Friday, December 2, 2016

Modern Day Mercantilism: Donald Trump Intervenes at Carrier

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.