Caleb Brown: This is the Cato Daily Podcast for Tuesday, January 10, 2017. I am Caleb Brown. President-elect Trump has singled out companies like Ford, Carrier, and Toyota for direct recrimination. But the benefits of manufacturers deciding to keep more production in the U.S. may not balance out the impact of a president willing to threaten companies who don’t play ball. Simon Lester, trade policy analyst at the Cato Institute, comments.
As we continue this series talking about President-elect Trump and trade, he recently was, as you might expect, tweeting about Toyota, suggesting that their plans to build a new plant in, as he says, Baja, Mexico, to build Corollas for the U.S., no way. Build plant in U.S. or pay big border tax. Now of course he is confusing a plant that already exists in Baja with one that is planned in, and I’m going to screw this up, Guanajuato, Mexico. Which, of course, it is interesting to note, this plant is not moving production from the U.S., it is not — it is moving from Canada to Mexico, so there are a lot of issues here that we should talk about in turn. One is that a tweet drove down Toyota’s stock price briefly.
Simon Lester: Yes. Donald Trump is famous for his tweeting and I think to some extent we should not take it all too seriously. Let’s wait for some policies to evolve. At the same time, though, as you point out, when a tweet can bring down a company’s stock price in a not insignificant amount, that affects a lot of people. That affects shareholders, that affects people’s retirement funds. I think it should go without saying that presidents and others should be a little more careful about how they present these issues if it is going to have this kind of impact on companies.
Caleb Brown: Okay, so this isn’t the first time that Donald Trump has taken on, specifically, automakers that have investments in the U.S. Two of them are U.S.-based for whatever that means, exactly, but General Motors and Ford. And at least in the Ford example, they seem to have responded with oh, we’ve you know, we’ve come to our senses and we are going to do something different now.
Simon Lester: I think companies have a difficult decision when they get targeted in this way, that there’s a real fear of the implications, as we already talked about with their stock price, if Donald Trump you know, has you in his sights and wants to, you know, take you on or bring you down in some way. So there is definitely an incentive to at least appear to do something in response, and Ford made an announcement that it would not open this Mexican factory and that it was actually going to do some more production in the U.S. Not all companies have responded that way. I think it’s a difficult decision. It depends on the particular circumstances. In Toyota’s case they have already started building this factory in Mexico. It is hard to believe that they would actually you know, write that off as a loss in response. And they seem to be pushing back a bit, saying hey in fact we employ lots of people in the United States, which is absolutely true, and it is a good point to make, and it is something that everyone needs to be aware of when we think about the implications of Donald Trump’s Twitter threats.
Caleb Brown: Now with specific respect to Ford, they said that they would be scrapping a plan to build a $1.6 billion assembly plant in Mexico and they would instead build small cars in a factory that they already have in Mexico and invest hundreds of millions of dollars in a Michigan plant. So it’s not…
Simon Lester: It’s not clear how much of an actual change this is. This may have been something they were considering anyway. Maybe they saw an opportunity to look like they were appeasing Trump. You know, they had these existing plans to shift things around and thought hey, we can use that as the basis for satisfying Donald Trump. Maybe. I think there’s a lot still to be learned about what is going on behind the scenes for Trump’s interactions with Carrier, and with Ford, and with Boeing, who have all seemed to adjust things in response to discussions with Donald Trump.
Caleb Brown: Presidents do this. They don’t do it as publicly.
Simon Lester: That’s true. This is the kind of thing — this kind of thing has been going on for a long time. It’s not you know, completely novel. It’s just yeah, it hasn’t been so public. It hasn’t been so bold and blatant and absurd, to some extent, sort of you know, picking strange situations to address. But yes, I mean presidents have advocated on behalf of U.S.-based companies for a long time, just more subtly, behind the scenes, a little more nuanced and targeted, as opposed to what appears to be a bit haphazard.
Caleb Brown: So is it your view a fool’s errand, then, to attempt to appease rather than say well, look, this is why we are doing this, these are the problems that we have with making all of our products in the United States?
Simon Lester: A lot of people over the past year or two have tried to appease Donald Trump, in sort of the business world, the political world. I don’t know how much success any of them ultimately achieved, so I can see the reasons why somebody would try. I don’t know — there’s no evidence that I’ve seen that this actually works and gets you something down the road, but I think because nobody knows what the right strategy is, sort of like the politicians who were up against Trump weren’t sure how to respond, I think these companies are also not sure how to respond. And we are going to see different companies try different things and we’ll see who comes out with the best, who ends up with the best strategy.
Caleb Brown: Now with respect to the actual trade that goes on in the auto industry and all sorts of you know, heavy production that companies do, these are global firms. Carrier, Toyota, General Motors, Ford. They have production facilities all over the world. They move products all across the globe. There are things that could be done to make the United States relatively more attractive in some ways, but what might those be?
Simon Lester: Well I think that the general strategy should be just to get your own regulatory, and tax, and fiscal policies right. If you make your country or state look how — a good place to invest — companies will want to locate there. And when you try to compete with tariff threats, ultimately you make yourself a worse place to invest. If you try to compete with these sort of you know, attacks, the U.S. looks like a less stable place to put your factory, if you know that future production decisions are going to be monitored by the president and if he doesn’t like them he is going to take action against you, well maybe you won’t setup the factory there in the first place. So I think ultimately, in the long run, what you need are just good overall economic policies and that will draw an investment. And this kind of disruptive attack on particular companies and threats of tariffs are only going to hurt you in the long run. Unfortunately it gives you the chance, it gives Trump the chance to declare a victory which may, in three months, turn out to have not been a victory but it gives him a chance to hold press conferences and declare results. And what is required is for I think people in the media, others who have sort of observed these things, to fact check it and to call into question some of the claims he is making about the successes, which I don’t think really are successes.
Caleb Brown: And there’s a seen versus unseen issue here…
Simon Lester: Exactly.
Caleb Brown: …which is investments that might have otherwise occurred may not occur because of the instability caused by understanding that a President-elect or a President of the United States is going to openly threaten companies with some sort of punitive measure whereas, and as you point out, he gets to declare victory in these small issues…
Simon Lester: That’s right.
Caleb Brown: …and that could be, down the road, as a long game, not very productive.
Simon Lester: That’s absolutely right. And unfortunately it’s just hard to measure that unseen. And we try and we put thought into how we can you know, two years down the road look back and monitor, but you know, he gets to hold that press conference saying Carrier is keeping these jobs. And you know, that has — so far it has had more of an impact than the two-year, down-the-road review where we say well actually it didn’t. That doesn’t mean we shouldn’t keep trying, it just means you know, there’s a high burden to counteract the claims he is making.
Caleb Brown: A related issue here is that when you threaten companies that are based in other countries you can’t involve the governments of those countries in tensions that wouldn’t otherwise have existed. Reuters here reports that the Japanese government defended Toyota Motor Company, as we record this on Friday, as an important corporate citizen of the United States, after President-elect singled them out.
Simon Lester: Well I think it was really interesting. The Japanese government is not known for being confrontational in diplomatic matters. But on this issue they came right out and gave what I think is a very important sort of factual context for this. I mean maybe the Japanese government would have preferred Toyota produce all its cars in Japan. But regardless, Toyota is producing a lot of cars in the U.S. and the Japanese government is pointing this out and saying you know you really should understand the big picture here. Okay, so I have some numbers on this. Toyota has the capacity to produce 2.2 million cars in North America. Right now it is producing 89,000 in Mexico. That’s 89,000 out of 2.2 million. The new factory would be another 200,000. So the vast majority of cars that Toyota is producing in North America are in the U.S. and Canada. Of course I don’t have the U.S.-Canada breakdown for you, but they are producing a lot of cars in the U.S. And Donald Trump, I would think, and all of us, should be praising that and be happy, but that’s good. It’s a good sign that people think the U.S. is a good place to produce. It’s good for Americans who work in these factories. It’s good for American consumers who can buy these goods, and I think it’s great that the Japanese government did that and you know, they stepped in right away. I think they would want to prevent this from escalating into a real you know, international trade conflict, but I think it makes sense to step in right away and present the facts and hope that that helps diffuse the situation.
Caleb Brown: President-elect Trump, having threatened both GM and Toyota with similarly punitive taxes for either moving production or creating production outside the United States, how does that comply with our trade agreements and is it legal?
Simon Lester: There are serious political and legal problems with this. It has really never been done before. I mean often we’ve, the U.S. government or other governments, have threatened tariffs on products from other countries, but this is a tariff on a specific company which, I think, I mean because it has really never been tested we don’t have a lot of law to look at, but I don’t see how this is legal under U.S. statutes. I don’t know what U.S. statute would authorize it. I think there would be a massive political fight with the Republicans in Congress if he were trying to do something like this. And I think it’s you know, most obvious is our international trade agreements like the WTO and NAFTA, where we’ve agreed not to impose tariffs beyond a certain amount. If we impose those tariffs you know, if we do impose those tariffs, well we are clearly going to be in violation of those provisions. So you know, to some extent as a trial lawyer I think it would be fascinating to watch this all play out, but obviously sort of as a policy matter it would be awful and it would lead to you know, sort of political tensions within the U.S. within the Republican Party and massive litigation within the U.S. courts and international courts, so it’s a loser on all of those counts.
Caleb Brown: Now, I’m from Kentucky. And GM, Ford, and Toyota all do engage in significant production in Kentucky. And there are some companies that are wholly owned subsidiaries of Toyota that have, in the past, sold parts that end up in Ford cars. So it is a — trade is just a very complicated set of exchanges that you know, we can barely hope to try to control them…
Simon Lester: Right.
Caleb Brown: …in the ways that we might expect to.
Simon Lester: I think that Donald Trump and maybe some of his advisors are imagining a world of like the 1930s, where you have you know, a U.S. company, producing in the U.S., for U.S. customers, and the same thing over in Germany — German company producing for German customers. But that’s not the world of today. There are these global companies, they are integrated producers. You know, they make parts in one factory, send it to an assembler in another factory in another country, they sell parts and products as between each other, they have joint ventures. It’s just a very different world than the simple one of GM as an American company that perhaps Donald Trump is thinking of and basing his tweets on. And you know, that more complicated world requires more thought about what we should actually do to make America an attractive place to invest.
Caleb Brown: Simon Lester is a trade policy analyst at the Cato Institute. Subscribe to and rate this podcast at iTunes and Google Play. And follow us on Twitter, @CatoPodcast.