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assembly, Carrier, components, flat panel displays, Foxconn, incentives, innovation, Jobs, manufacturing, Paul Ryan, productivity, regulatory reform, Scott Walker, subsidies, tariffs, tax breaks, tax reform, Terry Gou, Trade, trade policy, Trump, Wisconsin, {What's Left of) Our Economy
Sorry for the recent absence – and during an incredibly newsworthy period! There’s been lots of important economic data released recently, which I’ll be reporting on in upcoming days. So what to focus on in this return offering? One recent story that seems to reflect many of the biggest developments and trends of the Trump administration’s first six months is the announcement this past week that the Taiwanese electronics giant Foxconn will be spending $10 billion to build a new factory for flat panel displays in southeastern Wisconsin.
Think this is a stretch? Then consider this:
The announcement, which could become a big win for the American economy – and a big feather in the president’s cap –was completely upstaged by a series of White House personnel shakeups orchestrated by Mr. Trump himself.
Moreover, the Mainstream Media accounts invariably combined their longstanding hostility to the president with their instinctive rejection of the possibility that unconventional economic ideas and policies can have any merit.
For instance, they uniformly focused on the job-creation effects of the new factory – which, as typical for capital-intensive products and industries, will be relatively modest – to portray the news as ruse by the president to convince voters that he was keeping his campaign promise to revive manufacturing employment. Their main evidence? The tax breaks and other subsidies the project would receive, which came to many thousands of dollars per position, which were easy to depict as a first class boondoggle.
Further, the media uniformly depicted employment as the only possible upside to strengthening the nation’s high value manufacturing. Its major contributions to the economy’s productivity growth – which could use a major helping hand – and to its innovative capacities, were completely ignored.
At the same time, the reporting overlooked crucial questions that need to be answered to assess whether the new Foxconn factory will live up to its promise. Principally, will it be engaged in components production – where so much of manufacturing’s value-added comes from? Or will it simply be assembling final products from imported components, as has been the case with other recent foreign electronics investments? If the latter, the subsidies it’s garnered will be much more difficult to justify. And in this vein, have either federal or Wisconsin authorities imposed any conditions that would encourage genuine manufacturing?
Not that the Foxconn announcement completely vindicates globalization policy critics, either – or at least not those who, like me, have insisted that manufacturing revival that matters will require a thorough recasting of American trade policy. I’ve been especially skeptical of the idea that jaw-boning a la Trump plus some subsidies could make a real difference – though I’ve insisted since Mr. Trump as president-elect intervened in the Carrier company’s decision to offshore Indiana manufacturing jobs that his use of the bully pulpit could greatly aid the welcome transformation of America’s approach to manufacturing that he seemed to have in mind. And for the record, I’ve been skeptical that subsidies can be decisive, either – because America’s financial support for manufacturing was so unlikely even to approach the scale of, say, China’s. Finally, I’ve never thought that the kinds of regulatory reform efforts Mr. Trump has launched would matter much, either, given that so many potent American trade rivals are practically regulation-free.
At this early stage, the jury is still out. But since the Foxconn announcement has hardly been unique, and no significant changes have taken place in U.S. trade policy other than a withdrawal from the Trans-Pacific Partnership trade agreement, the president so far is doing a pretty good job of proving me wrong.
Nonetheless, I’m still confident that, sooner rather than later, the manufacturing needle won’t be moved without imposing trade curbs of some kind. Although avowed fiscal conservatives like House Speaker Paul Ryan (of Wisconsin) and his state’s governor, Scott Walker, enthusiastically supported the Foxconn incentives package, their appetite for such measures – even when reduced taxes are involved — is likely to be limited for other parts of the country because of their budget-busting effects. Indeed, it looks like Ryan may wind up accepting a smaller corporate tax cut in Congress’ tax reform package for precisely this reason. Moreover, these breaks could easily be offset by similar moves by foreign governments – and added to existing predatory practices like currency manipulation and tariffs of their own. And I remain convinced that a high-income country, first world country like the United States can never rely heavily on deregulation to compete better against very low-income, largely regulation-free third world countries like China or Mexico. Nor should it want to. But no initiatives could match the power of policies that would limit or close off access to the world’s greatest economic and commercial prize by far, the American market.
In fact, as Foxconn’s CEO has strongly suggested, the threat of U.S. tariffs helped persuade him to promise to manufacture much more in America. And he’s hardly alone in the corporate world, as I’ve reported. That’s why I’m somewhat worried about the administration’s reluctance actually to impose tariffs, as opposed to threatening them. If Mr. Trump keeps hemming and hawing about steel tariffs, and if he keeps opposing ideas like the border adjustment tax, which has just been stripped from Congress’ tax reform package, America’s competitors could easily conclude that his trade policy is largely bluff, and that they can keep using Americans as customers and not workers after all.
RealityChek 