Back in December of 2016, President-elect Donald Trump announced that he had struck a deal with Carrier to prevent the company from outsourcing jobs in a plant located in Indiana to Mexico. The deal would reportedly keep 1,100 American workers employed in the plant while allowing for a tax break for Carrier in the process (read more HERE). In addition to this, Trump has threatened to levy tariffs on firms who outsource employment and attempt to sell product within the United States. This is no recent pronouncement; this had been a calling card to his campaign in the first place.
Carrier was planning to outsource employment in Mexico in order to offset the various costs of production in the United States. If this were not the case, the move would not have been planned in the first place. There are multiple reasons as to why this is the case. First of all, Mexico has an abundance of unskilled labor within its population. Its workforce is able to produce labor-intensive goods and services utilizing its unskilled labor more efficiently relative to other goods and services at cheaper costs. This, in the jargon of political science and economics, is the principle of comparative advantage.
There are also numerous arbitrary costs imposed upon manufacturing firms by government. Economist Walter E. Williams, in his article “Please, No More Miracles” (can be found HERE) noted that Carrier and other manufacturing firms also suffer from import restrictions placed upon steel and other metal imports that artificially raise the price of metal imports, making the production of goods such as air conditioners and automobiles much more expensive. Once again, we may observe the economic havoc wreaked by protectionists who seek to fulfill their undying passion for “fair competition”. There are, of course, other devices of the State at play that wreak havoc upon manufacturing firms, such as the corporate income tax and the federal regulatory Leviathan. But let us not lose focus on the matter at hand.
The deal has been made; X amount of jobs have been kept in the United States and Carrier receives a tax break. More employment can be added to the plant. These workers will increase their purchasing power and will thus be able to spend it on other goods and services, providing employment elsewhere, and so on. All of this is what is seen as a result of the deal.
What remains unseen, however, is that which has been foregone as a result; the benefits that would have been brought into existence by Carrier’s outsourcing of production into Mexico. Had Carrier been allowed to move its production across the border, the company would have been allowed to not only offset the artificial costs of production placed upon it by the State, it would have been able to take advantage of Mexico’s comparative advantage with labor. As a result, the reduced marginal cost of production would have resulted in a larger scale of production. The larger scale of production would have resulted in a larger supply of goods in order to meet market demand, and in conjunction with market competition, the price of the manufactured goods would have decreased. As the price of Carrier’s products decreased, consumers would have saved more of their dollars. These dollars could have been saved or spent elsewhere, which would have increased the market demand for other goods and services, therefore increasing employment among other firms. The dollars that could have been spent in Mexico could have been in turn spent on goods and services from American exporting firms, increasing employment in those respective firms. In the end, no new employment has been created as a result of the Carrier deal. Rather, employment has merely been diverted. Had Carrier continued with their plans, the resources once tied up in the manufacturing plant would be freed up to be employed elsewhere more efficiently wherever it is demanded in the market; all of the potential goods and services that could have been brought into existence are foregone, along with the constituted demand for the factors of production (i.e. labor, land, capital) necessary to produce them. Instead, Carrier now faces an overall economic loss as a result of the opportunity cost of not moving its production across the border. The United States as a whole suffers an economic loss as a result of the Carrier deal, for the labor and capital tied up in the plant cannot be used for another purpose.
There are plenty of options that the Trump Administration could pursue in order to increase employment in the United States: repealing regulation issued by the totalitarian EPA and slashing the corporate income tax would be an excellent place to start. Reviving 17th Century Mercantilism is not how economic progress is brought about.
By: Tyler Coleman