Kudlow's Corner

Why Trump’s protectionist ways will hurt the economy

Stephen Moore and Larry Kudlow

Here's a historical fact that Donald Trump, and many voters attracted to him, may not know: The last American president who was a trade protectionist was Republican Herbert Hoover.

Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?

Republican presidential candidate Donald Trump speaking in Mobile, Alabama, August 21, 2015.
Getty Images

Trump is also now running full throttle on an anti-immigration platform that could hurt growth as well and alienate Republicans from ethnic voters that the GOP needs if it is going to win in 2016.

We call this the Trump Fortress America platform.

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He recently announced that, as president, he would prohibit American companies like Ford from building plants in Mexico. He moans pessimistically that "China is eating our lunch" and is "sucking the blood out of the U.S."

But strategic tax cuts and regulatory relief after the anti-business rule-making assault by Obama, not trade and immigration barriers, are the solution to America's competitiveness deficit.

A draft of Trump's 14-point economic manifesto promises that, as president, he would "modify or cancel any business, or trade agreement that hinders American business development, or is shown to create an unfair trading relationship with a foreign entity."

His immigration stance would not just deport illegal immigrants, but even lock the golden doors to those who come lawfully for opportunity, freedom and jobs. This could hardly be further from the Reaganite vision of America as a "shining city on a hill."

"Decades of disastrous trade deals and immigration policies have destroyed our middle class," Trump writes in his latest policy manifesto. This "influx of foreign workers," he continues, "holds down salaries, keeps unemployment high and makes it difficult for poor and working class Americans — including immigrants themselves and their children — to earn a middle-class wage."

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There's some evidence that competition for jobs in very low-skilled occupations holds down wages, but, for the most part, immigrants fill niches in the labor market that natives can't or won't fill. They add to the overall productivity of the labor force while starting new businesses, and thus are net creators of jobs.

Tech CEOs will tell you there might not be a Silicon Valley were it not for foreign talent and brainpower.

Free trade is also one of these prosperity building blocks, and Trump's call for tariffs as high as 35 percent are worrisome in the extreme. We want Americans and workers all over the world to have access to the best-quality products at the lowest possible price.

Take the Ford plant in Mexico. If it's more profitable for Ford to produce trucks in Mexico, fine. As the supply of Mexican trucks goes up, this creates higher income for all Mexicans who then go out and spend the new money, not just at home, but in purchasing U.S. goods and services available on the market. And the purchase of American goods and services builds up the U.S. economy. It's win-win.

Trump is correct that there are unfair trading practices around the world. We know, for example, that China pirates U.S. technologies and patents. They counterfeit our goods.

But slapping Trump's punitive tariff on imported Chinese goods will hurt America at least as much as it does Beijing. Do we really want to pick an economic war with some of our biggest trade partners?

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Because the U.S is the hub of the global trading system, a lurch toward protectionism in America would give other nations an easy excuse to erect higher trade barriers and the domino effect could shut down the global trading system. No wonder financial markets are so jittery.

Trump's idea of a 35-percent tariff on imported goods would be the biggest tax increase on U.S. consumers in modern times. This won't help the poor. Wal-Mart has been one of the greatest anti-poverty programs in world history, and it has achieved the "everyday low prices" that greatly benefit the poor and middle class in part through low-cost imports.

Hundreds of millions have moved into the middle class primarily in China, India and elsewhere in Asia, in parts of Latin America and in sub-Saharan Africa — a phenomenal achievement, underscoring the benefits of free trade and open markets.

Here's what we think is a better economic plan:

Start with substantially cutting or even eliminating the corporate tax. Then stop the double tax on multinational profits by moving to a territorial system, like everyone else in the world. Also, shift to full cash expensing for new investment in plants, equipment and building structures.

Then, reform the personal tax code by lowering the rates, getting rid of corporate crony deductions, simplify the whole system and rip out tens of thousands of regulatory pages from the IRS code. We prefer a flat tax structure. We have seen firsthand companies from Medtronic to Burger King flee the U.S. for lower tax nations because our tax rates are 10 and even 20 percentage points higher than nations like China, Canada and Ireland. This is like imposing a tariff on our own goods and services.

Next, a pro-America energy policy that expands the North American shale oil and gas revolution, ends the war on coal states, builds pipelines, drills on federal lands and allows the export of our vast oil and gas sources — in other words, the precise opposite of the Obama energy strategy — will create millions of new jobs.

Then tackle America's massive regulatory burden, which ,under Republicans and Democrats has expanded exponentially — Obamacare, Sarbanes-Oxley, Dodd-Frank, the Consumer Financial Protection Bureau, EPA and the National Labor Relations Board — the incredible maze of licenses and regulatory codes that pose a huge barrier to small new-business startups.

Finally, a strong and stable dollar policy that ensures that the value of tomorrow's greenback will be the same as today. In the 1970s and 2000s, the collapse of the dollar led directly to the collapse of the economy. Right now, the unstable dollar is a huge deterrent of future investment from abroad or at home.

Ideally, Fed monetary policy should aim at a commodity-price rule bolstered by forward-looking inflation-sensitive market prices.

Trump says his goal is a pro-business policy that rewards companies that "invest in America, return to America, or stay and thrive in America." Let us add, "create in America." The good news is that the draft 14-point economic plan that we have seen from Mr. Trump contains variations on most of these ideas. They worked. Growth exploded.

That happened under Republican Reagan and Democrat Clinton. And both were free traders who favored legal immigration.

Commentary by Stephen Moore and Larry Kudlow, co-founders with Arthur Laffer and Steve Forbes of the Committee to Unleash Prosperity. Follow Larry Kudlow on Twitter @Larry_Kudlow.