminatory regulations. But there are no rules that prevent countries from showering subsidies on companies to persuade them to invest. To pick on Apple again, The New York Times recently reported that Foxconn, the Taiwanese giant that assembles iPhones in China, has been the recipient of billions of dollars in Chinese government subsidies.
The fact that the U.S. remains the largest consumer market in the world gives it considerable leverage.
The agreements could be international or bilateral. Countries would commit to limits on special tax reductions to attract investment; there is a good model already in the European Treaty of Rome, which forbids countries from offering special subsidies to attract corporate investment. Countries should also agree to tougher standards on labor rights and environmental protection to avoid a regulatory race to the bottom. Any agreement would distinguish between permissible subsidies (say, government help in training workers or building infrastructure, which brings broader economic benefits) from prohibited ones (such as long tax holidays or cut-rate energy).
The Trump administration will have both carrots and sticks to offer. Countries that agree to such rules will continue to enjoy open access to the U.S. market and will be able to compete freely for investment without the threat of sanctions or unexpected attacks via Trump’s Twitter. Much as in trade rules, the fact that the U.S. remains the largest consumer market in the world gives it considerable leverage to press other countries for a more level playing field on investment.
Such an initiative would help the U.S. attract more of the investment and jobs that Trump wants but it would do so in a way that would help the world as well as helping the U.S. To get to where he wants to go, Trump will need the help of others.