How Donald Trump is changing the rules for American business

The president-elect has a new approach to dealing with corporate America. It is not all good news

HIS inauguration is still six weeks away but Donald Trump has already sent shock waves through American business. Chief executives—and their companies’ shareholders—are giddy at the president-elect’s promises to slash burdensome regulation, cut taxes and boost the economy with infrastructure spending. Blue-collar workers are cock-a-hoop at his willingness to bully firms into saving their jobs.

In the past few weeks, Mr Trump has lambasted Apple for not producing more bits of its iPhone in America; harangued Ford about plans to move production of its Lincoln sports-utility vehicles; and lashed out at Boeing, not long after the firm’s chief executive had mused publicly about the risks of a protectionist trade policy. Most dramatically, Mr Trump bribed and cajoled Carrier, a maker of air-conditioning units in Indiana, to change its plans and keep 800 jobs in the state rather than move them to Mexico. One poll suggests that six out of ten Americans view Mr Trump more favourably after the Carrier deal. This muscularity is proving popular.

Popular but problematic. The emerging Trump strategy towards business has some promising elements, but others that are deeply worrying. The promise lies in Mr Trump’s enthusiasm for corporate-tax reform, his embrace of infrastructure investment and in some parts of his deregulatory agenda. The dangers stem, first, from the muddled mercantilism that lies behind his attitude to business, and, second, in the tactics—buying off and attacking individual companies—that he uses to achieve his goals. American capitalism has flourished thanks to the predictable application of rules. If, at the margin, that rules-based system is superseded by an ad hoc approach in which businessmen must take heed and pay homage to the whim of King Donald, the long-term damage to America’s economy will be grave.

Helping the few at the expense of the many

Start with the confusions in Mr Trump’s philosophy. The president-elect believes that America’s workers are harmed when firms move production to cheaper locations offshore. That is why he wants to impose a 35% tariff on the products of any company that moves its production abroad. Such tariffs would be hugely disruptive. They would make goods more expensive for American consumers. By preventing American firms from maximising their efficiency using complex supply chains, they would reduce their competitiveness, deter new investment and, eventually, hurt workers’ wages across the economy. They would also encourage a tit-for-tat response.

Precisely because tariffs would be so costly, many businessmen discount Mr Trump’s protectionism as mere rhetoric. Plenty of them see the focus on individual firms as a politically canny (and thus sensible) substitute. If Mr Trump can convince American workers that he is on their side using only a barrage of tweets and a few back-room deals like the one with Carrier, there may be no need to resort to tariffs. To profit from a business-friendly bonanza, the logic goes, clever executives simply have to make sure they stay in the president’s good books.

That looks like wishful thinking. Mr Trump’s mercantilism is long-held and could prove fierce, particularly if the strong dollar pushes America’s trade deficit higher (see article). Congress would have only limited powers to restrain the president’s urge to impose tariffs. More important, even if rash protectionism is avoided, a strategy based on bribing and bullying individual companies will itself be a problem.

Mr Trump is not the first American politician to cajole firms. For all its reputation as the bastion of rule-based capitalism, America has a long history of ad hoc political interventions in business (see article). States routinely offer companies subsidies of the sort that Indiana gave to Carrier. From John Kennedy, who publicly shamed steel firms in the 1960s, to Barack Obama, who bailed out car companies in 2009, all presidents have meddled in markets.

And Mr Trump’s actions so far are not exceptional relative to his predecessors or by international standards. Britain’s prime minister recently made undisclosed promises to Nissan, a Japanese carmaker, to persuade the firm to stay in Britain despite Brexit. The French government is notorious for brow-beating individual firms to keep jobs in France. The most egregious crony corporatists, from Russia to Venezuela, dish out favours to acolytes and punishments to opponents on a scale that would bring blushes even in Trump Tower.

Courting the king and currying favour

Nonetheless, Mr Trump’s approach is worrying. Unlike the Depression, when Hoover and then Roosevelt got companies to act in what they (often wrongly) saw as the national interest; or 2009, when Mr Obama corralled the banks and bailed out Detroit, America today is not in crisis. Mr Trump’s meddling is thus likely to be the new normal. Worse, his penchant for unpredictable and often vindictive bullying is likely to be more corrosive than the handouts most politicians favour.

If this is the tone of the Trump presidency, prudent businesses will make it their priority to curry favour with the president and avoid actions that might irk him. Signs of this are already evident in the enthusiasm with which top CEOs—many of them critics of Mr Trump during the campaign—have rushed to join his new advisory board. Helping the Trump Organisation or the Trump family might not go amiss either. The role of lobbyists will grow—an irony given that Mr Trump promised to drain the Washington swamp of special interests.

The costs from this shift may be imperceptible at first, exceeded by the boon from economic stimulus and regulatory reform. And as president of the world’s largest economy, Mr Trump will be able to ride roughshod over firms for longer with impunity than politicians in smaller places ever could. But over time the damage will accumulate: misallocated capital, lower competitiveness and reduced faith in America’s institutions. Those who will suffer most are the very workers Mr Trump is promising to help. That is why, if he really wants to make America great again, Mr Trump should lay off the protectionism and steer clear of the bullying right now.

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