CAPX 7 April 2025 Donald Trump has broken with democratic capitalism By Dalibor Rohac @daliborrohac

  CAPX

7 April 2025

Donald Trump has broken with democratic capitalism

By Dalibor Rohac @daliborrohac

Donald Trump has broken with democratic capitalism

Photo: Andrew Harnik/Getty Images

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   - The US President is learning from Vladimir Putin's economic model

   - Trump’s tariffs will embed croynism into the American economy

   - The profitability of any US business now hinges on striking ‘deals’ with Trump and his administration

Shortly after becoming president, Vladimir Putin held a now-historic meeting in the Kremlin with Russia’s oligarchs. The deal he put on the table in the summer of 2000 was simple: the country’s economic elite could keep and further cumulate their enormous wealth, more often than not acquired through legally and ethically dubious means, but they had to remain loyal to the leader. 

In the years that followed, Putin was ruthless in enforcing the new social contract. Mikhail Khodorkovsky, at the time the wealthiest man in Russia, was promptly expropriated and jailed for a decade when he had dared to criticise the regime’s corruption in a televised meeting with Putin in 2003. Earlier, Vladimir Gusinsky, then the owner of an independently-minded television station, served a jail sentence and emigrated – as did Boris Berezovsky who had clashed with Putin in the early weeks of his presidency.

It is not an exaggeration that Donald Trump’s draconian tariffs against the rest of the world, announced on April 2, seek to recreate Russian-style political economy in America. Their purpose is not to bring back manufacturing jobs or raise revenue – nor is it to extract trade and other concessions from US trading partners. Instead, their aim is to assert political control over the world’s largest, most dynamic market economy, ensuring that independent economic wealth does not pose a challenge to Trump’s hold on political power for the next four years, and potentially beyond. 

Does it sound far fetched? Sure, the US economy is not controlled by 21 oligarchs, like the ones who joined Putin for that momentous gathering in the summer of 2000, nor is it organised around highly concentrated extractive industries, producing economic rents – rather than well-earned profit for innovators and risk-takers. By ‘rent’, economists understand a stream of income that is related to the ownership of an asset above and beyond its productive use. Control of Russia’s mineral wealth is one such source of rents, unrelated to skills or entrepreneurial acumen of the country’s oligarchs. Tariffs – especially on the gargantuan scale deployed by the Trump administration – are another. 

In the coming weeks and months, expect some US businesses to clamour for exemptions for imported inputs that they use in US-based production. Expect others to fight for the Government’s sustaining – and even increasing – tariff protection for their output marketed in the United States. Others still may come to Trump asking him to make concessions to foreign governments who will have retaliated against American protectionism, hurting US firms.

In short, tariffs have unleashed a bidding war for favours granted by an increasingly personalistic federal government. Economists, starting with Gordon Tullock and Anne Krueger, have called this phenomenon ‘rent-seeking’, and used it to explain why the visible economic costs of tariffs, artificial monopolies and government patronage are substantially larger than what standard economic theory would predict. Rent-seeking involves the use of economic resources by special interests to change policy or to keep existing structures in place, oftentimes by extending favours to members of the political class. 

While rent-seeking has always existed in every political system, including the United States’, this version is different. A common concern, especially on the Left, has always been of undue influence of well-organised interests – big tech, oligarchs, ‘dark money’ – on the nation’s politics. Trump’s innovation consists of turning that logic on its head in the same way as Putin did. As a personalistic leader claiming discretion over tariff policy no previous president thought possible, he is turning the private sector into a supplicant, whose rent-seeking activities will inevitably involve bending the knee to Donald Trump himself, just like in Putin’s Russia. 

There is another novelty. While it is well understood that the presence of natural resources and associated rents (think Russia, or the Congo) breeds political dysfunction and authoritarianism, few have hitherto imagined a US president creating new economic rents out of thin air through executive fiat – especially in a big, market-based economy. On a smaller scale and through years of patient effort, Viktor Orbán did something similar, by misusing EU funds as a tool of patronage and turning his cronies into billionaires. By one stroke of a pen, Trump made the continuous success of US businesses, investors and entrepreneurs conditional on their staying in good graces with his administration. 

Make no mistake. The rents that Trump’s tariffs have just created and the rent-seeking that they are setting in motion will come at the expense of America’s economy, until now the envy of the world. With an average applied tariff hovering at 30%, the profitability of essentially any US business now hinges on navigating the system and striking ‘deals’ with Trump and his administration – rather than on entrepreneurial acumen, good management practices or access to finance. And that is a recipe for cronyism and wholesale economic decline. 

This is not a short-term problem, even if Americans are lucky and Trump fails to entrench his power like Putin. As the new system solidifies, businesses will adapt and make sure that they are, on net, on receiving end of the newly created rents. Once they are, they will fight vehemently against any change – even if a free trade regime is a better option for everyone and even if resources spent on rent-seeking negate any gains that such businesses end up earning from the tariff protection and associated policies. Tullock called this paradox the ‘transitional gains trap’, and used it to explain why highly dysfunctional policies tend to be sticky. 

Licensed taxi drivers would fight, for example, to keep New York City’s medallion system in place even when the price of a medallion would outweigh the gains that such barrier of entry created for the incumbents. Remember that Trump’s steel and aluminium tariffs from the first term, trivial compared to protectionist measures rolled out by this administration, survived a long way into the Biden administration – precisely because their removal created short-term losses for well-organised special interests.

Unless reversed quickly and in their entirety, the tariffs introduced last week represent a drastic change, and not only for US allies and trading partners, who can no longer rely on American leadership but have to work around the United States. They also represent an even deeper break with America’s tradition of democratic capitalism, imperfect as it often was, setting the United States on a path firmly away from the foundations of its prosperity and constitutional government.