Don’t be unfortunate

To say America is ‘exciting’ right now will be a major understatement. President Trump is releasing Executive Orders like confetti everyday and that’s before we even get to what he tweets everyday.

But there’s something more interesting going on. America’s Presidency is a powerful office, not just in America, but around the world. What the American President says and does will have far reaching consequences across the globe. More to the point, Donald Trump’s ideas have the power to shift what political scientists call the Overton Window i.e. bringing certain ideas into fashion. Once that happens, a policymaker in an African country will take it as ‘vindication’ of their down dodgy ideas (I’m told one very prominent Nigerian policymaker is very excited by Trump’s policies already).

As this column is about economics, I want to focus on two of those ideas. The first one is Trump’s refrain of ‘Buy American, Hire American’. This sounds a lot like #BuyNaijaToGrowTheNaira championed by the Senate President, Bukola Saraki and his co-travellers in the National Assembly. It will not be long before Trump’s policy will be used to justify the Nigerian version. But are they the same thing? To begin with, America has a $17trn economy. To get to that level, you must have a lot of jobs and things being produced within your borders. Whatever jobs Trump might be trying to bring back with his policy are jobs that left America when Americans got too rich to do them. That is, the jobs left to look for cheaper labour. In that sense, if Trump bullies companies to come back to America, their response will be to find a combination of labour (American workers) and capital (robots, automation) that ensures they can continue to produce in America profitably.

Can anyone seriously say Nigeria is trying to bring back lost jobs with a Buy Naija policy? If Trump’s policy backfires, the jobs simply won’t come back from Mexico or China while America’s unemployment rate will still be around 5%. But if a Buy Naija policy backfires, price of goods will go up (as they already have), smuggling will increase and most importantly, the economy won’t create the brand new jobs it needs just to keep up with population growth. If a Nigerian policymaker uses Trump to justify a Buy Naija policy, be wary.

The second policy is where Trump says he wants to put a 20% tariff on companies making stuff outside America and shipping them into the country. The implication is that if you want to avoid this tariff, just shift your production inside America and all will be well. Again, this sounds very much like policies we’ve seen in Nigeria including the disaster known as the ‘Auto Policy’ which put a 70% tariff on cars shipped into Nigeria. But there’s more to Trump’s side of the story.

The context is that America has one of the highest corporate tax rates in the developed world (35%). But the law is filled with so many exemptions and loopholes that in reality, most companies only pay half of that rate. It is also the reason why big American companies like Apple have kept around $1trn of their profits outside America. To fix this problem with America’s tax code, Republicans have been working on something called Destination Based Cashflow Tax (DBCFT). This will reduce the US tax rate to 20% while only taxing profits made in America. That is, when Apple sells a phone in Nigeria, it will no longer be liable to pay tax on the profit from that sale so it can send the money back to America free of tax.

But there is an even more interesting component to the DBCFT which is where Trump comes in. The plan also has a Border Adjustment Tax (BAT) which means that exports will no longer be taxed but imports will be taxed at 20%. When you add the DBCFT to the BAT, you can see what will happen – even if American labour is expensive, the tax savings might just make it worth it bringing back production to America. Trump, being the showman that he is, has of course focused on the BAT part to look and sound tough. But the full plan being proposed is quite revolutionary. Most economic models show that the American dollar will appreciate by the size of the BAT which means that Americans won’t notice any increase in prices. This is the difference between a real economy and roadside one – flexibility is built in to allow prices and exchange rate adjust quickly.

The worst part of this plan is that you might be minding your business in Nigeria and the economic stray bullet will come hit you all the way from America. The dollar is currently around N500 to $1 today. If the Republicans pass their DBCFT and the dollar appreciates, you will wake up and find the dollar at N600 to $1. It will also become harder to attract investment to Nigeria as we will now be competing with America.

I sense that Nigerian policymakers will soon start quoting Trump to vindicate their policies of banning and tariffing things. Dear Nigerians, I write this to you as a warning. Please do not listen to them. They will even accuse economists of ‘hypocrisy’ as if both things are the same. Ignore them.

One of the biggest dangers for developing countries with half baked policy makers is the risk of being led astray by Trump’s policies and tweets. If you copy what he says as justification for your own policies, your economy will suffer on earth and they will hear in heaven.
Don’t be unfortunate.