Donald Trump’s initiative to prevent manufacturing jobs from being offshored from Indianapolis to Mexico (at least what we know of it so far) makes me feel like one of those “two-handed” economists that so frustrated former President Harry Truman. You know – the ones he complained would always give him an “On the one hand…on the other hand” answer when he was seeking clear advice. Here’s what I mean. (Spoiler alert: As you’ll see, however, on balance, the Carrier news is encouraging.)
On the one hand, I wish the President-elect had never vowed during the campaign to prevent the Carrier company from closing that factory and sending the production and employment south of the border in order to save on labor costs – or at least to punish it with tariffs if it proceeded. After all, individual offshoring decisions can be heavily dependent on the special characteristics of the products and/or markets in question. Therefore, it seemed the height of hubris and even folly to risk personal political credibility, or the credibility of an entire policy agenda (in this case, on trade) on stopping a single instance of such job flight.
Moreover, Carrier’s intent to carry out the operation by the middle of next year ensured that the new president had created an effective deadline that would likely force him to try to act before his new administration was fully in place. Addressing the problem before he even took the oath of office seemed even more ill-advised.
In addition, the kind of deal being reported, hinging largely on tax incentives for Carrier to stay stateside, wasn’t the kind I would have struck. As I’ve explained repeatedly, even with America’s remaining and often considerable productivity edge in most sectors of advanced manufacturing, tax-focused policies suffered too many shortcomings to prove an effective tool for reshoring, or persuading businesses not to leave in the first place.
For example, many multinational manufacturers in particular pay little or no actual taxes, whatever their nominal liabilities might be. Further, it’s difficult to see how a first world country like the United States – whose citizens rightly insist on first world levels of public services – could win or even be competitive in a tax-cutting competition with third world countries, where expectations of government are so much lower. (Unless Americans want to see their country’s budget deficits shoot even higher?) And when it comes to the flip side of tax breaks – subsidies – nothing that American leaders have ever proposed, or are likely to propose, is remotely in the league of the subsidy programs of countries like China.
Indeed, Carrier itself has a long history of offshoring even when offered or given tax incentives. As widely noted, the company had received breaks from Indiana shortly before it decided to export the Indianapolis facilities. And in 2004, the company actually turned down similar offers from New York State after announcing its intent to move production to the American South and to Asia. The numbers were simply too paltry. (See the first link in the preceding paragraph.)
As a result, I’ve always favored what Mr. Trump emphasized during the campaign – imposing a stiff tariff on products that offshoring companies sought to sell back to the United States. As he rightly noted, access to the U.S. market remains paramount in the business models of nearly every business on earth that seeks world-class status. Consequently, conditioning that access on producing and employing domestically – no matter what the job and production flight destination – was the best bet to keep factories at home, to bring many back or induce new U.S. facilities, and to lure more foreign-owned capabilities.
And yet there’s that proverbial other hand – which strikes me as dominant at least in terms of Carrier’s Indiana facilities in particular. First, in conjunction with his repeated promise to kill the Trans-Pacific Partnership (TPP) agreement, it looks like Mr. Trump is determined to keep at least many of his trade and manufacturing-related campaign promises. This should be applauded both by trade policy critics and by anyone who believes that the yawning, chronic gap between politicians’ rhetoric and their actions has dangerously corroded American democracy.
Second, the President-elect’s initiative again signals his awareness that international trade and investment flows have been profoundly shaped by government – and therefore human – decisions; that these decisions at least as often reflect special interest priorities or simply mistaken perspectives as they do expert calculations of national interest; and that when evidence abounds that they’re doing more harm than good, they can and should be changed.
So at least for the next four years, Americans, and especially American workers, won’t have to be settle for leaders content to cry a few crocodile tears over trade-related job and production loss even while insisting that they’re the inevitable casualties of an impersonal, uncontrollable, and of course ultimately beneficial force called “globalization.”
Moreover, although the Carrier plan by no means rules out a more comprehensive, trade-centered response to offshoring over the next four years, Mr. Trump’s actions so far have also already usefully shed light on executive actions that can potentially make a difference before one is put into place, and that in certain cases might be superior alternatives to tariffs.
For example, it’s been speculated that the President-elect could use the reliance of Carrier’s parent company, United Technologies (UT), on government military contracts to keep the Carrier factories state-side. Ideas along these lines have also been proposed in Congress.
UT apparently isn’t devoid of leverage, either – e.g., it’s the sole supplier of engines for the new F-35 jet fighter. But does an American company really want to threaten an incoming president – and the country as a whole – with withholding a product crucial for national security? Be very, very skeptical.
In this vein, Mr. Trump also seems to be in the process of showing that the bully pulpit powers of the presidency still matter. Carrier’s Indiana offshoring decision attracted national attention because of some special factors. It both took place during a presidential campaign, and generated a video that went viral and dramatically illustrated the outrage and anguish felt by the workers seemingly fated to lose their livelihoods.
But most other such corporate moves fly under the radar, especially the national media’s. The president-elect seems determined to make sure that offshoring decisions become headline news and therefore that heat will be felt by politicians in both major parties who have grown accustomed to blithely rationalizing them with the “impersonal forces” argument – unless they’re ignoring them altogether.
Appreciating the bully pulpit effect also rebuts a criticism already widely being made of the Carrier deal – that it will simply persuade other companies to threaten to move factories overseas in order to get juicy tax breaks. As the Carrier-United Technologies latest reaction to this controversy has made indisputably clear, most businesses hate the kind of bad publicity that Mr. Trump’s spotlight has generated. They’ll like it even less if a President of the United States publicly accuses them of extortion – especially a chief executive who’s proved he can connect with large percentages of the electorate, and as a result who’s demonstrated over and over again that he can break the major rules of American politics and come out a winner.