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March 6, 2018

Tariffs Don't 'Drain the Swamp,' They Are the Swamp


As a presidential candidate, Donald Trump repeatedly promised to “drain the swamp” in Washington. It was one of his biggest applause lines, so it’s remarkable that he is pushing a proposal that is the very essence of the swamp. 

“Draining the swamp” can mean different things to different people, but one clear meaning is that big-moneyed, special interests can buy political access and favors. 

That’s exactly what happens with tariffs. 

Company or industry executives and lobbyists who can’t, or don’t want to, compete against their rivals head to Washington to complain that other companies, or countries, aren’t playing fair. The whiners want to ensure they receive an attentive audience, and so they bring their checkbooks to make sizable campaign or PAC contributions.

It was telling that when the president surprised the country—including his staff—by announcing he would immediately raise tariffs on steel and aluminum, he was surrounded by “rent-seeking” steel and aluminum executives who want protection from their competitors.* 

Adam Smith highlighted this practice back in 1776. In The Wealth of Nations he wrote, “people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” 

The rent seekers complain that foreign governments are subsidizing their competitors, or that competitors rely on cheap labor. So they use the power of government to limit or punish their competitors—and to ensure higher profits for themselves. The U.S. steel manufacturers achieved that goal. 

But the U.S. and states also engage in direct or indirect subsidization of some companies and industries. For example, Wisconsin recently provided Foxconn $3 billion in tax breaks

Even if one agrees that U.S.-made steel must be protected, the problem is that imposing large tariffs gives a green light to every other company or industry hoping to use government power to protect it from competition. They will now descend on Washington, checkbook in hand. That’s the swamp, or what’s known as “crony capitalism.” 

What Trump should do is give his corporate tax cuts and reforms some time to work. A 40 percent cut in the corporate rate should make steel manufacturers much more competitive. Providing a low corporate tax rate and a light-touch regulatory environment, not tariffs, is the best way for governments to help challenged industries.

* “Rent seeking” is a term used by economists to describe the “practice of manipulating public policy or economic conditions as a strategy for increasing profits.”


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