Trump’s way of saving jobs has companies on edge: threaten big tariffs and make it personal

Reporting from Washington —  President-elect Donald Trump has not yet been sworn in, but he’s already set the tone for how he will deal with companies as the nation’s chief executive.

After successfully pressuring furnace maker Carrier Corp. to keep hundreds of jobs in Indiana instead of leaving for Mexico, Trump wasted little time in fingering another manufacturer in Indianapolis, Rexnord Corp., about to move south of the border and “rather viciously firing all of its 300 workers.”

Along the way, Trump issued a blanket warning that businesses shifting jobs abroad will soon be looking at tariffs of 35%, the same amount that he had threatened during the campaign that he would slap on Mexican imports. He spoke of 45% duties on Chinese goods.

Rhetoric aside, analysts reckon some companies now will think twice about moving. Why incur the risks of stiff penalties, damaging publicity and possibly even hectoring from the White House? Trump has said that companies thinking about leaving the U.S. will get “a lot of phone calls,” presumably from his new administration.

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Trump has made protecting American jobs his mantra, and analysts, investors and corporate chiefs are hoping that he will focus on cutting taxes, reducing government regulations and boosting infrastructure investments – key planks in Trump’s economic platform that should spur economic growth.

But what has many businesspeople nervous is this other, less predictable side of Trump, which suggests that as president he won’t hesitate to take on individual companies and get personally involved in industrial policymaking the old-fashioned way: in backroom deal-making that has analysts concerned about crony capitalism.

Even Republicans in Congress have been watching warily as Trump has taken to Twitter to criticize Apple for its China-assembled iPhones and to rattle Boeing’s stock by complaining about the high cost of its possible contract to build the next Air Force One.

“Short term, you might get an injection of jobs and enthusiasm,” William Reinsch, a distinguished fellow at the nonpartisan Stimson Center, said of Trump’s pledge to go after individual companies. But he said the benefits would probably amount to a drop in the bucket and may even make matters worse.

If Trump follows through on imposing tariffs on imports broadly, that would almost certainly raise prices for American consumers and cause significant problems for global production systems, eventually slowing corporate sales, investments and hiring.

“We may assemble more stuff here, but we’ll export less because they’ll be more expensive,” said Reinsch. “We’re going to be losing market share. Ultimately, the cost is jobs.”

Trump will take the Oval Office amid a steadily growing job market, but manufacturing has been lagging. The sluggish global economy, strong dollar and political and financial uncertainties around the world have weighed on exports and industrial production.

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Still, in other respects, manufacturing in the U.S. has stabilized. Factory employment stands at 12.3 million, which is down from more than 17 million in 2000 but up from 11.5 million at the end of 2009.

The long decline in U.S. manufacturing facilities — the 70,000 factory closures that Trump often cited during the campaign — hit bottom in 2013. Their numbers have since inched higher.

And while no one has precise figures, Harry Moser, an MIT-trained engineer who tracks job-flow trends, estimates that U.S. payroll losses to offshoring dropped to around 60,000 last year from roughly 230,000 a year in the early part of the 2000s.

Should Trump put a tariff on companies that send jobs offshore this year or next, but not on those that went abroad years ago and reaped the benefits of cheap labor, Moser said, “that would seem very unfair to me.”

“Almost everything that was imported was first made here,” said Moser, who runs the Reshoring Initiative, a Chicago nonprofit organization that works with companies to bring manufacturing jobs back to the U.S.

Mauro Guillen, an international management professor at the Wharton School, sees another hole in Trump’s approach to keeping American plants humming with workers.

“The problem is that jobs are being lost not just because of free trade. They’re also being lost because of technological change,” he said. “Everything is so entangled — all the different reasons why jobs are leaving.”

And Trump won’t find it easy to replicate the Carrier deal. The company gave up some of its $65 million in savings expected in the move to Monterrey, Mexico, in exchange for $7 million in state tax breaks and the hope of Trump making good on his promise of slashing corporate taxes and providing regulatory relief. But with $56 billion in sales last year that include defense contracts, Carrier’s parent firm, United Technologies, could probably afford it. United also probably concluded that it wasn’t worth risking the wrath of the incoming commander in chief.

It’s a different story for Harman Professional Solutions and its Crown Audio operations in upstate Indiana’s Elkhart County. Harman plans to move Crown’s production and warehouse to Tijuana starting next month, erasing 125 jobs. Trump hasn’t come to the rescue, and Elkhart officials point out, resentfully, that Harman asked for and received tax breaks from the city just three years ago.

“We gave them a tax benefit to stay here, but they didn’t stay,” said Elkhart Councilman David Henke.

China and Mexico have long been the top two offshoring sites. But surging labor costs and other barriers in China have slowed moves there. Mexico has especially gained in recent years from increasing investments from American and foreign automotive firms, much of that due to linkages to the big U.S. auto market and production system.

In such an intertwined global supply chain, large tariffs on imported goods from Mexico would undoubtedly cause serious disruptions in production.

Japanese car companies, for example, have been manufacturing on American soil since the 1980s and now have scores of suppliers in the U.S. and Mexico that ship components back and forth.

About 40% of all Mexican exports to the U.S. contain American content. So large tariffs on Mexican products would be felt by U.S. workers as well as those in Mexico.

As one director of a large Japanese auto parts maker explained, his company operates a big factory in Indiana making components for engine valves. Some of these parts are shipped to Monterrey, Mexico, for final finishing and delivery to Nissan and Ford.

The more labor-intensive part of the process, he said, is actually done in Indiana because electricity is much cheaper than in Monterrey. Mexico’s average wages and benefits in manufacturing are about one-sixth of those in the U.S.

“It would be total madness to interrupt this flow of ‘work in progress,’” said the director, Rick Dyck, without identifying the Japanese company. What made this kind of cross-border manufacturing possible, he said, was the North American Free Trade Agreement, which Trump has threatened to renegotiate.

For now, many businesspeople and analysts see such threats as just that and no more, something meant to fire up Trump’s blue-collar base, as he did in the campaign.

“Maybe this is only wishful thinking, but it’s kind of a show,” said Yorizumi Watanabe, professor of international political economy at Keio University in Tokyo. “But showtime will be ended in January and serious business begins. I hope things will change; otherwise it will be catastrophe.”

Labor leaders believe NAFTA had a much darker effect on American industry and workers. Regardless, they, too, see Trump’s shaming tactics and promises of large tariffs as counterproductive, even reckless.

“I think all that’s going to do is cause trade wars across the world,” said William Fairbairn, head of the Electrical Workers Local 2249 in Spencer, Ind. The local represents 300 employees of a General Electric refrigerator plant that shut down in August because the Bloomington, Ind., operation couldn’t compete with cheap labor costs at another company factory in Mexico.

“Even if everyone worked for free, the plant would still be losing $2 million a year,” he said, noting that the unionized workers at the factory made on average $29 an hour. “When you do the numbers, there’s just no way.”

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