Market-Driven Foreign Investment, Yes; Politics-Driving Foreign Investment, No
Here’s a letter to a new correspondent.
Mr. P__:
Thanks for sending along the report in which Nvidia’s CEO says that Trump’s tariffs might prompt his company to move production to the United States (“Nvidia CEO says company has not been asked to buy a stake in Intel,” March 20). You conclude that “Nvidia’s admission proves President Trump’s tariffs work…. It is a win for America when tariff threats incentivize companies to build factories here.”
With respect, I disagree.
Forget that more foreign investment in the U.S. puts upward pressure on the very same U.S. trade deficits that Trump & Co. mistakenly believe necessarily harm America. (The fact that Trump and his trade advisors are apparently unaware of this elementary reality makes them especially incompetent to conduct trade policy.)
Focus instead on the fact that, while market-driven foreign investment in America is good for Americans, the same isn’t true for politics-driven foreign investment. Companies cannot expand operations in the U.S. without drawing workers and other resources from other U.S.-based operations.
Absent U.S. tariffs or tariff threats, prices and other market signals reveal, as accurately as possible, both the costs and the benefits of the countless alternative opportunities to use resources. Owners of these resources thus allocate them to those uses that have the highest likelihood of yielding the highest returns – in short, those uses that are most productive. Tariffs and tariff threats override these market signals with political signals. Resources are allocated away from their economically most productive uses and into uses that gratify the fancies of people with political power. Because there is simply no way even for the most well-meaning people with political power to know as well as markets (forget about knowing better than markets) what is the economically most productive allocation of resources, there is every reason to believe that workers and other resources employed in factories established in America only because of tariffs and tariff threats will be American workers and resources used less productively than otherwise.
Unlike Mr. Trump and other protectionists, I welcome market-driven foreign investment in the U.S. and applaud, rather than fret over, any resulting increases in U.S. trade deficits. But also unlike them, I recognize that politics-driven foreign investment in the U.S. is not only not free, its costs exceed its benefits, resulting in slower U.S. economic growth and slower rises in ordinary Americans’ standard of living.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
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