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Trump wants to impose a whopping 35% tariff on businesses that move jobs overseas. This is why.

- December 5, 2016

Donald Trump has just announced via Twitter that he wants to impose sweeping new restrictions on US businesses. He says that he intends to impose a punitive 35% tariff on any U.S. business that lays off American workers and builds a factory or employs people in a new country. Such a policy, if it were adopted would be a radical shift from the kinds of economic policies – whether neo-liberal, liberal or mercantilist – that U.S. presidents have adopted in the past. Trump is declaring himself to be an economic nationalist. Here’s what that means.

Trump’s appointments reflect his political contradictions

Trump’s initial appointments suggest that he still hasn’t decided on his economic goals. His chief strategist, Stephen K.Bannon, arguably the brains of the operation, describes himself as an economic nationalist (though he is also known for leading Breitbart News, a breeding ground for racist, right-wing conspiracy theories). Bannon and Trump argue that the “system is rigged” against middle-class Americans. They want to restrict immigration and trade, raise the minimum wage and expand public spending on infrastructure, all to create jobs and raise incomes. They explicitly reject the existing neoliberal approach endorsed by the country’s business, intellectual and policy elites.

Yet Trump’s appointment of Wall Street executive Steven Mnuchin to Treasury and billionaire Wilbur Ross to Commerce suggest a continuation of the capital-friendly policies of previous administrations. Trump’s promises to hamstring the Environmental Protection Agency and unleash fossil fuel production also point in that direction. It remains to be seen how he will manage the tensions between a right-wing populism focused on helping workers and a conservatism focused on helping their bosses. However, by embracing economic populism on the stump, Trump has already changed the tone of political conversation. In fact, his camp told congressional Republicans last week that they were no longer the party of Ronald Reagan.

Yet Trump may be shifting away from neoliberalism

If Trump moves toward populism, it will be a big shift away from the existing economic consensus. From Reagan onward, Republicans and Democrats endorsed neoliberalism — a broad consensus that economic policy should focus on expanding market freedom in the belief that this leaves everyone better off.  Neoliberalism has been enormously profitable for elites, it vastly expanded global trade, and it kept inflation low with only moderate unemployment. But it also produced stagnant wages: The median household income has barely kept pace with inflation since 1980. Mostly, it helped the working and middle classes in Asia rather than the United States.

Part of the Trump-Bannon proposed solution is to return to the labor-friendly market policies of the 1950s or 1960s. Trump is vague about the details, but he supports a higher minimum wage, government spending on infrastructure and paid family leave. Here he finds widespread support, including from Sen. Bernie Sanders (I-Vt.) and others on the left.

Trump’s callout to the 1960s, however, ignores why the postwar approach fell apart in the 1970s. Labor-friendly policies were only one half of what international relations scholars have called the “embedded liberalism” of the post-war era. The other half was an open system of international trade, designed to avoid the calamities of protectionism in the 1930s, which helped lead to the political upheavals of the 1940s.

The stagnant growth, rising inflation and higher unemployment of the 1970s had multiple causes, but one of them was trade competition. American companies found themselves competing with low-wage manufacturing from Asian companies, first from Japan and later elsewhere. That open trade hurt American profitability and pushed the business community sharply to the right, giving birth to the neoliberalism of the 1980s.

Neoliberalism kept the open trade system but paired it with capital-friendly policies and low inflation. That allowed American firms to move production overseas, restoring their profitability. But the political coalition supporting embedded liberalism had collapsed. Big business no longer believed America could afford labor-friendly policies.

Trump wants to restrict trade. That may be a big problem.

Trump’s economic team has at least a partial understanding of why the postwar deal of embedded liberalism fell apart. This is why the other half of their economic plan is to restrict trade and immigration, to protect American blue-collar jobs. It is one of the few things that the new economic team might agree on: From Steve Bannon to Wilbur Ross, Trump’s team wants to close the borders. Many elites scoff, arguing that “those jobs are never coming back,” but in truth that’s more hypothesis than fact. What is a fact is the last time America tried to close its borders to trade, the results were disastrous.

The Trump foreign economic plan most closely resembles President Herbert Hoover’s “mercantilist” approach, which tried to deal with the 1929 crash of the U.S. economy by protecting U.S. industry from foreign competition (and Mexican immigrants). The Smoot-Hawley Act of 1930 dramatically increased U.S. tariffs on imports, thereby hurting America’s trade partners. Those countries, especially the European ones, responded with trade tariffs of their own. The resulting trade war worsened economic problems, produced the Great Depression, and paved the way for Nazis in Germany. If Trump’s “close the borders” approach led to trade wars with China and others that were even half as nasty as those of the 1930s, the world would be immeasurably worse off.

This framework helps put Trump’s economic approach in context

One useful way to think about the economic policies of different administrations is to focus on two questions. The first question is: Is the administration trying harder to help “capital” (i.e. business) or labor? The second question is America’s attitude to trade with the rest of the world — whether it favors open trade or trade restrictions.

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This helps us categorize different administrations. For example, the Hoover administration, which ushered in the Great Depression, had capital-friendly market policies and restricted international trade. When those policies failed, first Roosevelt and then Truman moved in the opposite direction, creating labor-friendly market policies and open international trade. FDR’s “New Deal” created Social Security, supported unions and boosted public spending to create jobs. After World War II, the Bretton Woods System established a stable international economic order that was open to trade.

Beginning in the 1980s, neoliberalism kept trade open — opening it even wider, in fact — but national market policies shifted away from labor in favor of capital-friendly policies. Bannon watched that shift first-hand as a Goldman Sachs executive and understood how it hurt blue-collar workers. So now he wants to take America into uncharted waters: a combination of restricted trade with labor-friendly market policies.

This simple account doesn’t pay attention to important factors such as rising immigration, oil shocks, job-destroying automation, and increases or decreases in capital flows. It also sets aside the disastrous fiscal implications of Trump’s proposed plan, which could see the deficit skyrocket. However, it does capture key aspects of economic policy, and explains both the economic approaches that Trump wants to reject (neo-liberalism and embedded liberalism) and those he has to choose between — Hoover’s mercantilism and Bannon’s neo-nationalism.

Thinking about the world in this way leads to some awkward conclusions. Neoliberalism has arguably produced the conditions that are leading to its own eclipse at the hands of Trump. This suggests that it creates the conditions for its own demise, as the political and economic theorist Karl Polanyi suggested in the 1940s.

However, both mercantilism and neonationalism have their own problems. Each essentially ignores the way in which the rest of the world will react, presuming that the U.S. will be able to build tariffs and other barriers to trade without other countries retaliating in ways that will hurt U.S. imports or worse. Neither mercantilism nor neo-nationalism can be implemented without causing trade wars between major economies. Trade wars could undermine economic growth and hurt the very people they are supposed to help (to say nothing of the risk that trade wars lead to military wars). Nor does either approach seem capable of dealing with climate change, which is a real global threat that cannot be solved by countries retreating behind their own borders.

This leaves embedded liberalism, the darling of progressive cosmopolitans. It might be a better approach to policy, but it is not clear that a political coalition can be built to support it. Last time it succeeded thanks to a World War, which induced patriotism and led elites to decide that they needed to pull together to prevent economic collapse and the resurgence of authoritarianism. It remains to be seen whether today’s progressives and moderate conservatives can come together to provide a set of answers to the problems of globalization and automation that would both be coherent and have electoral appeal.

We don’t know whether Trump will succeed either in creating a coalition for economic nationalism. Certainly, it may appeal to many US workers in the short run. Equally, it is likely to lead to retaliation from other countries, and very strong opposition from multinational firms, who have often supported the Republican party in the past. If Trump and the people around him get his way, America is about to launch a vast new experiment in economic policy, with highly uncertain consequences for the US economy and the world.

An earlier version of this post was published on November 29.

Jeff D. Colgan is the Richard Holbrooke associate professor in the Department of Political Science and Watson Institute for International Studies at Brown University.