Tuesday 17 January 2017 4:59 am

Donald Trump’s business meddling: Crony capitalism to a Tea

To understand why many large businesses and pro-market US policy wonks are anxious about a Donald Trump presidency, one has to understand the lessons of the Tea Party.

No, not the recent grassroots phenomenon caricatured in the UK media. I’m talking about the Boston Tea Party of 1773 – in which American colonists, belonging to a resistance group and dressed as Mohawks, stormed three British ships and dumped 342 chests of tea into the harbour.

The unrest was the result of a tax dispute. But this was not about being overtaxed or so-called “taxation without representation”. In fact, it was a reaction to the 1773 Tea Act passed in the British Parliament, a law which lowered the overall tax burden, but to help one entity – the East India Company. The colonists were mad because East India’s exemption from the tea tax (previously applied to all) was a special treatment that gave the company an unfair advantage. In effect, it gave it monopoly privileges. It was that inequity of treatment that riled up the resistance.

Now, the principle that companies should be treated equally under the law, and that government should avoid picking winners and losers, is a mainstay of the pro-market approach to the economy. Former US Treasury secretary Larry Summers has described it as “rules-based capitalism”.

At times it is applied imperfectly – certainly, in the UK we only have to look at the tax code to see certain sectors of the economy favoured, through so-called “tax credits”. Yet broadly, events such as the Conservative government’s recent assurances to Nissan about the implications of a Brexit vote shock us because they are rare. We tend to take for granted that our government will not give special treatment to individual companies. When they are perceived to (and this has hit the news in recent years with perceived “tax deals” between major companies and HMRC), we are outraged.

Yet this week Donald Trump will be inaugurated as President of the United States. And thus far he has given every indication that he will use the bully pulpit of the presidency, and any carrots and sticks at his disposal, to cajole and pressure companies at an individual level – making deals which assist his agenda.

He has so far used Twitter to praise Ford for a decision not to build a new plant in Mexico and Fiat Chrysler too, alongside other tweets ominously warning that companies that “want to do business in our country, have to start making things here again”. He and his team similarly appeared to change the business decision of United Technologies. The firm cancelled plans to move a plant to Mexico, because of a range of proposed US tax incentives and implicit threats to some of the company’s revenues from government contracts. The stock prices of other businesses have risen or fallen based on Trump’s musings on Twitter.

This type of behaviour – arbitrary, company-level, and seeking to get observable wins for his political promises to “bring jobs back” – worries those of us who believe in an open market economy.

We worry it will exacerbate crony capitalism. In the knowledge that individual decisions are now in the purview of an arbitrary President, the fear is that companies will more often base their business decisions according to expected political reaction. As business becomes politicised, the incentive to invest more in lobbying, government relations and political donations to meet the demands and desires of government, rather than consumers, will be irresistible.

Innovation and entrepreneurial activity will be less likely – the easier path will be to become a “favourite” of the administration. Policy will become biased towards existing firms rather than new entrants – the long-term consequence of which will be even more distrust of large business and government.

This risks creating a self-perpetuating political dynamic. Recognising the problems of crony capitalism, those who believe in free markets have long advocated for smaller government precisely to separate it from business. Populists, usually on the left, have instead sought to bring business to heel – give companies treats when they do “the right thing” according to politicians, and the stick if they are perceived to act badly. Indeed, it should not surprise us that the left wing Democrat Bernie Sanders criticised Trump’s deal with United Technologies for not protecting enough American jobs.

What if, rather than seeing cronyism as a consequence of Trump, the American public see any perceived failures as failures of politics, and push for yet more political strength?

Of course, we should not get ahead of ourselves. Trump has not taken office yet. In many ways his business agenda is market friendly – rhetorically, at least, promising broad-based regulatory and tax reform that would apply equally to all. Who knows how he will use his power? The separation of powers could constrain his worst instincts.

But for now America seems to have voted to shift away from the principles the Tea Party rebels fought for.