Can President-elect Donald Trump’s administration, paired with a Republican-led Congress, really bring jobs back home and restore America’s reputation as the preeminent manufacturing country in the world?
Opinion is sharply divided. Trump’s supporters believe he can deliver the goods, their optimism buoyed by his deal with air conditioning firm Carrier that will keep several hundred in Indiana, the home state of Vice President-elect Mike Pence. But naysayers disagree and point to other indicators, noting that Carrier was persuaded by generous tax breaks and that the deal is relatively small (see box below).
Let’s take a closer look at what could be in store for manufacturers in 2017.
Complexities in Current Affairs
It’s a bit of an oversimplification to say that U.S. manufacturing is in decline. Data for October — the month before election — showed the industry edging past the production numbers posted before the recession of 2008-09, with fewer workers.
Another oversimplification is the idea that America is “losing” jobs overseas.
This is true to some extent — the use of cheaper foreign labor is well-documented — but the main culprit here is, ultimately, technology. Robotics and other innovations are having a profound effect on the manufacturing sector.
The numbers don’t lie. Manufacturers shed more than seven million jobs during the past three-and-a-half decades while reaching a high point in productivity, according to the Economic Policy Institute (EPI). The institute goes on to say that U.S. manufacturing had a gross output of $5.9 trillion in 2013, more than one-third of the gross domestic product (GDP) for that year.
This solidifies the position of manufacturing as the key U.S. business sector. It supported approximately 17.1 million indirect jobs in the U.S. plus 12 million directly employed individuals for a total of 29.1 million jobs in 2013. That was more than one-fifth (21%) of total U.S. employment, according to the EPI.
Trump has said he’ll renegotiate trade agreements — including the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) — and impose tariffs in his efforts to restore jobs. This could result in higher tariffs on 11 countries, such as Mexico and China, according to the Wall Street Journal. But would this just be a Band-Aid on an even bigger problem (see box below)?
The Issue of Tax Inversions
Money talks, so it’s no surprise that multinational companies have been moving their operations overseas. Part of the appeal is lower labor costs. Another draw is the ability to reduce tax liability. By moving headquarters to such tax havens as the Cayman Islands, corporations can save millions in taxes.
Trump has vowed to halt these tax inversions as part of his economic and tax reform policies. To this end, he has proposed a one-time, 10% repatriation tax and lower corporate tax rates. Congress is expected to go along.
But consider another repercussion of bringing manufacturing jobs back home. When items are produced overseas, manufacturers and sellers can keep prices lower than if the goods were produced domestically. So it’s only logical to assume that increasing the manufacturing output in the U.S. generally would result in somewhat higher prices.
A Question of Price
Would American consumers be willing to pay more for domestically produced products? Surveys suggest they would, particularly if a patriotic appeal is made. But how much more? Almost everyone has a price point where they just say no (see box below).
As mentioned above, the main factor in the loss of manufacturing jobs is technology, and that isn’t likely to change. So imposing higher tariffs on foreign countries might simply encourage even greater automation, especially as new technological advances are made.
Another potential problem: U.S. exports are inextricably linked to a global supply chain that relies on cheap components. If product components are produced in countries with tariffs, it could increase costs throughout the global supply chain.
Other countries could then turn around and hit the U.S. with higher tariffs and then everyone pays more. This would have a decidedly negative impact on the U.S. economy.
It’s also important to remember that trade agreements have boosted jobs. After NAFTA was inked, for instance, some of the large automakers — including Toyota, Nissan, Mercedes and BMW — established plants and hired workers in the U.S.
What the Future Holds
Whatever steps the Trump administration takes, the outcome should make sense for the U.S. Ultimately, the manufacturing sector must seek to find its competitive advantage in the current global economic environment in order to thrive in the years to come.
Made in America? Cost Matters
When it comes to a choice between buying domestically produced products or paying less, price wins out, according to a 2016 survey by the Associated Press-Gfk.
Almost three out of four survey participants said they’d like to buy goods manufactured inside the U.S., but those items are often too costly or difficult to find. Only 9% said they buy strictly American.
When Carrier, a division of United Technologies, announced that it was going to move an estimated 2,100 factory jobs from Indiana to Mexico, President-elect Donald Trump went on a mission to keep the jobs at home.
Trump quickly secured, with the help of Vice President-elect Mike Pence, a deal with the air conditioning firm.
But the victory came at a price. The trade-off was $7 million in tax breaks to be paid by Indiana over 10 years. Also, only about half of the estimated job losses were prevented. It remains to be seen if this deal can be termed a success and a harbinger of things to come.
