Thursday, December 8, 2016

Trump and Carrier

Trump has made a variety of statements associated with the Carrier deal.  It might be a mistake to take what he says (tweets) too seriously.   Still, I find myself thinking about the effects of a policy of imposing tariffs specifically on firms that close a plant in the U.S. and relocate it outside the U.S.

The actual Carrier deal appeared little different from standard state-level economic development programs.   State governments have long offered special enticements to large firms considering opening a plant.   The different state governments see themselves in competition with other locations--other states and other countries.   When firms are considering a move away from a state, this same apparatus frequently kicks in.   What can state and local government do to convince  a major employer to stay?   For the most part, what is unusual with the Carrier deal is that normally the governor of a state and various local elected officials takes credit, but we now have a President grandstanding.   The other complication is that Carrier's parent company, United Technologies has federal defense contracts, and some think that Trump threatened future defense contracts.

No, it is not the enticements included in the actual deal that are interesting, but rather Trump's proposal for a special tariff on firms that move outside the U.S.   It is not at all clear that this was a threat that worried Carrier or United Technologies. 

But what would be the effect of such a policy?  I think the presumption should be that such a policy would have no effect.   Uneconomic plants located in the U.S. would still be closed.   New plants would still open in other countries for the purpose of exporting products to the U.S.  

A special tax on the products imported from firms that have "moved" from the U.S. would simply result in an end to talk about moving.    A firm opens a new plant in Mexico and then a year or two later, closes the U.S. plant.   Open the new plant during the expansion, and close the U.S. plant during the recession.   Of course, if the policy is nothing but window-dressing, then just  open one plant and close another.  Just don't say it is a move.

Sufficiently draconian controls could stop a particular firm from shifting operations across national borders.   If a firm closes a plant in the U.S., then tariffs are imposed upon any of its product from other countries that it seeks to export to the U.S.  

But in the extreme, the result could simply be that a new firm, or perhaps a subsidiary of a French or German firm, opens in Mexico producing a product such as air conditioners.   Profit and depreciation costs from the uneconomic U.S. plant are paid out to the Carrier stockholders, who purchase stock in the firm that operates in Mexico--whatever its name.   

It would seem that all the Trump approach can hold hostage is the brand name "Carrier."    And I suppose I shouldn't be surprised that Trump puts a lot of stock on brand names.   Since they do have value, it should have some impact of delaying the shift of operations from less economic domestic production to more economic foreign production.

Of course, a policy of imposing tariffs on imported air conditioners would have a greater impact than simply punishing U.S. firms that "move" production of air conditioners to Mexico.   And all of these policies have approximately no effect on the total employment in the U.S., but rather shift the pattern of employment in the U.S. in a way that reduces total U.S. and foreign income and output.           

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