Is Trump the Godfather of trade?

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trump trade war stevens lkl_00000000


    Donald Trump's trade war


Donald Trump's trade war 02:21

Story highlights

  • Luigi Zingales: Trump's approach on trade is "making offers people could not refuse"
  • If he keeps it up we're headed for old-fashioned mercantilism, he writes

Luigi Zingales is professor of finance at the Booth School of Business at the University of Chicago. The opinions expressed here are his own.

(CNN)In the movie "The Godfather," Vito Corleone was not making deals, he was making offers people could not refuse. He was not giving orders either, he was giving suggestions that sounded like orders, because they were backed by unspeakable threats. Unfortunately, this behavior is not just a creation of Mario Puzo's imagination, nor is it limited to criminal organizations. In most countries without the rule of law, this is the way governments make economic policy. In the better ones, at least physical threats are spared, but it is simply because economic ones are more than sufficient.

Luigi Zingales
Donald Trump's new economic policy seems to follow this strategy.
Consider the 35% tax on companies that send jobs overseas, recently proposed by President-elect Trump. While better than ad hoc subsidies (at least it is a more impartial rule and does not increase the deficit), it is an extremely difficult measure to implement in an objective way. It feels very much like a big stick in the hands of the President-elect. If you do not do what he says, you are going to be punished with a targeted tax.
    Or consider the much-touted Carrier deal with United Technologies. After United Technologies announced that it will keep open its Indiana plant, CEO Gregory J. Hayes said in an interview: "I got a call from President-elect Trump. He simply said, 'Look, Greg, I need you to relook at your decision to close the Indianapolis factory of Carrier.'"
    When asked how he justifies this decision to his shareholders, Hayes pointed out that "10% of our revenues come from US government" and they can greatly benefit from better regulation and better tax environment. He was quick to reassure the viewers that there was "no deal," but this was ultimately a "good deal for UTC." Whether it is backed by the carrot of special deals or by the threat of retaliation (or by both), is irrelevant. It might be a good deal for UTC, but it is a bad deal for the country.
    And now we have the attack on Boeing for its alleged overpricing of the new Air Force One. It is possible the plane is too expensive, but how would Trump know? And if he did know, wouldn't it be better if he documented why the price was excessive rather than blasting the company via Twitter? It feels like Trump wants to show that he carries a big stick and he is willing to use it, possibly in the subsequent phone call he had with Boeing CEO Dennis Muilenburg.
    Do not get me wrong. In the short term, this Corleone-like strategy is very effective. It does not increase the deficit and in most cases it does not even require legislative intervention.
    But in the long term, it corrodes the foundations of a market economy, and that's a much bigger problem in the making. A market economy is based on known and impartial rules, which apply to everybody in the same way. It is only in this context that markets can work their magic -- spurring innovation and investments, creating jobs and providing to everyone better products at cheaper prices.
    When a president-elect (or worse, a president) changes the rules depending on his whims, business people cannot focus on what matters: innovation, talent development, expansion in new markets. They are too busy making sure they are not on the wrong side of the government in an environment when the game can change at any moment. They end up spending an enormous amount of time and resources in what economists call "rent-seeking" and what normal people call "sucking up."
    This behavior can spread like an infection. If everybody follows a well-established and impartial law, everyone in general stays healthy. But if other people see that random acts of executive power can help or hurt them, they start to ask for favors, exceptions and special deals. It proves impossible not to join the crowd. It is like waiting in line. Once some people start to cut the line, it becomes unbearable not to join them, because by waiting patiently one does not go ahead, one goes backward. This is when a capitalist economy degenerates into chaos, possibly taking the world's economy along with it.
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    I hope to be wrong here, but I fear that President-elect Trump has abandoned the Republican pro-market stand to embrace an old-fashioned mercantilism. It is the dawn of a crony capitalist system in America.