Donald Trump has pulled off a public relations coup by persuading Carrier, the air conditioning company, to reverse plans to offshore hundreds of jobs from an Indiana factory to Mexico. That fulfills a campaign promise before the incoming president even takes office. But the kind of corporate arm-twisting Trump is engaging in could easily backfire and end up destroying more jobs than if Trump were to do nothing.
Trump has reportedly struck a deal with Carrier to keep half of the 1,400 jobs it planned to outsource in Indiana, with details to be revealed later. Beyond jawboning the company, Trump supposedly promised relief from regulations and lower taxes, which in theory ought to offset some of the additional costs of paying higher wages to American workers. It’s a highly unusual arrangement, since elected officials rarely, if ever, make such deals with individual companies. If anything, it allows Trump to claim a win while Carrier gets off the hook.
Until Trump’s offer materializes, however, the incoming president is essentially forcing a U.S. company to bear higher production costs, which is an ominous way for any president—and especially a Republican—to interact with American firms. Carrier, the heating and air conditioning subsidiary of United Technologies (UTX) said in February it planned to move 1,400 jobs from Indiana, where workers average about $34 per hour in pay and benefits, to Monterey, Mexico, where comparable pay is about $6 per hour. Trump promised while campaigning that he’d persuade Carrier and other firms that plan to outsource jobs to keep in the in United States.
Carrier’s parent company, United Technologies, is a big defense contractor that earns about $5 billion in annual revenue from government contracts on fighter-jet engines and other types of weaponry. So Washington could make those contracts contingent on keeping other jobs in America. Trump also plans widespread tax cuts and regulatory relief that could be targeted at Carrier, though it’s not clear if he offered Carrier more than any other company would get. Meanwhile, Trump has backed off his campaign pledge of slapping 35% tariffs on air conditioners imported from Mexico to the United States, to punish any company that relocates production south of the border.
A deal with Carrier marks the second such “victory” for Trump, following Ford Motor Co.’s (F) agreement to keep some production for its Lincoln brand at a Kentucky plant instead of moving it to Mexico. Trump tweeted after that deal ward that “I worked hard with Bill Ford [the company’s chairman] to keep the Lincoln plant in Kentucky.” Maybe so, but Trump’s meddling with the production plans of US manufacturers could end up raising their costs, making their products less competitive and endangering the very jobs Trump is trying to save.
Giving global competitors an edge
If companies like Carrier only sold their products in the United States and competed only against other US firms, the case for keeping the jobs here would be simpler and stronger. But no country’s economy works like that anymore, and inefficiencies at any one company give competitors a pricing or quality edge. “Carrier must worry about competition from other producers, some of whom may produce all their products in low-cost overseas plants,” says economist Gary Burtless of the Brookings Institution. “If Carrier loses US and overseas business and profits because its manufacturing costs are higher than those of its competitors, the US plants may ultimately shrink or close.”
Carrier’s competitors include Trane and American Standard, both owned by Ingersoll-Rand (IR), which is based in Dublin, Ireland; Rheem, headquartered in Atlanta; and Goodman, owned by Daikin, a Japanese conglomerate. Each has manufacturing operations all over the world. If any one company has higher costs than another—whether labor, components or anything else—its products will be more expensive than the competition and sales will most likely decline. If you can’t cut costs, the only choice often is to skimp on quality, which erodes profits even more. This is true for all appliances and just about every other sort of manufactured good.
If Trump’s corporate arm-twisting becomes a regular habit, companies like Carrier probably will keep more jobs in the United States, at least for a while. But sales would decline compared with competitors able to undercut such firms on price. Trump could pursue aggressive tariffs on imports, to force competing prices up as well. But higher prices usually lead to lower sales across the board, while hurting consumers who must purchase those products. Businesses bear those higher costs as well, and they’ll have less money to hire people if other costs go up.
If profitability at any given company were poor enough, some producers would get out of the business altogether. And none of this accounts for the possibility of retaliatory tariffs on US exports to other countries, a likely tit-for-tat outcome that would further cut into American production.
Trump has identified a legitimate problem in the decline of opportunity for working-class Americans who used to be able to make a decent living working with their hands. But contorting the parts of capitalism that work—investing money where it gets the highest return, wringing out inefficiencies—would harm the people Trump is trying to help.
Tax cuts on corporate income might be a gentler way to encourage companies to keep work in the United States, although that would benefit the shareholder class well before any of it trickles down to ordinary workers. Cutting regulations, as Trump vows to do, would leave companies with more money to spend, but there’s still no guarantee they’ll spend it on costly jobs for American workers when they might get a better return on the money investing it some other way.
The man Trump will replace in January, President Obama, tried to help displaced workers by making college education more affordable and providing skill training that would enable them to do more sophisticated work. Those are reasonable ideas that won’t become obsolete just because Obama leaves office. If Trump’s tough talk doesn’t get the job done, maybe he’ll try a softer approach.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.