Trump's tariffs will open up the graft floodgates
It was the flip-flop hailed around the world. After insisting that he would not budge on his tariffs and branding anyone who urged him to do so as a 'PANICAN (A new party based on Weak and Stupid people!),' President Donald Trump reversed course and paused his massive reciprocal tariffs for 90 days (except on China) while he negotiates deals with other countries.
But sighs of relief might be premature. For one, America's tariffs are still at a 100-plus year high by one measure, according to the Yale Budget Lab, which will cost Americans dearly. Even more important, these tariff negotiations will inevitably result in a cascade of corruption. The American economy is being transformed from the leading free market in the world to the leading example of crony capitalism.
A market economy functions best when there are limited constraints placed on it, but especially when those constraints are clear, fair and applicable to all. The more complicated the taxes, rules and regulations, the greater the inefficiency — as studies show in country after country, from India to Nigeria to Morocco. But more significant, the greater the complexity, the greater the corruption. With tariffs come tariff waivers, often granted by the hundreds to specific industries, companies, even products. In 2018 and 2019, the Trump administration announced an assortment of tariffs, including 25 percent on steel, and also a program of waivers; they got around 500,000 applications. This week, when asked how he would determine these exemptions, Trump replied, 'instinctively.' Studies show that politicians' instincts usually favor their contributors, which then encourages pervasive corruption. It was true with tariffs for much of American history until President Franklin D. Roosevelt changed the system, and over time — in Paul Krugman's words — 'tariff policy went from being famously dirty to remarkably clean.'
It's getting dirtier fast. A detailed academic study of the tariffs in Trump's first term found that 'companies that made substantial investments in political connections to Republicans prior to and during the beginning of the Trump administration were more likely to secure exemptions for products otherwise subject to tariffs. Conversely, companies that made contributions to Democratic politicians had decreased odds of tariff exemption approval.' That study looked at more than 7,000 applications for exemptions from tariffs on China in the first term and found that just a $4,000 donation to Democratic candidates reduced the companies' chances of being granted an exemption to less than 1 in 10. As Timothy Carney from the conservative think tank AEI notes, 'Trump's first election created a trade lobbying boom' — from 921 lobbying clients with lobbyists working on trade to an apex of 1,419 by 2019.
With the highest tariffs in the industrialized world, the American bazaar is now open. Countries and companies will descend on Washington to cut deals and gain carve-outs, exemptions and special terms. In the past few weeks, Vietnam has announced a flurry of measures designed to mollify the Trump administration and get a good trade deal. Among them: approval for Elon Musk's Starlink to operate in the country and a plan to expedite a Trump Organization project. In fact, there are at least 19 Trump-branded real estate projects around the world that will be under development while he is president, and possibly many others in the works. Trump launched his own social media company and his own meme coin; other countries surely see this all as an invitation to invest — and to influence American foreign and economic policy.
It has been deeply dispiriting to watch some of America's legendary capitalists — canonical figures from Wall Street — endorse a dealmaking process by which the American free market is going to be pockmarked with tariffs, taxes, rules, exemptions and carve-outs. It is worth recalling Milton Friedman's repeated admonition: 'You can get any leading businessman to give you an eloquent speech on the virtues of a free market. But when it comes to their own business, they want to go down to Washington and get a special tariff to protect their business. They want a special tax deduction. They want a tax subsidy.'
The India I grew up in was a country riddled with tariffs, high barriers designed to protect the country's domestic industry and shield it from what was regarded as unfair foreign competition. It produced stagnation, poverty and lots of corruption, thoroughly politicizing the economy. No business of any size in India could survive without a good relationship with the government. When I got to America, I was thrilled to see that most businesses went about their work with little care as to who was in the White House. But now I watch tech pioneers give interviews slavishly extolling Trump's genius and Wall Street titans race to post North Korea-style congratulations to the president for his brilliance in rescuing the economy from his own actions, and I wonder, what country am I living in?
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