Faced with a deteriorating global economy, the initial rhetoric of global leaders was to oppose a return to protectionism to keep the wheels of trade turning and credit flowing. However, the current pro-protection American administration may well jeopardise this recovery effort and in effect hasten the decline of American growth, draw out the recession and delay its recovery.
Obama has promised change. His website proposes to “enhance competitiveness” and “create jobs” by repealing tax breaks for corporations retaining earnings overseas, and using those savings to lower corporate taxes for companies with operations in the U.S. However, according to the Wall Street Journal, America has the world’s second highest corporate income tax rate of 35% and nearly all of corporate America has extensive operations overseas. Raising their taxes would cause corporate America to lose greater market share to foreign competitors.
This ties in with the Patriot Employer Act of 2007 introduced by Obama where he advocates American jobs for American workers. But he failed to realise that companies forced to increase wages and benefits will have to pass back additional costs to the already burdened consumer and make significant cutbacks on hiring. What he should have done instead was to create less incentive for jobs to go overseas by cutting back on the high corporate tax rate for all companies.
Obama’s website stresses that he will “fight for a trade policy that opens up foreign markets to support good American jobs” and “amend the NAFTA” to alleviate the unfair burden placed on Americans. But as the Heritage Foundation points out, NAFTA countries conduct $2.2 billion trilateral trade daily that supports U.S. jobs and bolsters productivity and investment. Coupled with the deteriorating environment and dwindling domestic consumption, a sudden enforcing of trade barriers may cause other countries to retaliate leading to drying up of the export economy. Already burdened firms will go bust and thousands more jobs will be lost.
American policy makers must tread carefully.The CATO Institute rightly suggests that they must “focus on reforms that remove impediments to work, savings, investment and production”. Otherwise, non-productive businesses and the increasing flight of capital will contribute to poverty and increase burdens on the state machinery, hastening America’s decline as a place of opportunity, prosperity and growth.