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During the presidential campaign, Donald Trump sharply criticized US companies like Ford, GM, Nabisco, and Carrier for investing and producing overseas and threatened to penalize offshoring decisions. This week, President-elect Trump, Vice President-elect Mike Pence, and Indianapolis-based company Carrier announced a deal resulting in Carrier’s commitment to keep some 800 jobs in Indiana instead of shifting them to facilities in Mexico to save on labor costs—plans will proceed, however, to relocate 1,300 jobs.1 Reportedly, the terms include promises from the Indiana Economic Development Corporation to grant Carrier tax breaks—$700,000 annually over the next decade, totaling $7 million. The move is part of Trump’s sweeping campaign promises to keep manufacturing jobs in the United States.
The Carrier case could be a harbinger of Trump’s strategy to convince other US companies to make similar declarations.2 And it could prompt other companies to elicit favorable deals in exchange for keeping US operations. Gary Hufbauer, senior fellow at the Peterson Institute for International Economics (PIIE), concludes, “While saving a fraction of jobs via such a strategy makes for good headlines, it does not represent sound economic policy.” Fixing the US social safety net and improving the adaptability of the US labor market to the challenges of a globalized economy would do more to address the underlying economic anxiety of American workers—and not only those facing fewer opportunities in manufacturing.
Policies that incentivize or reward US production are not new—for example, past presidents have used “Buy America” statutes to require domestic purchases, and tax incentives are widely used to attract domestic production and investment (a related question is whether such policies can run afoul of US international commitments in the World Trade Organization, but that question is not addressed here). But direct intervention in company production decisions, so far on a case by case basis, would signal the emergence of a kind of industrial policy in the United States that represents a big break from past norms. PIIE Senior Fellow Caroline Freund sums up what’s at stake: “US companies compete with foreign multinationals that use global supply chains. Constraining their production process will limit their ability to thrive in the global marketplace.”
Saving Few Jobs at High Cost
Promises to save manufacturing jobs alleviate the real concerns and economic anxiety of affected workers. But the number of jobs saved is not likely to be large enough to significantly affect the overall labor force. For context, nationwide, nearly 2 million American workers face layoffs and discharges each month. The roughly 1,000 jobs saved at Carrier represent a minuscule fraction, 0.008 percent, of the 12.3 million Americans employed in manufacturing. In Indiana, 514,000 out of its 3.2 million workforce are in manufacturing—a figure that dropped more than 20 percent since 2000 following the national trend.
It’s too soon to determine the potential cost through tax benefits or other measures per job saved in the Carrier case, but past episodes of industrial policy have proven quite expensive. In one such case in 2011, tariffs imposed on Chinese tire imports to protect US industry likely saved some 1,200 jobs. At the same time, the total cost to American consumers from higher tire prices was roughly $1 billion in 2011 and the cost per job saved at least $900,000 that year according to estimates by Hufbauer and Lowry (2012).
More broadly, while some examples of reshoring may now emerge, such efforts are not likely to bring about a resurgence of manufacturing jobs in the United States. Automation and technological change have fundamentally transformed manufacturing, resulting in productivity gains that require fewer workers for greater output. The trend of manufacturing’s declining share of total employment was in motion long before the North American Free Trade Agreement or other trade deals went into effect.3 Moreover, as Simon Johnson argues, “the rapid advance of artificial intelligence and robotics means that even if manufacturing output in the US stabilizes or ticks upwards, it will not involve anywhere near the number of middle-skill jobs that it did in the past.”
Importantly, the ability to shift production between locations at home and abroad and run efficient global supply chains will remain an important source of competitiveness for US firms (Oldenski 2015). As global players, multinationals help make the US economy bigger and more productive and are also themselves an important source of domestic jobs; as the rest of the world sees faster growth, they must remain competitive to compete in a global economy.
Saving jobs may be a temporary salve but does little to address the underlying challenges facing the US labor market. As Chad Bown argues, globalization and automation have necessitated a more nimble US workforce—“one that was more adept at engaging with the increasingly skill-intensive, computerized and service-oriented economy.” Specifically, this means the United States “must now address two separate needs: It must help the currently displaced US workers while preparing the broader US labor force for the inevitable waves of change still to come.”
Along these lines, Carrier’s public statement acknowledged that “this agreement in no way diminishes our belief in the benefits of free trade and that the forces of globalization will continue to require solutions for the long-term competitiveness of the U.S. and of American workers moving forward.”
Carrots and Sticks
The Carrier decision was likely sealed by the carrots, or positive incentives, rather than sticks, or punitive threats such as tariffs on Carrier goods exported from Mexico. During the campaign, Trump threatened a 35 percent tariff on exports from Mexico. In his remarks at the Carrier plant on December 1, 2016, Trump reiterated that “companies are not going to leave the United States any more without consequences.” But singling out US companies with punitive tariffs would prove costly. As PIIE research shows, major trade restrictions and inevitable foreign retaliation would adversely impact firms and cost millions of American workers their jobs in both traded and nontraded sectors. Beyond potential economic cost, as Hufbauer argues, it makes little sense for Trump to disrupt the economy with trade restrictions just when his administration hopes to build congressional support for major changes in domestic law related to tax cuts, infrastructure spending, and healthcare.
Besides the direct tax incentives guaranteed to Carrier, the policy agenda of the Trump administration contains several carrots—in broad terms—that likely influenced the Carrier decision. Corporate tax reform is a major priority and companies stand to gain a big payoff from lower corporate tax rates alone. Ensuring firm loyalty helps shore up support for selling the reforms politically. As Trump stated at Carrier, “One of the things we’re doing to keep them is we’re going to be lowering our business tax from 35 percent, hopefully down to 15 percent, which would take us from the highest-taxed nation virtually in the world—this is terrible for business.” Trump also mentioned streamlining the regulatory burden facing companies. And all companies also have an interest in infrastructure spending; Trump’s promises to upgrade infrastructure could have positive spillovers for companies like Carrier and its parent company, United Technologies.
No doubt smooth government relations are a priority for both sides—United Technologies holds major federal contracts. The connection prompted Senator Bernie Sanders to explicitly urge Trump “to make it clear to the CEO of United Technologies that if his firm wants to receive another defense contract from the taxpayers of this country, it must not move these plants to Mexico.” This line of thinking is behind concerns that Trump’s strategy will not only be economically unsustainable and costly but also could further politicize individual business decisions.
Notes
1. In a CFR interview, United Technologies CEO Gregory J. Hayes discusses the motivations behind Carrier’s decision to move jobs to Mexico.
2. Auto company Ford announced plans to keep producing an SUV model in Kentucky-based facilities rather than moving to Mexico—according to Chairman Bill Ford “a relatively painless but authentic way to give Mr. Trump a victory”—but acknowledged the decision is not likely to create jobs.
3. To be sure, trade has played a role, and research by economists David Autor, David Dorn, and Gordon Hanson finds that increased trade with China in particular contributed to the steep decline of manufacturing employment in the United States since the 1990s. Despite these findings, the authors also conclude that “the reality is that the globalization of manufacturing is a fait accompli. Those manufacturing jobs are not coming back.”
