President Obama told a group of Pacific trading partners yesterday that he favors free trade. They were happy. They should be. Should we be happy?
In theory we should. Free trade is good. We were founded on the ideals of a free market and that market has grown from a community economy to a regional one to a national one to an international one to a truly global one. We are all part of the same market. We make and sell and we buy goods globally. U.S. companies produce at home for domestic and export needs (the international phase) but we also increasingly make things abroad for foreign markets (the global phase).
I often used to say in my tax lobbying work that the nationality of the business had lost meaning. A new chemical plant is needed to serve the Chinese market. We know it will be built in China. We don’t know if it will be built by a U.S. company or a French, German, British, Japanese or Chinese one. All of the protectionism in the world won’t bring that plant to the U.S. but it could keep the U.S. company from building it.
Free trade is good if (and it is a big if) we allow our companies to compete freely. We don’t always do so.
Free trade is good if we don’t add to the U.S. cost stack with unnecessary expenses. There is a great concern that energy intensive companies (chemicals, steel, heavy manufacturing) will have increased costs with climate change measures like cap and trade. The added cost of power and the increased limits on manufacturing will simply mean that in a free trade world manufacturing will seek a cheaper place to do business.
You know, in fall, leaves don’t simply fall from trees. They are pushed off! A chemical released by the tree pushes them away. The tree is making the leaves leave (if you will) yet we blame the leaves by calling it fall.
So it is with business when we over-regulate and force it away. Business exists to make money. In a global economy, it can make money anywhere. You can’t make it impossible for business to compete and then wonder why it leaves.
Labor costs are often seen as a major reason why the U.S. loses jobs and it is true that labor costs affect a lot of the labor-intensive, low-cost fields like services (the Mumbai call centers) and low-quality consumer goods manufacturing.
Nobody questions the right to earn a decent wage. We must also, in a global world, accept the right of others to earn wages according to their local standards. This doesn’t mean labor should accept less than what is fair but they also need to focus on retraining for the more capital intensive heavy industry jobs that remain or for skilled jobs that can’t be farmed out to the lowest bidder. They must also realize that each burden placed on business (whether it be health care or paid family leave) means a loss of jobs at the margin.
Those who lose jobs each time there is a new government mandate or an increase in the minimum wage are the people at the margins who can least afford to lose their jobs. Just as a manufacturer can’t price itself out of the market, labor must be careful not to do so.
A final area that affects our ability to compete globally is the area of taxes. I hear a lot of Democratic campaign rhetoric that says we need to close the loopholes that give U.S. companies an incentive to ship jobs overseas. That makes me laugh on a number of fronts.
The first is that taxes usually aren’t enough of a reason to go overseas or if they are it is because the other country is giving a huge tax break not that the U.S. is giving an incentive, and the U.S. tax and accounting laws do a great job of eliminating those breaks for U.S. companies.
We also have to remember that most of the business being established overseas is to serve a foreign market and, as such, it never was going to be built in the United States. That new Coke bottler to serve Shanghai was never going to be located in Peoria (due to transportation costs). The new Procter and Gamble detergent plant to serve Thailand makes more sense in Bangkok than Bangor, Maine or Bangor, PA.
The question often isn’t where will it be built but who will build it. The U.S. economy still benefits when P&G builds in Thailand or Intel in Israel. There is over a 1 to 1 correlation of headquarters jobs to manufacturing site jobs in many industries. The injection molding for that plastic doll might be done in China, but design, marketing, finance, etc. takes place here. Part of the trick is matching skills to where they are needed.
Second is that labor savings are often a bigger incentive than tax savings for locating abroad. In cases where U.S. businesses move established operations elsewhere, it almost always is because pre-tax profit will be higher regardless of any tax benefit. This is due to lower costs of labor and government regulation.
Free trade also means being open to foreign investment. We can have Coke and Pepsi in every civilized country in the world (and even France) but we wonder why a foreign company has to set up shop here. American companies can go around the world buying up businesses in foreign countries but we object when that happens here. We need to be open to investment despite the funny accent or color of the skin. We expect that when we operate abroad.
Adding something like card check, the ability to form a union without a secret vote and with the fear of union duress) isn’t likely to make the United States more attractive to a foreign investor looking to come here.
The third is because those incentives don’t exist. I asked candidate Sam Bennett’s campaign manager to give me examples of those tax incentives that U.S. companies have to ship jobs overseas. Now, I’ll admit that Sam didn’t keep managers long enough to answer questions but I also know that under the rhetoric, the incentives aren’t there.
I spent 11 years as a chief tax officer at a Fortune 300 company. International operations were well over one-third of the company. Our best and brightest talent was in the international tax area. They could never find those incentives either.
The truth is that U.S. companies looking to compete abroad on a project are often at a disadvantage due to our tax system. And that is the most common fact pattern for many global industries. A plant will be built in Country X because it will serve industries or consumers in that country. An air separation plant to serve a steel company will be built next to the steel company. A high purity chemical plant to serve a Korean wafer fab makes a great deal of sense in Korea.
The question isn’t where the plant will be built but who will build it. If we hamstring our businesses with onerous international tax systems and regulations, those plants will still be built in Country X or in Korea. They just won’t be built, owned and operated by an American company. Nothing with bring those manufacturing jobs here. A level playing field in taxes may mean that the engineering, product development, finance and other jobs are created here to support that business. Far from seeking incentives, U.S. companies have been seeking a level playing field for years.
Unfortunately, the rhetoric of the left is to punish business because somehow that appeases labor. Hamstringing U.S. business doesn’t help labor. It is great to hear Obama talk of free trade but unless he understands that energy policy, labor policy, tax policy and many other policies affect our ability to compete, free trade will simply be an invitation to play and lose.
So free trade is good but please be the general manager that builds the team to win. In free trade, we want to be the New York Yankees not the Washington Nationals.
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