I’m really not a great fan of tax breaks and such to attract or maintain companies, but I’m realistic enough to understand that most states and regions use these as one of the weapons in their arsenal to attract new companies. (Case in point: last year Governor Hogan proposed a ten-year tax break for companies relocating to certain parts of Maryland, but the proposal went nowhere.) So it was with Carrier Corporation, which was supposed to abandon the state of Indiana for Mexico but brought that move to a screeching halt at the behest of President-elect Trump and his running mate, Indiana Governor Mike Pence.
One thing that has been brought out in the general conversation over Carrier’s change of heart was the Trump proposal to punish companies that move overseas. He’s proposing a 35 percent tariff on such firms, so under his idea had Carrier moved its operations to Mexico they would have had a 35% surcharge on their product.
But the incoming President is also advocating for a series of proposals to make America more business-friendly, such as cutting regulations and lowering the corporate income tax from roughly 35 to 40 percent down to about 15 percent. (These are ballpark figures, but that’s okay since Trump only sees these as starting points for negotiation anyway.)
The reason I bring this up is to make the case that all the carrots should be utilized before a stick is ever brought out. It’s patently obvious that America doesn’t make things like it used to, but the factors of why are most important. Just off the top of my head, here are some possible reasons:
- Overseas labor costs are far cheaper.
- There are fewer labor and environmental regulations to deal with.
- China is a larger market overall and is growing in its consumerism.
- The tax structure overseas is more beneficial.
However, even if all these things are true, it boggles my mind that it’s possible to profit by creating a product halfway around the world and shipping it back here on a slow boat when the most affluent consumers are still in the good old U. S. of A.
And then you have certain advantages we can exploit for ourselves: a first-class transportation system, a ready-made skilled workforce, and sufficient, reliable energy that’s inexpensive. Unfortunately, previous administrations were reluctant to allow companies to use these advantages, so they departed for greener pastures. In the case of labor-intensive products such as clothing, it’s not likely they will be coming back.
But at the same time we are looking to make things in America, it’s worth pointing out that these things that we can make use more and more automation to create. I’ll jump across the pond for this example, but a reason cited for the demise of the long-running Land Rover Defender model (a 67-year run) was that:
Five hundred workers build the car by hand – there are fewer than 10 robots on the whole line; step across to the Range Rover line on the other side of the Lode Lane, Solihull factory and you’ll find 328 robots.
If you assume that each robot takes the place of a single employee (which is probably generous to the employees) that means about 1/3 the manpower built the Range Rover compared to the Defender. The same is true in Detroit and Japan. To a manufacturer, there’s a lot of appeal to automation: it doesn’t take smoke breaks or mental health days, won’t come back from its lunch break drunk or stoned, and won’t go on strike for ever-increasing health care benefits or wages. The quality of work is very consistent, too, and once set up there’s no such thing as training a new hire.
For decades, though, workers have used machines to assist them in creating products – even the assembly line itself was a vast machine that automated the process of moving the frame of the car along as its component parts were added. Plastic products aren’t really created by hand, but by machines that extrude the parts for them – an offshoot of the process is 3D printing. When you come right down to it, the Carrier plant is one where premade components such as a motor, fan, cooling unit, outside shell, and electronics are assembled to create a larger product, which is where the value is added in this case. There’s not a huge amount of skill needed to put these things together – the skill comes from the design of these units to keep up with the demands of regulation, consumer preferences, and profitability. (Apparently the luckless Land Rover Defender stopped keeping up with these demands.)
But no amount of physical skill can overcome the capricious nature of government whim, and this is where Trump’s idea becomes somewhat impractical. Let’s say in three years Carrier decides it has to move production to Mexico, so it becomes subject to the 35% tax. A unit that cost $10,000 will now have to run at $13,500.
On the other hand, Carrier’s competitor Fujitsu, which is headquartered in Japan, may have a price for a similar unit of $11,000 because they have to ship it over. (For the sake of argument, I’ll assume their products are made overseas.) Thanks to Trump’s proposal, they can raise their price to $12,500 – making more profit for their foreign owners yet still undercutting their competition. Similarly, if Trump decides to go full-bore protectionist and slap tariffs on imported items, there’s no doubt everyone else will do the same thing and that will kill our export market.
I understand the frustration Americans have when they perceive China and others are beating us economically because they are cheating. Truthfully, they could be absolutely correct – in the case of China, I put nothing past Communist scum. But the solution is to make China less attractive by making ourselves more attractive, not trying to punish people. If Trump wants his 35% penalty, that should be the absolute last resort once all other efforts have been made to make our nation as business-friendly as possible. Unfortunately, I think The Donald is too vindictive for his own good.
Someone will pay for all these Carrier incentives, and I suspect these far smaller businesses will be the ones who suffer for the sins of others around the world.
Commentary by Marita Noon
Ford Motor Company made headlines on Wednesday, September 9, when, during an investor conference, CEO Mark Fields told attendees that it will invest $1.6 billion building a manufacturing plant in San Luis Potosi, Mexico, and will move all of its small car production there during the next two to three years.
The announcement was hardly news as Ford has been talking about the shift for more than a year. But in the throes of an election that has both candidates decrying companies that send jobs to low-wage countries, the decision was an invitation for attention. The next day, during a speech in Flint, MI, Donald Trump declared that it was: “horrible.” He’s previously called the proposed move “an absolute disgrace” and promised to punish Ford with a 35 percent tariff on cars made in Mexico that are then sold in America – which he believes will prevent them from moving production out of the U.S.
No one wants American jobs to go away – and Ford plans to build more profitable vehicles in the plants that currently produce the Focus and C-Max small cars. It claims it is not going anywhere and that the U.S. is its home. Reports do indicate that no jobs at the Wayne, MI, plant will be lost, as it will likely be converted to building the new mid-size Ranger pick-up truck and, possibly, a new Bronco compact sport-utility.
But there’s more to the story that isn’t generally being addressed.
Earlier this year, Fields told CNBC: “We’re always going to invest where it makes sense for business.”
Obviously, it no longer makes “sense” to invest in small car production in America. Most of the news surrounding the move to Mexico addressed the benefit of low-cost labor. According to the Detroit Free Press: “The industry has known for decades that domestic manufacturers struggle to make a profit on small cars.” In Slate’s MoneyBox blog, Jordan Weissmann says: “You can protest that Ford should find a way to consistently churn out profits while manufacturing small cars at home, but that’s easier said than done.”
The number of auto jobs in Mexico is up 40 percent from 2008, while they are only up in the U.S. by 15 percent over the same period. Reuters reports: “American automakers pay Mexican workers $8 to 10 an hour, including benefits.” By comparison, Ford’s labor costs average $57 per hour at home.
Even with the huge labor cost differential, American car companies’ trucks and SUVs are profitable to manufacture in the U.S. and they are the vehicles Americans want to buy – which should raise the question: Why do car companies make small cars when they can’t make them profitably? The answer is the story not being addressed in the current coverage of Ford. And this is where Trump could, possibly, change the outcome.
In a free-market world, companies that want to stay in business should stop activities that lose money and focus on those that make money. Yet the Big Three automakers continue to produce small cars that for years have made little, if any, money.
Business Insider explains: “If Ford is going to keep them around, it needs to address the profit problem. Americans don’t want to buy small vehicles at the moment (actually, they almost never want to buy small cars), so Ford’s only rationale for continuing to build them is to satisfy the more stringent fuel-economy standards in the future.” Those fuel standards are called CAFE - which stands for Corporate Average Fuel Economy. In short, it means that car companies can only sell the bigger vehicles that Americans want if it also produces cars that achieve very high fuel efficiency (including electric vehicles, in which Ford is investing heavily) that results in an “average” of the mandated miles per gallon – which is now 54.5 by 2025.
Merrill Matthews, Ph.D., a resident scholar with the Institute for Policy Innovation, blames the Ford move on, along with other draconian government policies, the CAFE standards: “The CAFE standards, which began in 1975, require auto manufacturers to meet government-imposed fuel economy standards across a fleet of cars. In order to meet those standards, which have been dramatically increased under President Obama, carmakers have to make light, inexpensive cars with high fuel economy to offset their trucks and SUVs with lower fuel economy. And electric cars really help their fuel economy balance. So the companies make minimally or even unprofitable small cars and electric vehicles so they can sell their popular and profitable large products – and hope for a profit in the end. By moving their small cars to Mexico, which has skilled but cheaper labor, Ford hopes to break even or make a little profit off of them.”
While the CAFE standards have increased dramatically under the Obama administration, and have also increased costs for consumers, most people don’t realize that they are not set in stone. Brad Plumer, senior editor for VOX.com outlines the options: “A new president can revise them, up or down. These CAFE (corporate average fuel economy) rules are scheduled to come up for a midterm review in 2017. At that point, automakers may lobby to allow the standards to rise more slowly – particularly if sales of fuel-efficient vehicles have been sluggish due to low oil prices. Green groups, meanwhile, could push to make the standards stricter, or to have them keep increasing past 2025, to push vehicle emissions down even further.”
A President Trump could, perhaps, by promising to allow car companies to make whatever kind of cars they want to make, entice Ford to keep its money in America – though, admittedly, there are other factors (such as trade deals) that make manufacturing small cars attractive in Mexico. CAFE is just one of the many policies that make doing business difficult in America.
Revising the CAFE standards, which could reduce the cost of future cars and would remove government intrusion from vehicle selection, is something Trump can do that would make doing business in America “make sense” again for U.S. car companies. For all business, let’s make America a place where it makes sense to invest.
The author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc., and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE). She hosts a weekly radio program: America’s Voice for Energy - which expands on the content of her weekly column. Follow her @EnergyRabbit.
As usual, the collection of oddities and things I run across which merit a paragraph, two, or three. Once I figure I’m up to 600 words or so I decide it’s time to add another chapter to this long-running series.
So let me begin with the shrill diatribes of one Pat McDonough. I’m going to pick out two paragraphs from a release he put out today.
The President’s fiat providing amnesty rights to illegal aliens by allowing them to acquire work permits circumvents the Congress and violates the Constitution and the Federal Immigration Act. This political stunt initiated in an election year cries out for immediate impeachment hearings and a preventive federal lawsuit. Congressman Steven King of Iowa, the Chairman of the Immigration Reform Committee, has announced that he will launch a federal lawsuit to stop Obama’s reckless executive order.
From a practical point of view, the President’s actions will seriously hurt American workers. Twenty-four million people are underemployed in this nation and 43% of the unemployed have been collecting benefits for more than 6 months. With a stroke of a pen, Mr. Obama has generated 1.5 million new work permits to people who are in our country without lawful presence. The result is 1.5 million jobs will be stolen from Americans. This illegal action is designed to promote his re-election at a time when we are suffering a “jobs depression” which he has been unable to resolve are unbelievable.
Pat is mostly correct in what he says, but it seems to me the message needs to come from other venues as well. After all, when the first thing out of Pat’s mouth in the wake of Obama’s Friday announcement was a call for his impeachment – a wish that stands less than zero chance of happening in this political climate – it makes McDonough look too much like an opportunist. Never mind he’s toyed with the idea of running for several offices before keeping the one he has.
On the other hand, I get more of a impression of sanity with Larry Hogan and Change Maryland. Referring to budget trends among the states based on data from the National Governor’s Association, he also managed a swipe at the outgoing incumbent:
“What happens when you increase spending by more than most other states and you pass 24 tax and fee hikes? You end up having the biggest job loss in the nation,” said Change Maryland Chairman Larry Hogan, referring to the latest U.S. Department of Labor report which showed Maryland leading the nation in lost jobs.
Now I will grant that Hogan was also in and out of a electoral race, bowing out midstream in favor of Bob Ehrlich in the 2010 gubernatorial race, but he’s not cultivated a reputation for bombast like McDonough has. There are ways of selling one’s self which are more effective than others and Hogan seems to have that knack.
Turning to other state events, Senate Minority Leader E.J. Pipkin blasted the secrecy of expanding gambling in Maryland.
“The (Workgroup to Consider Gaming Expansion) is operating in the privacy of a windowless, third floor conference room in the Lowe House Office Building without a single member of the public present. If this isn’t a sad example of the proverbial ‘smoky back room,’ I don’t know what is.” said Pipkin. Earlier Monday morning, a Pipkin staffer was barred from the Workgroup’s meeting.
“Behind closed doors, and out public sight, this group is crafting policy,” said Pipkin. ”Maryland’s emerging casino gaming industry will soon be pumping millions into the state’s coffers, and now the workgroup is cutting deals in private. Members of the public who wish to attend these meetings should not be barred. Obviously the O’Malley administration has no interest in a transparent process or open governance.”
“They are pulling every political trick of the trade to ram through a sixth casino location in Prince George’s county and table games at all six casinos. The Governor’s staff operates like a crew of barroom bouncers guarding the door and refusing public access to these secret meetings.”
Bear in mind that the eleven-member group was selected by three politicians: Governor O’Malley, Senate President Thomas V. Mike Miller Jr., and House Speaker Michael Busch, all Democrats. So imagine if a Republican had such secretive meetings – it would set off a firestorm of withering criticism from the press. Instead, it’s left to Pipkin to make his statement while the workgroup hammers out a bill for a July Special Session.
If you’ve been following the Dan Bongino campaign as I have, you probably know he did a money bomb last week, raising nearly $15,000 according to this Gazette article. While the paper correctly notes that Ben Cardin has a huge cash advantage at this date, it’s also worth stating that Bongino’s $60 or so average contribution is peanuts compared to the thousands of special interest dollars Cardin seems to have at his beck and call. Just as one example, it’s interesting how much attention has been paid to our Eastern Shore postal distribution center since the letter carriers’ union and postmasters forked over $10,000 to “our friend Ben’s” campaign coffers – and that’s just since the beginning of 2011.
I have no problem with money in politics, but it’s amazing to me where all Ben’s money comes from.
Speaking of money, the Worcester County Republicans raised enough, through a number of means, to at least make one of their planned two billboards a reality. I’m told by Don Stifler, who sent along this photo to me, that the sign is located just north of the Virginia line along U.S. 13, so I’ll have to look for it in my upcoming travels down that way.
Honestly, though, I’m not sure the sign isn’t too clever by half in its reference. There’s no question we need to get rid of Obama, but I think there could have been a better message. Regardless, the sign is what it is and I’m sure some people will tell me that it’s a perfect analogy – to each his or her own, I guess.
I’m going to close with a riddle – what do Afghanistan and Mexico have in common?
You probably know from a previous article that my blogging friend Bob McCarty is trying to raise funds to help him launch his upcoming book. But he raises some good questions about the similarities between events in Mexico and “green on blue” attacks in Afghanistan that bear closer examination – not that much of it is forthcoming from those who can address the issue. And in both cases, people are winding up dead.
Meanwhile, Bob is about 1/6 of the way to his goal. No doubt a lot of people want money these days, but if the subject seems interesting perhaps you can help Bob out. (You can even rattle my tip jar, too.)
So there you have it, as I actually went way beyond my 600-word barrier, even though I counted the blockquotes. I wrote a lot nonetheless, so I hope you learned at least as much as I did.