The Trump Administration Should Focus on Deregulation, Not Tariffs
Freed of regulatory deadweight, Americans will be in a much better position to compete with the world.
President Donald Trump's justifications for tariffs keep shifting—one moment they're to cut the flow of illegal drugs and immigrants, the next, they're to bolster American businesses and jobs. But the argument that seems to resonate most with the public is that they will result in a stronger and more competitive U.S. economy. Economists aren't convinced, to put it mildly. The fact is that American government is often the biggest impediment to the workers and employers that politicians claim to be helping.
"Large and persistent annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base [and] resulted in a lack of incentive to increase advanced domestic manufacturing capacity," Trump argued in an April 2 executive order imposing stiff tariffs on most of the planet. "President Trump is working to level the playing field for American businesses and workers by confronting the unfair tariff disparities and non-tariff barriers imposed by other countries."
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Barriers To Trade Come From Our Own Government
But what if the most insurmountable barriers for domestic businesses and the jobs they create come not from foreign governments but from homegrown regulators trying to mold the economy into their preferred form? In fact, entrepreneurs and executives at established firms complain bitterly about the costs of pleasing elected officials and government employees who create red tape instead of prosperity.
"Considering all federal regulations, all sectors of the U.S. economy and all firm sizes, federal regulations cost an estimated $12,800 per employee per year in 2022 (in 2023 dollars). Small firms with fewer than 50 employees incur regulatory costs of $14,700 per employee per year – 20% greater than the cost per employee in large firms ($12,200)," according to a 2023 study commissioned by the National Association of Manufacturers (NAM) as a continuation of earlier work by the authors for the U.S. Small Business Administration's Office of Advocacy.
That's bad enough. But if you're concerned about domestic manufacturing, you should know that the situation is even tougher for companies that make things: "The regulatory cost disadvantage confronting small firms is amplified greatly in the manufacturing sector, with small manufacturing firms bearing more than double the cost of large manufacturing firms, or $50,100 versus $24,800 per employee."
For all firms, economic regulations were the most burdensome—followed by environmental regulations, then tax compliance, and occupational safety and health and homeland security (OSHHS) rules. For firms with fewer than 50 employees, environmental regulations had the greatest costs.
In the manufacturing sector, environmental rules imposed the greatest expense for firms of all sizes (over 80 percent of the total for firms with fewer than 50 employees), followed by economic rules, OSHHS, and then tax compliance.
"Federal and state requirements establish mandates for every element of the manufacturing process: the employees, machinery, methods, inputs and waste," according to a separate 2017 NAM report.
American companies are strangling in red tape imposed by American government. Unsurprisingly, small businesses in particular say that heavy regulation is a killer.
Growing Regulatory Burdens Especially Worry Small Businesses
"The latest Small Business Index survey finds that 51% of small businesses say navigating regulatory compliance requirements is negatively impacting their growth," the U.S. Chamber of Commerce revealed in December 2024. "Almost as many (47%) say their business spends too much time fulfilling regulatory compliance requirements."
The percentage of small businesses saying they spend too much time on regulatory compliance rises to 51 percent of manufacturers—and 57 percent for professional services.
Unfortunately, this isn't a new barrier to creating and growing successful companies. In 2018, Gallup found that among small businesses, "more owners mention issues relating to government policies and regulations (24%) than any other" challenge.
In 2011, "small-business owners in the United States are most likely to say complying with government regulations (22%) is the most important problem facing them today," also according to Gallup.
Given governments' tendency to intrude ever more deeply into human life and to find new justifications for bureaucrats' salaries, it should be no surprise that regulatory costs rise year after year.
"Our research shows that regulatory compliance costs of US businesses have grown by about 1 percent each year from 2002 to 2014 in real terms," Francesco Trebbi, Miao Ben Zhang, and Michael Simkovic wrote in a 2024 Cato Institute research brief.
One percent per year in growing compliance costs may not sound like a lot, but that compounds over time into an increasingly more oppressive tangle of red tape that firms must deal with. That hampers large firms, frustrates mid-size ones, and keeps many small businesses from ever getting off the ground.
Shift Gears to Deregulation
Before starting a trade war with the rest of the planet, the Trump administration should strongly consider getting the U.S. government out of the way of American businesses so they can build, innovate, employ, and compete with the foreign firms that so worry U.S. politicians.
There are encouraging signs the Trump administration is friendly to that goal. The first Trump administration left office after "adding a net total of $40.4 billion in regulatory costs," which was less than 10 percent of the net burden imposed by the previous Obama administration, according to the American Action Forum. "When removing independent agencies, the Trump Administration actually achieved net regulatory savings of nearly $1 billion over its term."
That is, Trump at least slowed the regulatory state and may have slightly reduced its burden.
Last month, with Trump back in office, the Treasury Department dropped enforcement of burdensome "beneficial ownership" reporting rules that were causing confusion and concern for small businesses.
"NFIB has been steadfast since the beginning that this onerous requirement is a massive intrusion into small businesses' privacy and creates an unprecedented new government database on Americans," responded National Federation of Independent Business President Brad Close. "We agree with President Trump that requirements from the Corporate Transparency Act are 'outrageous and invasive.'"
For his second term, President Trump has signaled that deregulation is priority. A January 31 executive order requires that "for each new regulation issued, at least 10 prior regulations be identified for elimination" as part of an effort "to significantly reduce the private expenditures required to comply with Federal regulations."
Deregulation is where the Trump administration should focus its efforts, not tariffs. Once freed of regulatory deadweight, Americans will be in a much better position to compete with the world.
