Principled righties must dig in their heels regarding protectionism

Tyler Cowen has a Bloomberg column today that is definitely worth your time. It's entitled "Trump's Disastrous Pledge to Keep Jobs in the U.S."

One of Donald Trump’s most consistent campaign promises has been to prevent U.S. businesses from moving good jobs to Mexico -- whether through taxes, jawboning, or more drastic means, such as an outright prohibition. Economists might regard this as a misguided form of protectionism, but in fact, it’s worse than that: If instituted, it could prove a major step toward imposing capital controls on the American economy and politicizing many business decisions.

Let’s consider how such a policy would be enforced in practice.

When an American company “moves jobs to Mexico,” it doesn’t disassemble a factory and load all of the parts onto border-crossing trucks. That might be relatively easy to stop. Instead, the company closes or limits some U.S. production while expanding or initiating new production south of the border. Given that reality, how is government supposed to respond?

Using the law to forbid factory closures would have serious negative consequences. For one thing, those factories may be losing money and end up going bankrupt. For another, stopping the closure of old plants would lock the U.S. into earlier technologies and modes of production, limiting progress and economic advancement.

An alternative policy would prohibit companies from cutting American production and expanding in Mexico within, say, a two-year window. But would that be effective? If a law is needed, it presumably means that Mexican production is more profitable, at the margin, than U.S. production. So if American companies couldn’t shift production to Mexico, Mexican companies could expand production on their own. Or perhaps Mexico would look to non-American multinationals. The end result would be that Asian, European and Mexican investors would gain at the expense of U.S. companies.

American investors could also work around the law. If regulations prevented, say, Ford Motor Company from transferring its own capital funds to Mexico, what would keep it from using affiliates, subsidiaries, commercial alliances, or a complex web of foreign transfers to achieve more or less the same ends? The initial restrictions might prove as porous as the U.S. corporate income tax system.

Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors -- Mexico -- suddenly would be hobbled.

Perhaps most importantly, a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be.

This is one of the aspects of the Squirrel-Hair phenomenon that has most spooked me all along. If the point is to eradicate crony capitalism and minimize the role of government in the nation's economic life - and that is the point if one is a proponent of free-market economics - this is quite clearly not the route to take. I'm happy for the Carrier workers in Indianapolis, but, while I'm not generally fond of watching the sausage-making process by which this kind of thing is accomplished, I do want to know what went down in this case. Whatever happened, it sets a precedent.