Caleb Brown: This is the Cato Daily
Podcast for Wednesday, January 11, 2017. I am Caleb Brown.
Large multinational companies spend a great deal of time and energy
discovering where to locate production facilities. Labor costs,
taxes, tariffs, and regulations all play a role. Cato Institute trade policy analyst Dan
Pearson comments on how trade gets done and what the new Trump
administration should focus on.
When a firm is deciding where it is going to continue its
operations or whether it is deciding well, should I really stay in
this country or should I move somewhere else, what are some of the
key factors that companies use to make that decision?
Dan Pearson: This is not such an issue for
businesses that just manufacture in the United States, because most
of them will stay here and if there is competitive pressure they do
as well as they can for as long as they can, but the real challenge
comes from multinational firms that already operate in multiple
countries, because they have a very good understanding of what the
costs and benefits are of manufacturing in these different
locations. So when you have a U.S. firm like Carrier that
manufactures in multiple countries, at least in the United States
and Mexico at this point, they know what it would mean to shift
production out of Indianapolis down to Mexico. And there can be a
number of reasons for that.
Caleb Brown: Alright so for a company that
decides well, we are just going to move this new plant, or we are
going to open a new plant in Mexico versus Canada or the United
States, what are some of the key factors that would lead them to
make that particular decision?
Dan Pearson: Certainly the labor cost is a
potential factor. Mexican labor is, in Carrier’s case, it was
about a fourth of the cost in the United States on an hourly basis.
However it is hard to know how to interpret that because the
productivity of the average U.S. worker is more than three times
higher than the average Mexican worker, and so it is not obvious
that labor cost alone would cause them to shift.
Caleb Brown: So putting out a cattle call for
workers in the United States would yield workers that, walking in
the door, could do many different things?
Dan Pearson: On average, the worker walking in
the door in the United States would have a higher level of
education, more skills, and could step into a wider variety of
positions quickly and comfortably.
Caleb Brown: What else contributes to that
Dan Pearson: There’s the broad regulatory
environment. You have the OSHA,
and environmental, and National
Labor Relations Board requirements in the United States. In
many other countries those requirements might be less expensive.
And I think Mexico would meet that standard. Another issue that is
policy-driven that causes U.S. firms to want to move elsewhere is
the fact that steel is overpriced in the United States. And I say
that not because I don’t think highly of the U.S. steel industry,
because they are a very good world-class industry, but what has
happened over time is that that industry has brought anti-dumping
and countervailing duty cases, and now they have more than 160 of
those orders in place. And that has had the effect of raising the
steel price in the United States above what it is in most of the
rest of the world. So, that’s good for the steel industry, I
suppose, but it isn’t very good for the downstream firms that use
steel as an input in their manufacturing.
Caleb Brown: So for a company that decides oh,
we are going to locate this new plant in Mexico versus the United
States, what kind of savings could they expect on imports to their
plant in that new country or the United States?
Dan Pearson: Right. It would depend, of course,
on the product, because the amount of anti-dumping duty varies by
product. But it would be real easy to think of a price benefit of
between 5% and 20%. That would not be unreasonable. There are some
products coming into the United States, steel products, that have
combined anti-dumping and countervailing duties in excess of 500%,
so the U.S. steel market now is really very protected, more so I
believe than any time since decades ago when the Smoot-Hawley
Tariff of 1930 was in the process of being dismantled.
Caleb Brown: So the practical impact then
potentially for attempting to protect one domestic industry in the
United States is to have companies that make use of the products of
that industry move outside of the country that they have been based
Dan Pearson: Absolutely. If you are an air
conditioning manufacturer or an auto manufacturer in the United
States — both those products use lots of steel — your
competitor firms, be they in Europe, or Japan, or Korea, or Mexico,
those firms are going to have a lower cost for steel. And so they
have a distinct advantage. I mean look, in this country people can
buy washing machines made in Korea, for instance. Those are heavy
things. They have a lot of steel in them. They also can buy cars
made in Germany or Japan and one of the cost factors that is
helping those overseas firms is the price of steel.
Caleb Brown: President-elect Donald Trump has
taken great pains to threaten a company like Carrier, and then
ultimately agreed with Carrier that somehow
the U.S. government will be providing them some subsidies to stay
here in the United States, but if I understand what you are saying,
it would make more sense for President-elect Trump instead to be
railing against the regulatory environment or the various trade
agreements that have sort of created these incentives.
Dan Pearson: The overall U.S. tariff structure
for most products, including steel, is really quite low. Most steel
products come into the country at zero or low levels of tariff.
However, we have a system through anti-dumping and countervailing
duties that allows U.S. industries that believe they are being
injured by imported products to bring action that allows then, if
they are successful, allows the imposition of anti-dumping and
countervailing duties. And those duties have become quite high in
the steel sector and cover a whole lot of products, such that the
effective level of protection for steel is much, much higher in the
United States than it is in most countries.
Caleb Brown: Broadening this to beyond steel,
when companies are trying to make that decision, that all-important
location decision, they are also considering the market that they
are trying to serve?
Dan Pearson: Absolutely. Is it more
advantageous to have a plant located close to the area where the
inputs are coming from, or closer to the area where the customers
are? Now there are real advantages in having some facilities in
Mexico because Mexico historically was underserved with
manufacturing, and so if you are going to build small automobiles
in Mexico you’ve got local demand for a lot of them. Attitudes of
government toward business as reflected in a wide range of policies
are important. This would be tax policy, environmental policy,
policies toward labor, policies toward economic freedom in general.
And some countries are better at that than others. Some states in
the United States are better at it than others. There are reasons
why we see more business investment in Texas than in Massachusetts,
for instance. Okay? Texas is just much more business-friendly. The
same with North Carolina relative to Washington state.
Caleb Brown: If you had one piece of advice for
the incoming Trump administration to both attract large firms that
might consider locating some of their production in the United
States and you know, seeking also to keep our current large firms
that produce items in the United States, what would it be?
Dan Pearson: I would recommend that we reform
the anti-dumping and countervailing duty system. Now those duties
can be put in place when U.S. industries believe that imports are
unfairly traded. But there are so many of those orders in place for
steel, more than 160, the downstream manufacturers that use steel
as an input are paying an abnormally high price. And that is
hurting the competitiveness of those firms against firms overseas
that make similar products. So I think that we should change U.S.
law so that we would not impose anti-dumping and countervailing
duties except if it is clear that that duty would increase the
economic welfare of the United States. In other words, there would
be a net benefit to the economy of the United States from imposing
those measures, because right now we are hurting our country with
Caleb Brown: And in terms of the tax system and
the regulatory system that we have in the United States?
Dan Pearson: Yes, the tax system certainly
discourages firms from locating here because the corporate tax rate
is 35%, one of the highest in the world. The regulatory structures
— when you are unable to get a permit to run a pipeline from
Canada to the United States because of political pressure from the
White House, that’s not a regulatory environment that encourages
investment in the United States.
Caleb Brown: Dan Pearson is a trade policy
analyst at the Cato Institute. Subscribe to and rate this podcast
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