Multinational Corporations: Friends or Foes of the American Worker?

September 12, 2016 10:30 AM

Multinational corporations (MNCs) are being demonized as never before. Presidential candidate Donald Trump has promised “consequences” for US companies like Carrier, Ford, and Nabisco that move plants abroad and sell products back home. Rival candidate Hillary Clinton has raised similar concerns: “Too many companies lobbied for trade deals so they could sell products abroad but then they instead moved abroad and sold back into the United States.”

I recently received a letter from Philip, a concerned citizen, that underscores the growing anger many Americans feel toward big corporations. He writes:

Let’s begin with the writing on the back of my Colgate toothpaste tube. It reads:

Colgate-Palmolive Company-New York, NY Made in Mexico

What does this mean? It means that Mexico is doing all the work, while New York is raking in all the profits. Do they make the toothpaste in Mexico, and sell it to Mexicans? No. They ship it back here so they can sell it to Americans at a higher price.

Philip’s anxieties, picked up by politicians, are about the costs and benefits of multinationals to the US economy. Are they justified?

Let’s start with some facts, continuing with the Colgate-Palmolive example:

  • First, the United States is neither the largest nor the fastest growing market for many firms. Colgate’s Latin American net revenues (27 percent) far exceed net sales in the United States (20 percent), and the company’s future growth prospects are in emerging markets.  
  • Second, Colgate sells toothpaste to both Mexicans and Americans: A two tube pack of total clean mint is $0.32 per ounce in Walmart Mexico and $0.41 per ounce in Walmart US. So yes, the price is lower in Mexico, but so too are the costs of distribution in Mexico. 
  • Third, the share of employees working for Colgate in the United States is about the same as the share of Colgate’s net US sales (20 percent), so it’s hard to imagine that a purely domestic company would employ more Americans. In addition, as a result of Colgate’s global expansion, there are many high-paying jobs for American managers abroad.

What are the benefits to the country from Colgate’s business plan?

The United States claims the fifth largest producer, by revenues, of soaps and detergents in the world (after Proctor & Gamble, L’Oreal, Henkel, and Kimberly Clark). Colgate employs about 8,000 people in the United States and nearly 38,000 globally.

The fact that Colgate is a global player has most likely increased US jobs; research finds that firms that increase employment in Mexico also tend to increase employment at home as these firms become more productive and grow larger. MNC jobs are good jobs, raising the standard of living all over the world.

Consumers benefit too: Toothpaste is cheaper for consumers everywhere because Colgate is an efficient producer. BEA data show that the price of toothpaste hasn’t budged since 2000; in contrast, the cost of dentistry has risen by 75 percent.  

So overall, Colgate helps make the US economy bigger and more productive and is an important source of jobs, while supporting health at a reasonable price.

Philip concludes his letter with concerns about innovation and trade creating an “elitist situation” where “others are necessarily left behind.” While he is right about rising inequality in the United States, attributing the increase to trade and technology does not necessarily follow. To be sure, innovation and trade are disruptive in a way that is costly for those whose livelihoods depend on long-standing production technologies. But policies exist to accommodate such changes. 

Where the United States has failed is in managing change. The annual compensation for Ian Cook, Colgate’s CEO, is estimated at $19.23 million. In contrast, a customer service representative at Colgate receives about $37,000 a year. It is questionable whether this huge compensation gap entirely reflects productivity differences, but if that is what the market bears, there is a simple solution: redistribution, retraining and enhanced regulation. Ian Cook and others like him should pay far more in taxes, which can be used to compensate other American workers and retool them for growing sectors of the economy. In addition, policies to limit executive compensation may be justified, as a growing body of evidence suggests that extraordinary compensation packages are not in the best interests of the public or shareholders.

In line with the importance of policy, a recent study of US inequality finds that the deregulation and tax reductions initiated under President Ronald Reagan, especially of income accruing to the top brackets, do a far better job explaining rising inequality than trade or technology. These results would also explain why countries like Japan and France, which have experienced the same trade and technology shocks as the United States, have not experienced similar increases in inequality—and why the United Kingdom, which underwent deregulation similar to that of the United States under Prime Minister Margaret Thatcher, also records a rising share of top incomes.

On balance, multinational corporations are very good for the US economy. That said, concerns about the stagnating real wages of the American worker—while CEOs thrive—are valid. But the best way to address those concerns is with a stronger social safety net and better education, not restrictions on our most productive companies. 

Comments

Steve Cohen

This article suffers from the all-too-frequent insensitivity of liberal trade-advocating intellectuals (full disclosure:  I am one of these).  There is no mention of a critically important social issue:  loss of employment by American workers when U.S. companies close down a factory line and move it to another country to increase profit margins and/or to stay price competitive.  As long as our job retraining programs remain inadequate, it cannot be automatically assumed that it would not make for a better society if we paid an additional nickel for a tube of toothpaste in order to preserve jobs.  The effects on the national good varies from situation to situation, but the generalities in this article are insufficient to sustain a blanket argument that the so-called runaway plants are always good economics, even if they are bad socially.

  In sum, I find myself more sympathetic to the views expressed by Phillip than by the author.  Some of the statistics she cites, such as employment by Colgate in the U.S. being proportionate to their share of net U.S., are superfluous.  Their main effect is to incense people opposed to free trade and free-flowing FDI.

Caroline Freund

 

Thanks for your comment. I agree that runaway plants are not always good economics, but I don't think that restrictions on mobility will solve the social problem and they will have large negative consequences both economically and socially as some firms fail. So while firm mobility is not always good, restrictions on mobility are almost always bad.

 

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