Are Government Stakes in Private Enterprises the New Tariffs?

As I wrote on this blog a little under a year ago, Donald Trump believes that tariffs are magic. He seems unaware of the tradeoff between the ability of tariffs to spur domestic industry and their ability to raise revenue. At the risk of being pedantic, I'll explain the point again: If a tariff raises the costs of imported goods to the point that domestic goods not subject to the tariff have a competitive advantage, sales of the imported goods will decline, which in turn means that the government will collect less revenue than it would have collected if the imports had remained steady.

Nonetheless, no serious person should be surprised that Trump frequently touts tariffs as being able to spur domestic production without any diminution in their ability to generate revenue for the government. After all, he also routinely states (and perhaps actually believes) that tariffs are paid by "other countries" rather than by U.S. importers who must eventually pass their costs on to U.S. consumers.

That's not all. Trump seems to regard tariffs as a kind of Swiss Army knife, also useful for conducting foreign policy--whether to punish Brazil for holding its former president accountable for an attempted coup or to punish India for purchasing Russian oil (although that one might shift now that Trump is no longer angry with his once-and-future BFF in the Kremlin).

Tariffs actually are a kind of magic in a negative sense. They have the ability to negate one kind of tradeoff. In normal times, inflation and unemployment are inversely correlated. However, tariffs can cause stagflation--in which the economy simultaneously experiences higher-than-normal inflation and higher-than-normal unemployment. The tariffs on foreign goods and domestic goods that include foreign component parts also subject to tariffs spur inflation, but the reduced purchasing power of consumers slows economic growth, leading to layoffs and unemployment. Magic!

Meanwhile, Trump does not appear content to undercut the economy through tariffs. His latest weapon appears to be taking government stakes in private enterprise. Here, as with tariffs, we see dubious economic policy executed through legally dubious means.

In my latest Verdict column, I describe and analyze the deals (a word Trump and the media reporting on him use way too much) the government struck with Nvidia and AMD whereby, in exchange for the lifting on the ban of their sales of AI-ready chips to China, the government gets a 15 percent stake in the money they make from those sales. (Presumably that's 15 percent of profits rather than of the gross sales revenues, although the reporting on terms has been vague.)

My column addresses the constitutionality of the deals, which are taxes in all but name. I explain that commentators who have decried the deals as violating the Constitution's prohibition on export taxes are probably mistaken, because the chips at issue are manufactured by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan, not in the U.S., and thus fall outside the Article I, Section 9 prohibition of taxes "on articles exported from any state." Nonetheless, I suggest that the de facto taxes violate separation of powers because the power Congress delegated to the president to ban exports on national security grounds does not include the power to suspend such bans simply so the government can make a buck, and the president has no such inherent power: Congress, not the president, has the power to tax.

My column also concludes, however, that neither Nvidia nor AMD is likely to sue to invalidate the de facto 15 percent tax because they understandably fear retaliation from the administration if they do so. Thus, at least for the duration of the Trump regime and any like-minded authoritarian successor regime, the tax will remain in place.

Is that a bad thing? Yes, of course.

I suppose a policy case could be made for imposing some sort of tax on the foreign sales of goods made by U.S. companies in foreign facilities. It would raise some revenue and also incentivize those companies to relocate their production to the U.S.--except that over the long run it would simply give an economic advantage to non-U.S.-based companies. Nvidia and AMD can take the hit from the taxes because, for now, they have intellectual property in their chips' design, so a European, Asian, or other competitor cannot simply pay TSMC to make equivalent chips, which could then be sold to China more cheaply than the Nvidia and AMD chips because they're not subject to the 15 percent tax. That advantage won't last forever, however, and in many industries it doesn't exist at all.

In any event, if a tax on the foreign sales of goods made by U.S. companies in foreign facilities is justifiable in some industries for some period of time, surely the right approach is for Congress--or possibly a federal agency under authority clearly delegated by Congress--to formulate general rules. By contrast, Trump's bespoke deals--like his bespoke tariff deals--are more costly to negotiate one-by-one, arbitrary, and quite unpredictable.

And so, of course, the Trump administration is following this approach more broadly.

Yesterday it was reported that the administration is seeking a ten percent share in Intel--long a leader in computer chips but lately a struggling company. The NY Times story just linked cites as precedent the administration's insistence that the government receive a "golden share" in US Steel as a condition for its approval of the company's sale to Nippon Steel. But the Intel plan makes much less sense.

The Biden and Trump administrations had been blocking the sale of US Steel on pretextual national security grounds. Sale of the company to a company based in Japan would have posed no real risk to the U.S., as Japan is a staunch ally. Everyone paying any attention understood that steelworkers are a small but politically strategic constituency. The golden share--which gives the U.S. government veto power over certain key decisions by the US Steel post-acquisition--can facilitate continued government attention to the interests and wishes of steelworkers. Although it was acquired through an abuse of presidential authority, the golden share at least makes instrumental sense.

Not so the acquisition of a ten percent interest in Intel--which the government is apparently trying to obtain by converting nearly $11 billion in grants to the company under legislation passed during the Biden administration into an equity stake. That is objectionable in at least four ways.

First, it doesn't appear to be legal. Congress recently canceled some spending that it had authorized during the Biden years, but crucially, it did not cancel any of the CHIPS Act spending, which was what authorized those $11 billion in grants. And once money is granted, it is the recipient's to do with what it pleases. If Joe gives Jane $9500 as a gift, and Jane uses the money to buy a used car, Joe can't come back a few years later and say he owns any part of that car. Likewise for the government.

Second, when the government takes a stake in a company, it dilutes the value of the other shares. If approved by a judge pursuant to the bankruptcy filing of an otherwise insolvent company, that might be permissible, but otherwise it isn't. That's why the Times story suggests that shareholders could sue to block the acquisition as unlawful.

Third and perhaps most fundamentally, government ownership of ten percent (or any other percentage) of Intel is not in any way responsive to Intel's problems. Ten percent ownership does not give the government control of Intel, but even if it did, how would that help Intel make and sell better chips? Given Trump's penchant for appointing under-qualified and wholly unqualified lackeys and blowhards to important government positions, it is much more likely that any moves he made to displace existing Intel management would exacerbate the company's difficulties.

Fourth and finally, insofar as government taking forced ownership stakes in U.S. companies reflects a new general policy being pursued by the federal government, it contradicts just about every tenet of Republican small-government free-market ideology. But in this setting, as in others, one expects Republican office holders to go along with and rationalize the Dear Leader's embrace of a policy their party until very recently regarded as anathema--even to claim that it is somehow a longstanding conservative position. Oceania has always been at war with Eastasia.

--Michael C. Dorf