Tuesday, December 20, 2016

Donald Trump is going to learn what his predecessors did: strong-arming a job revival is easier said than done

See When Presidents Defy Economic Gravity, Gravity Usually Wins by Greg Ip of the WSJ.
"In his efforts to preserve manufacturing jobs, President-elect Donald Trump will at some point learn the same thing LBJ did. When gravity is pulling the economy in one direction, no number of presidential phone calls, threats or tweets can push it in another.

Last week, Mr. Trump publicly shamed Carrier, a unit of United Technologies Corp., out of plans to outsource 800 jobs at an Indianapolis plant to Mexico. But he can’t make every business produce things in the U.S. that are cheaper to make elsewhere, any more than President Barack Obama could persuade insurers to keep selling money-losing health policies or consumers to buy overpriced electric cars.

Mr. Trump’s pressure tactics won’t take away Mexico’s comparative advantage in labor-intensive manufacturing. In fact, it’s become 10% cheaperto manufacture in Mexico thanks to the plunge in the peso that followed his election. His tactics will, however, encourage other companies to seek special arrangements, even at the expense of consumers and taxpayers.

Past protectionism was usually aimed at foreign companies, not domestic ones. Still, it’s a useful guide to what awaits Mr. Trump. In 1977, President Jimmy Carter slapped restrictions on imported Japanese televisions to protect American producers. The result? As Japanese sales went down, South Korea’s and Taiwan’s went up. When those imports were restricted, imports from Mexico and Singapore went up. Japanese and Taiwanese companies began assembling televisions in the U.S. using imported subassemblies, which weren’t restricted.

When Mr. Carter imposed limits on imports of shoes from Taiwan and South Korea, those countries raised the quality and thus value of the shoes they did sell. In industry after industry, the hoped-for job revival never happened; in some sectors, jobs went down.

“Market responses to protection sometimes significantly undermine its intended purposes,” concluded Robert Baldwin and Richard Green in a 1988 study published by the National Bureau of Economic Research.

Something similar happened when Mr. Obama imposed tariffs on Chinese tires in 2009: Chinese imports plummeted while other countries’ jumped. The action saved at most 1,200 jobs, a study by the Peterson Institute for International Economics found, at a cost to consumers of $900,000 per job because of higher prices.

Mr. Trump’s tactics are different, but the results will likely be the same. Any company pressured into keeping a high-cost plant open will have to choose between subpar profits to match the price of cheaper imports, or losing market share. Other companies will shed unwanted assets some other way, such as closing or selling them to a leveraged buyout firm with less compunction about slashing jobs and wages.

The gas furnaces Carrier builds in Indianapolis are a low-tech product in which the U.S. has no comparative advantage, in contrast to the sophisticated aircraft engines that Carrier’s affiliate, Pratt & Whitney, builds in Connecticut for which it plans to add 8,000 jobs in coming years."

"Opaque, ad hoc deals between business and government breed crony capitalism. Brazil’s state-owned oil giant Petrobras has long been required to favor local content in its procurement. It has undermined its finances and hamstrung its production ability. The culture of favoritism played a part in the kickback scandal now engulfing the company and Brazilian politicians.

Virtually every business that locates in Puerto Rico gets its own tax break, with the result that the effective corporate tax rate is a pitiful 5%, according to economist Anne Krueger, who studied that territory’s economy at its government’s request. Yet such favors can’t overcome the headwinds of high taxes and regulation and inadequate education and infrastructure, which have left the economies of both Brazil and Puerto Rico stagnant."

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