Profiles in Hypocrisy: The Panama Papers and Protectionism

This is what "winning" looks like

What's Going On? | Matt Boomer | April 8, 2016

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The United States polices international tax evasion with the Foreign Account Tax Compliance Act (FATCA), which places restrictions and disclosure requirements on Americans holding wealth abroad – which is not, strictly speaking, tax evasion, but whatever. FATCA makes it difficult for Americans abroad to work with foreign banks, since holding American assets forces banks to risk having the bald eagle swoop in and start seizing assets.

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The main reason Americans move funds abroad is our endlessly complex tax and regulatory structure. Rather than reform this labyrinthine monstrosity to help Americans keep money at home, the IRS punishes those seeking greener pastures. This is classic statist logic. If free individuals don’t respond amenably to intervention, the problem isn’t that the government failed to predict that outcome, but that those individuals were free. So they should be punished.

Except when they shouldn’t.

The Panama Papers revealed many delicious tidbits of corruption, one being that the United States exempts itself from the tax rules it enforces around the world. FATCA transparency requirements have not been adopted for American banks, making them attractive for foreign nationals looking to hide money. The U.S. has little desire to enforce foreign tax laws – to undergo the process it imposes on others. This is great for Americans in banking, but the rest of us still deal with the taxman. We do not see the benefits of tax-haven status, as the need for secrecy limits the ability of these funds to impact our economy. They are mostly available to well-connected money launderers, such as Miami real-estate developers. The government and its friends follow one set of rules, everyone else follows another.

With this hypocrisy in mind, let’s talk about trade. See if you can spot the pattern – there’ll be a prize at the end!

Trade is under attack across the political spectrum. Donald Trump talks about us “losing our shirts” in trade with China and Mexico. Bernie Sanders says we need fair trade, which means stopping companies from moving to countries with cheap labor. Although they say it in different terms, the message is the same: dirty foreigners rip us off and take our jobs.

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Let’s unpack this one thing at a time. Trump says we need “great deals.” The FATCA hypocrisy is a good idea of what Trump’s deals would look like, considering it is based on the same logic. It means carving out exceptions for favored players while giving everyone else the shaft. It isn’t about fairness, it isn’t about prosperity or America “winning” – it’s about the Americans Trump likes winning. If Trump imposes his 45% tariff on goods from China, it might help a few manufacturers – though probably not, since most manufacturing jobs lost since 2000 went to robots, not scheming Chinese. It will, however, be terrible for American consumers, who will see prices for everything from food to clothing to electronics skyrocket.

The reason we have trade deficits with China and Mexico is not that “we don’t make anything anymore,” or whatever nostalgic Springsteen claptrap is popular nowadays. American manufacturers are in fact setting production and export records. The reason it seems like everything comes from China or Mexico is that the consumer goods Americans purchase in stores are not what we make. American manufacturers thrive in durable goods purchased by households and businesses: metals, machinery, automobiles, airplanes, etc. This is simple comparative advantage. America has a more skilled work force and a stronger technological base than the developing world, and specializes in products requiring them. The main reason America has trade deficits with China and Mexico is simply that China and Mexico are poor. Most Chinese and Mexicans cannot afford our products. There are, however, others who can, hence the export records. The notion that trade is responsible for American economic stagnation is nonsensical.

Meanwhile, Sanders’ ideas about trade with poorer countries are dangerously delusional. While many manufacturing jobs have moved overseas, and some are in horrendous, slave-like conditions, halting trade with the developing world would be a catastrophe for the world’s poor. If Americans stop trading with Bangladesh or Vietnam until they pass minimum wage increases, factory wages in those countries would not increase. The factories would close and move out. This would only worsen the poverty that makes Bengali and Vietnamese laborers willing to work for pennies an hour in the first place, which the spread of industry through trade has done wonders to ameliorate. It might, however, bring jobs back to the United States, which would mean favored groups in some economic sectors benefiting from the imposition of impossible expectations on the rest of the world.

Mexican-American trade provides a striking example of one-rule-for-thee, another-for-me protectionist hypocrisy, with NAFTA a bugaboo of both Trump and Sanders. Parts of NAFTA mirror Trump’s “great deals,” recreating the tax-law hypocrisy exposed by the Panama Papers. The Zapatista uprising in Chiapas, Mexico began upon the passage of NAFTA, spurred by fear that cheap corn and beef imports from the United States would destroy incomes for farmers and butchers. The Zapatistas were right to fear this, as the estimable 2015 Notre Dame graduate Billy McMahon has pointed out. American agricultural subsidies keep corn, as well as meat fed with corn, cheap, making them economical for Mexicans to import rather than purchase domestically, while stringent immigration policies prevent Mexicans from following employment opportunities across the border. Where the Zapatistas, and McMahon, go wrong is in blaming NAFTA and trade in general. The fault lies not with the ravages of capitalism but the failure of the U.S. to play by its own rules and create a free market by eliminating agricultural subsidies and easing immigration restrictions – a failure created by protectionist politicians in hoc to the agricultural lobby and restrictionist attitudes toward immigration. The U.S. government has bent the laws of economics to its will so it can experience the benefits of free markets without dealing with competition. That isn’t capitalism, it’s statism and imperialism, and it’s the sort of “winning” Trump is talking about.

There is a common thread between Sanders and Trump on trade: the imposition of draconian rules on political enemies, with selective enforcement to guarantee the happiness of each one’s clientele. This sort of arrangement is not free, or fair, or prosperous. But, provided you’re on the right team, it’s one hell of a deal.

Anyway, here’s your prize.

You deserved that.