Trump’s policies keep chipping away at US innovation and competitiveness

(Originally published June 17 in “What in the World“) Trump’s autarchic trade policies are backfiring yet again.

Tariffs on imports from China and efforts to block companies trading with China from receiving federal incentives are suffocating a nascent U.S. battery industry. Trump’s theory was that cutting trade with China would spark a manufacturing investment boom in the U.S. The problem is that the U.S. has fallen so far behind China in terms of cutting-edge manufacturing know-how that it can’t build its own version of China’s factories without using Chinese components and materials, if not Chinese technology and investment.

Or, as The New York Times puts it: “the United States needs to rely on foreign components and know-how as it builds its own supply chains and expertise, much as China did in the auto industry.”

In other words, if the U.S. is serious about putting Americans back into menial sweat-shop jobs, it needs to do what China did: ring-fence the domestic market behind import tariffs and regulatory barriers, suppress wage growth and worker protections, create incentives for Chinese investment in domestic joint manufacturing ventures, phase in technology-transfer requirements, then reverse-engineer China’s leading-edge technologies to create home-grown manufacturing giants, and lavish them with tax breaks and subsidies until they dominate their industry worldwide.

But Trump seems determined to undermine American competitiveness root and branch. Just to show how determined he is to discourage new investment and innovation to protect obsolete technology, he signed Thursday a law blocking California’s plan to ban sales of gas-powered vehicles in the state by 2035. His administration has meanwhile cut public funding for health research to its lowest in a decade. And a section—Section 899—in his One Big Beautiful Bill for tax and spending cuts (still battling its way through the Senate) risks scaring away foreign investors by threatening them with a “revenge tax.”

The revenge tax would be imposed on foreign entities from countries that impose digital service taxes or a so-called “diverted profits” tax. The trouble is that most developed countries now impose such taxes as part of an effort by the Organization for Economic Co-operation and Development to stamp out a corporate tax-evasion tactic known as “base erosion and profit shifting.” Simply put, companies declare their sales and profits to have been generated in a country with low taxes to avoid paying higher taxes to countries where their products are delivered. The result: in 2021, the OECD’s 135 members, including the United States, agreed to impose by this year a Global Minimum Tax of 15% on multinationals with more than €750 million in annual revenue. Known as “the Google tax,” 55 jurisdictions have already put a GMT into force. The GMT was supported by the administration of former President Joe Biden. Trump naturally rejected it and declared it void in the U.S.