Thursday, December 1, 2016

How Trump’s tactics for saving US jobs could kill them instead

From Mark Perry.
"Rick Newman has an article on Yahoo! Finance that exposes some of the flaws in president-elect’s naive views on trade, and explains how Trump’s attempts to “bring jobs back to the US” or “keep jobs from leaving the US” will likely backfire and kill US jobs in the long run:
Donald Trump may very well be able to persuade companies like Carrier to keep jobs in the United States instead of moving them to lower-cost countries such as Mexico. But pressuring companies to accept higher production costs, which Trump is essentially doing, could easily backfire and destroy more jobs than if Trump were to do nothing.
If companies like Carrier only sold their products in the United States and competed only against other US firms, the case for keeping the jobs here would be simpler and stronger. But no country’s economy works like that anymore, and inefficiencies at any one company give competitors a pricing or quality edge. “Carrier must worry about competition from other producers, some of whom may produce all their products in low-cost overseas plants,” says economist Gary Burtless of the Brookings Institution. “If Carrier loses US and overseas business and profits because its manufacturing costs are higher than those of its competitors, the US plants may ultimately shrink or close.”
Carrier’s competitors include Trane and American Standard, both owned by Ingersoll-Rand, which is based in Dublin, Ireland; Rheem, headquartered in Atlanta; and Goodman, owned by Daikin, a Japanese conglomerate. Each has manufacturing operations all over the world. If any one company has higher costs than another—whether labor, components or anything else—its products will be more expensive than the competition and sales will most likely decline. If you can’t cut costs, the only choice often is to skimp on quality, which erodes profits even more. This is true for all appliances and just about every other sort of manufactured good.
If Trump’s corporate arm-twisting were to prevail, a company like Carrier probably would keep more jobs in the United States, at least for a while. But its sales would decline compared with competitors able to undercut it on price. Trump could pursue aggressive tariffs on imports, to force competing prices up as well. But higher prices usually lead to lower sales across the board, while hurting consumers who must purchase those products. Businesses bear those higher costs as well, and they’ll have less money to hire people if other costs go up.
If profitability at any given company were poor enough, some producers would get out of the business altogether. And none of this accounts for the possibility of retaliatory tariffs on US exports to other countries, a likely tit-for-tat outcome that would further cut into American production.
MP: Trump seems to not understand that a private company like Carrier is not in business to maximize US jobs. Carrier’s main responsibility is to produce products for consumers (both domestically and globally) at the lowest possible cost and with the highest possible quality. Carrier also has a responsibility to its shareholders to provide them with the highest possible rate of return. As Newman correctly points out, multi-national firms like Carrier operate now in an intensely competitive global marketplace, where operational efficiency is the key to profitability, market share, and sustained existence. Persuading Carrier to bear the burden of higher labor and production costs in the US, instead of relocating production and jobs to a lower-cost country, may save some US jobs in the short-run. But that strategy is forcing Carrier to operate less efficiently with high labor costs, and will have serious negative long-run consequences for Carrier, its employees, its shareholders and its customers."

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