Carrier “International” Gets Trumped: Global Ramifications
Is Donald Trump’s special deal for the Carrier plant in Indiana the beginning of the unraveling of the U.S.-led wave of globalization?
December 8, 2016
December 1st, 2016, may well be remembered in the history books of the 22nd century as the beginning of the end of the U.S.-led globalization.
This is the day when the President-elect paraded his “victory” over the management of Carrier International, a unit of United Technologies that had announced the move of 2,000 some jobs to Mexico.
Until that moment, the United States had been the preeminent force to push for an ever freer movement of goods and capital around the globe for over 70 years.
Trump and the limits of trade and investment
To be sure, the President-elect is not known for his support of free trade. But until now, commentators were left wondering: Would he really go after Mexico and China? Renegotiate NAFTA?
Or were those declarations mere campaign rhetoric that the “pragmatic businessman” would conveniently forget as soon as he came into the Oval Office?
Carrier International is the first business case study of Trump versus globalization where analysts get to ponder the facts, not just words. What they and the world get to see does not bode well for the future.
For many years, French Presidents and Prime Ministers, left-of-center and right-of-center have tried, true to Colbert’s tradition, to weigh in on companies’ decisions to lay off workers or “delocalize” production.
That kind of state-sponsored industrial interventionism worked until, in 1999, the French Socialist Prime Minister, Lionel Jospin, solemnly declared: “The state is not all powerful.”
Jospin spoke those self-limiting, reality-enhancing words when his party and his government, a long-time close ally of French unions, was faced with an announcement by one of France’s industrial icons.
Michelin, the tire company Michelin, wanted to lay off thousands of workers, even though it was profitable at the time. The Socialists got under pressure from many quarters to intervene in the company’s decision. Jospin didn’t – and held the line.
When a French Socialist shows more backbone and market thinking than the U.S.’s incoming President, the world should take note.
The facts, for those non-American readers who might have missed part of the story, are as follows:
- Carrier International management announced in February that the company was moving 2,100 jobs to Mexico, where labor costs are substantially lower than in Indiana.
- The quality of the Mexican workforce is excellent, contradicting the rare shared part of ho-hum campaign rhetoric according to which “American workers are the best in the world.”
- A video of the announcement, captured on a smart phone, went viral and became an integral part of the 2016 U.S. presidential campaign.
- Candidate Trump, ever a man of action, promised to retaliate with a tariff of 35% on Carrier products made in Mexico — if the company persisted with its plan.
Trump, the interventionist
Fast forward to the last week of November, when negotiations between the incoming Trump administration and United Technologies management took place.
The initial plan did indeed get altered: About 800 jobs will be kept in Indiana, and anywhere between 1,000 and 1,300 jobs will still be shipped to Mexico.
In exchange for that change of mind, Carrier will get $7 million in tax rebates over ten years. In addition, it is believed that on top of the threat of facing 35% tariffs on their shipments from Mexico to the United States, United Technologies, the parent company of Carrier, was made to “understand” something else.
Its contracts with the U.S. government, to the tune of $5 billion a year – accounting for 10% of the company’s total sales — could be at risk.
What lessons should be drawn from this particular case, which might come to be seen as a deal template for the ever-tweeting President-elect of the United States?
Trump’s operating style #1: Lessons for Americans
- Trump truly carries a big stick.
- Trump also offers the companies he threatens a big carrot.
- Trump obtains fewer concessions from management than were expected by the workforce — or that he made the public believe.
- Trump’s blue-collar worker-voters have less reason to be enthusiastic about the results he gets.
- Trump voters still credit him for standing up for the American people.
- U.S. multinationals don’t bleed too much – their pain is assuaged by plenty of tax benefits.
- From a worker perspective, Trump is far more effective than the Democrats (and unions) in protecting jobs from being shifted abroad.
- Worse, Larry Summers, a top Clinton and Obama administration official and presumably a Democrat, ends up talking like a classic, rule-of-law Republican businessman in his latest Washington Post oped.
- No wonder America’s working class is deeply confused!
Trump’s operating style #2: Evolving lessons for the rest of the world
- Are international treaties concluded by the United States from now on mere pieces of paper which can be shredded at will?
- Who would be foolish enough to enter into negotiations with a government that does not live by its word?
- How to deal with U.S. companies from now on? What are contracts really worth that are entered into with them when even a U.S. company’s management decision can be censured by the state for purely domestic political reasons?
- U.S. trade negotiators have labored long and hard in the TPP to spell out the disciplines that apply to Sovereign Owned Entities (SOEs). Their obvious intent was to try to define rules for Chinese companies that are controlled, in whole or in part, by Beijing. Is there now a China-like category emerging in the supposedly free-market United States – a kind of “EDBWUIS” (an Entity Doing Business While Under the Influence of the State)? Doesn’t such an entity have to be disciplined accordingly in the international realm, especially when it is accorded competition-distorting tax benefits by the state?
- More broadly, should foreign countries still consider that the “rule of law” is being applied in the United States, or, more to the point, the new entity known as AUT (America under Trump)? Wikipedia’s definition of the rule of law states: “the rule of law is the legal principle that law should govern a nation, as opposed to being governed by arbitrary decisions of individual government officials.” That looks pretty clear cut.
- Buyers beware: Why would a third country negotiate an agreement with an administration which does not honor its commitments?
Trump’s enticing message to his fellow strongmen leaders
No doubt that the Carrier precedent provides cannon fodder for anti-market governments all over the world who are only eager to twist the arms of companies’ executives for domestic political gain.
“Interventionists of the world, unite. You have nothing to lose but the chains of the international order.”
- Under NAFTA, Carrier products enter the U.S. duty free.
- No safeguard action is possible without the consent of “the party against whose good the action is taken.”
- The U.S. government could in principle withdraw from NAFTA.
- Under the terms of the NAFTA agreement, it must give a six-month written notice to the other parties.
- Were the U.S. to withdraw from NAFTA, it could apply its MFN tariff rate to products from Mexico, a mere 2.2% at most, depending on the definition of the product.
- The U.S. could apply a higher rate only if it withdraws from the WTO, and applies to every country the column 2 tariffs that are currently used only towards Cuba and North Korea.
- Although it is obviously not pertinent to foreigners, Trump’s threat of a 35% tariff is also in contravention to the U.S. constitution, whose article I, section 8, confers upon Congress the power to “regulate commerce with foreign nations.”
- Even though the U.S. President has, as a result of a series of statutes voted over the years, as well analyzed by Gary Hufbauer at the Peterson Institute for International Economics, extensive powers to raise tariffs, he has very few options to impose high tariffs without Congress.
- Absent Congressional support, President Trump could invoke the Trading With the Enemy Act of 1917, even though that stretches the imagination.
- Even more imaginative is to declare war on Mexico, or to utilize the International Emergency Economic Powers act of 1977 Act, just to impose tariffs.
- Either way, both statutes actually seem to prevent the raising of tariffs on individual products.
Takeaways
Carrier International is the first business case study of Trump versus globalization.
Is it still the “rule of law” in the US, or, more to the point, the new entity known as AUT (America under Trump)?
When a French Socialist shows more backbone than the US’s incoming President, the world should take note.