Ultimately, protectionism is not a viable answer for America because of our views on property rights, and because of the costs of tariffs and subsidies. Americans believe in protection of property rights, including a corporation’s intellectual property. It has the right to sell its trade secrets to a foreign entity and to make products overseas to distribute to America.
The U.S. government can dissuade the company’s decision to move offshore through tariffs. This may incentivize the company to maintain enough manufacturing capacity in the U.S. to meet domestic demand, but if scale efficiencies are gained off shore, or if, through lower production costs, more global market can be gained than will be lost in the U.S., a tariff will only provide a form of taxation as a penalty to the multinational corporation (MNC) for transferring jobs.
When the U.S. government imposes a tariff, the U.S. consumer pays more for goods. However, the tariff’s goal of saving U.S. jobs may not be successful. When low cost goods are allowed to enter the U.S. without a tariff, the U.S. consumer pays less for goods, but jobs are lost.
If the MNC has a sizable market share, the MNC can set prices a small percent less than what U.S. companies must charge, and the MNC can still capture a sizable profit. As a result, the marginal benefit to the consumer of lower cost goods is more than offset by the cost of unemployment compensation to those that have lost U.S. jobs. Tariffs, therefore, are ineffective at retaining jobs, and do not stop the transfer of wealth from the consumer to the MNC and international shareholder.
As an alternative, the government can subsidize certain industries. In so doing, they allow that industry’s products to be priced more competitively. This alternative may make sense if the cost of the subsidy is less than the cost of paying for unemployed persons, or if the government finds that the non-competitive industry is nonetheless vital to our national security. However, the subsidy disincentivizes the U.S. company from becoming competitive. In addition, our bilateral trading partners will also retaliate by raising tariffs or providing subsidies of their own, cancelling out benefits and raising prices worldwide.
The U.S. is facing a prisoner’s dilemma. If U.S. MNCs do not use the funds of international investors to build factories in foreign countries, then other countries’ MNCs will fill the void. If other countries build, they will still sell to us at lower prices, we will still lose jobs, and we will still pay unemployment. At least when U.S. MNCs build foreign factories, they generally employ supplemental employees in the U.S., and pay some taxes to the U.S. as well.
Since we will lose jobs anyway, we might as well attempt to share in the MNCs’ profits as a form of payment for the transfer of jobs. I say attempt because while the U.S. government will attempt to share value through taxing profits of U.S. MNCs made in foreign countries, MNCs are adept at staying ahead of U.S. actions through manipulation of foreign subsidiary profits.
Acquiescing to U.S. MNCs building overseas appears inevitable, but America can create a better solution than we have thus far attempted. Just attempting to collect taxes is not an optimum solution. For one, if America must compensate the unemployed as a result of MNC job transfers, we should at least extract value from unemployment payments by employing the unemployed.
We need not use ineffective tariffs or subsidies. With my job voucher plan, unlike tariffs, consumers still get the benefits of lower prices. In addition, our country gains benefits of lower domestic prices as lower employment costs are passed through small businesses to consumers. With my job voucher plan, unlike subsidies which have both domestic and export costs, company incentives are capped at the cost of unemployment, a sunk cost that our government is already committed to paying.