The decision of United Technologies (UT) to move 2,100 heating equipment jobs and the related production from Indiana to Mexico is a major indictment of America’s longstanding approach to global economic challenges and opportunities on two levels – and has rightly become a presidential campaign issue.
Evidence abounds that UT and its Carrier subsidiary decided to ship this output and employment south of the border largely due to features of the post-Cold War global economy that U.S. leaders in both major parties have persistently ignored or rationalized away despite their destructive long-term effects on the domestic economy. But this latest instance of high-wage job flight also represents a failure of one of President Obama’s highest profile proposals for stemming the tide. Let’s deal with this narrower issue first.
As reported by Jillian Kay Melchior in National Review, in 2013, one of the Carrier plants heading to Mexico secured $5.1 million in federal tax credits aimed expressly at expanding production of energy efficient gas furnaces in domestic locations like Indianapolis. These tax credits came from a $2.3 billion Obama administration program designed to “create new jobs and supply more clean-energy projects in the United States and abroad with equipment made in America” in the words of Energy Secretary Ernest Moniz.
Indiana Governor Mike Pence and United Technologies blamed heavy federal regulations for the move – though the company reportedly failed when asked to identify any government mandates that tipped the balance toward offshoring. And although Indiana union officials complained about the low Mexican wages that they believe largely lured the company south, it’s not as if labor costs have been crippling United Technologies’ competitiveness in the sector.
Thanks to the two-tier wage system the company was able to impose on its Indianapolis workforce (thanks to the last recession, the slow recovery and, as will be seen, the implicit threat of offshoring), a quarter of the employees slated to lose their jobs were earning a mere $14 per hour – about $26,000 annually. That’s only about 55 percent of the current average private sector hourly wage, a slightly lower percentage of the current average manufacturing hourly wage, and just under 52 percent of the current average hourly wage in durable goods industries – the manufacturing super-sector to which the heating and cooling equipment category belongs.
The other three-fourths of the soon-to-be cashiered workers earn $26 per hour – a bit higher than the pay for the typical private sector and manufacturing worker, and a bit lower than the wage for the typical durable goods employee.
Moreover, wages in the heating and ventilation sector have been rising unusually slowly. Since the current recovery technically began, in June, 2009, they’re up in pre-inflation terms by only 10.10 percent. For the entire private sector, hourly pay has risen by 14.14 percent during this period, and in manufacturing overall, the increase has been 10.90 percent. At the same time, in durable goods – which still pays better in absolute terms than manufacturing in toto – wages are up only 9.46 percent since the last recession ended.
Of course, heating and ventilation equipment and other durable goods industries have no hope of competing with third world facilities based on wages. The key to keeping them in the United States, according to the conventional wisdom, is capitalizing on and increasing their innovation and productivity edge. But this is where one of those long-neglected aspects of the Age of Globalization comes into play.
As has been documented since the early 1990s as the debate heated up over U.S.-Mexico trade and the North American Free Trade Agreement (NAFTA), countries like Mexico offered offshoring-happy American multinational companies like UT an extraordinarily attractive combination: very low wages kept down by rapid population growth, high unemployment, and repression of unions, plus surprisingly high and rising levels of productivity.
The productivity levels weren’t high because Mexican workers were naturally smarter and more skilled than their American counterparts. They were high – and boasted major potential to rise quickly – because talent is evenly distributed around the world and American multinationals are exceptionally good at maximizing the efficiency of their employees. In fact, this is a prime feature of their fundamental business model.
And more than two decades of U.S. trade policy decisions like NAFTA – which enable firms like UT to supply the lucrative American market from very low-cost Mexico (and China and elsewhere in East Asia and Central America) – have naturally encouraged these companies to pour productivity-enhancing investment into Mexico, and often at the expense of their American operations. The result has been increasing foreign efficiency further, and therefore pushing the production costs of these facilities even lower vis-a-vis the United States.
I haven’t seen any data on productivity growth in Mexico’s heating and ventilation sector factories. But the country’s high-value manufacturing – much of it export-oriented and foreign-owned – boosted productivity by 5.8 percent annually from 1999 to 2014, according to the McKinsey & Co. consulting firm. We do have productivity data on American-based heating and ventilation manufacturing, and its performance has been much weaker. The cumulative growth between 1999 and 2014 has been only 30.7 percent.
But UT is also aware that Mexico’s cost advantages over American manufacturing are growing for another reason: Mexico’s peso has weakened in value versus the U.S. dollar by more than 26 percent over the last year. That means that producing in Mexico has become much cheaper versus producing in the United States during this period.
No one has yet accused the Mexican government of manipulating its currency’s value to gain trade advantage, along the lines of Chinese policy for so many years. But an American government that keeps failing to address exchange rates in its trade policy – as in its stance in the new Pacific Rim trade deal that includes Mexico – is inevitably going to preside over even more U.S. de-industrialization than has taken place so far.
A sliding peso could also mean that Mexico will pay more and more for the parts, components, and other imported inputs that go into its manufactures. By the same token, though, a weaker currency stands to solve the problem by luring more of that intermediate goods output to Mexico, too. But Mexico’s generally impoverished consumers are sure to face even greater obstacles to bringing bilateral trade flows into even rough balance by Buying American. And overall, current U.S. trade policies will continue creating a world in which America’s comparative advantage isn’t producing anything at all, but rather consuming the output of others on borrowed money.
I’m old enough to remember that the resulting imbalances and debt buildup helped trigger the financial crisis. Are any of America’s leaders? And how long will they continue claiming that yet more NAFTA-like trade agreements and green manufacturing subsidies can prevent a rerun?