The tension between the free-market philosophy and mercantilism
(e.g., an industrial policy) has been longstanding. I contend that the
philosophy of international business (or international economics) is flawed terms
of how far comparative advantage is applied, even at the expense of full
employment at the city or country level. The case of Carrier in Indiana points
to the legitimacy of government intervention even at the expense of comparative
advantage.
A mix of ominous threats from Donald Trump as U.S.
President-Elect, and enticing financial incentives worth $7 million from
Indiana kept roughly 1000 out of 2000 jobs at Carrier, a unit of United
Technologies, from being transferred to Mexico. The company had expected to
save $65 million by relocating not only the fan coil manufacturing lines, which
would still go, but also the lines that build medium- and high-efficiency gas
furnaces, which would now stay in Indiana.[1]
Carrier’s management must have factored in the likelihood of the upcoming Trump
Administration and Republican Congress imposing steep tariffs on imports entering
the United States from American companies that have moved production to other
countries in order to take advantage of lower wages and comparatively lax
regulations. In fact, Trump’s intervention with Carrier undoubtedly had the
benefit of reminding other such company managements of the possible additional
cost to manufacturing abroad and yet still having access to the huge American
domestic market via importing (a tariff would make specific-company
interventions unnecessary). So, the single-minded maximizing-profit calculus
notwithstanding, we can understand why Carrier’s management agreed to take a
bit—albeit just a bit—of a financial hit. “Every penny counts, but if we step
back and I’m looking at earnings of $6.60 per share this year, 2 cents is an
easy concession if the president-elect listens to some of the company’s bigger
concerns,” noted Howard Rubel, a senior equity analyst at Jefferies.[2]
The 2 cent per share reduction could in fact be offset (and more) by the
possible redressing of such “bigger concerns,” especially if the company and
its workers make politically strategic campaign
contributions.
Unfortunately, pressures on company managements to focus on
quarterly stock prices mean that assuming even a long-term profit-metric can be
difficult. The allure of producing abroad and importing products back into the
U.S. would likely continue; hence the rationale for a tariff. Lest it be feared
that trade wars might be triggered, the companies subject to the tariff would
be American rather than Chinese or European. Regarding the free-market
alternative, the comparative-advantage philosophy of international business
omits the practical need for manufacturing and low-skilled jobs in virtually
any geographical area. Not everyone in a given population can be retrained to
work in computer-tech industries, or educated to become CPAs, physicians, and
lawyers. To say the U.S. (or E.U.) is a knowledge economy leaves a lot of
people out—people who could be expected to be dependent on government benefits
to live. Therefore, a mercantile government policy oriented to retaining a
manufacturing sector makes sense for any government. The free-market logic
applied to international economics is flawed because a sizable proportion of a
country’s workforce cannot (or will not) be part of a “knowledge economy,” for
instance. It also follows that not everyone is going to participate in a “manufacturing
economy.” Geographically, economic diversity reflects the diverse makeup of the
labor force. Put academically, the logic of international economics has its
limits, or drawbacks, and so international political
economy is a better, more realistic, approach.
[1] Nelson
Schwartz, “Trump
Sealed Carrier Deal with Mix of Threat and Incentives,” The New York Times, December 1, 2016.
[2]
Ibid.
