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Berk's Blog

The Latest Giant Sucking Sound – US Stops Subsidizing Global Growth 

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The US stock market outperforms the rest of the world as the US begins removing subsidies.

 

Forever, it seems, our macroeconomists and high-level policy experts have explained that the “free trade” deals they and their acolytes negotiated would promote economic freedom and worldwide growth. I don’t expect to hear or have ever heard these people admit they were wrong – their livelihoods and opinion of themselves literally depend on it – so I expect vitriol all the way, no matter how good individuals with skin in the economic game are doing. Notice the experts do not bear the consequences of their “free trade” deals.

Brian Wesbury at First Trust has a great essay (here) today where he shows why the current US strategy of leveling trade barriers, lowering corporate tax rates and removing obstacles to US energy production is altering the global order for the better.

The US is now the largest energy producer in the world again. This has put the pressure on Venezuela, Russia, Saudia Arabia, Iran and all the other energy producers that were subsidized by curbs on energy production in the United States.

For decades the U.S. has held trade tariffs below those of most foreign countries. And until recently, the U.S. has maintained a corporate tax rate significantly above the world average.

At the same time, the U.S. hindered, through regulation, its production of energy. According to the World Trade Organization, before the Trump tariffs were put in place, the U.S. had an average tariff of 3.4%. Canada had an average tariff of 4.0%, the EU 5.1%, Mexico 6.9%, China 9.8%, and South Korea 13.7% – all higher than the U.S., which means the playing field was tilted in favor of foreign countries. The U.S. was subsidizing them.

In 1993, America lifted its federal corporate tax rate to 35%, from 34%. When combined with state and local corporate taxes, the average rate was 38.9% and held there until the Trump tax cut in 2017. In 1993, the average worldwide corporate tax rate was roughly 33% (about 6 percentage points below the U.S.) and by 2017, the average had fallen to 23% (about 16 points below the U.S.). In other words, at the margin, businesses looking to invest globally had an incentive to invest outside of America.

US Stops Subsidizing Global Growth
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/27/2018