Blog No. 120. The Bully in the Pulpit and The Carrier Coup.

On Monday, the New York Times reported that House leaders had pushed back against President-Elect Trump’s plan to impose a 35% tariff on companies that relocate jobs overseas. The report was the first sign–and a welcome one–of any willingness on the part of Congressional Republicans to stand up for traditional Republican principles in dealing with Trump. The threat of a 35% increase had been at the heart of Trump’s much-heralded deal with the Carrier Corporation and its parent, United Technologies (UT), but it carried a clear risk of sparking a trade war that could seriously damage the American economy.

The reaction of the House Republicans allows the Carrier deal to be seen from a more realistic perspective altogether. The deal had been widely viewed in the media, by Trump supporters and critics alike, as a brilliant political stroke, and so it seemed, at least for the moment. A politician had actually done something that he had promised, at least in part, and 800 jobs had been saved. (The frequent reference to “approximately 1,000 jobs” included 300 jobs for which no move had been planned.) Who could not have been be heartened by the good fortune of those fortunate employees and their families, especially coming only a month before Christmas? But this was not A Wonderful Life, and Donald Trump had not succeeded Jimmy Stewart in the role of George Bailey.

To begin with, the number of jobs “saved” was considerably hyped: there were another another 600 jobs at the Carrier factory in Indianapolis that would still go to Mexico as would another 700 jobs from a UT plant in Huntington. Viewed more broadly, Trump’s coup, even limited as it was, almost certainly raised expectations to a level that cannot be met. Many economists pointed out that prohibiting the relocation of facilities overseas may provide isolated benefit to particular communities, but has no prospect of restoring manufacturing jobs to the position that they once held in the American economy. For example, Philip Bump, writing in the Washington Post, cited persuasive data demonstrating that the principal enemy of the traditional factory worker  is not relocation or foreign trade deals, but automation. As Bump put it, in referring to the Carrier deal, “this isn’t simply a case of closing the barn door after all of the horses have escaped. It’s a case of closing the barn door decades after the horses were traded in for new automobiles.”

In addition to being unlikely to produce the desired result on a large scale, Trump’s Carrier venture raised troubling questions as to how the President-Elect will use the power of his office. Republicans have spent the last several years complaining, often with justification, on what they regarded as President Obama’s excessive use of executive power (epitomized in the phrase “I’ve got a pen and I’ve got a phone.”) Yet Trump, even before his inauguration, appeared to have gone beyond not only Obama but past presidents in seeking to invoke the power of his office against an individual company. Trump’s action reminded some of the actions initiated by President Kennedy against steel companies in 1962 after a price increase. But Kennedy at least was acting against an industry, and companies alleged to be acting in collusion; subsequent presidents have not found his actions to be an attractive precedent.

The Carrier deal was said to have been reached through the application of carrots and sticks, but there were clearly more in the way of sticks, express or implied, than carrots. The principal carrot came in the form of $700 million in tax breaks from the State of Indiana, but that carrot was no fatter or juicier than the one previously offered by Indiana and rejected by UT. A statement by UT also referred to the commitment of the Trump administration to provide an improved “business climate,” presumably involving relaxed regulation and lower taxes. At this point, however, such an improvement is speculative at best, and if it does materialize, it will benefit business generally and not UT in particular. In the context of this deal, the imagined improvement appeared to be nothing more than window dressing to distract attention from the sticks that UT found persuasive.

The most explicit stick was the threat to impose a 35% tariff on goods produced by Carrier facilities relocated from the United States. Indeed, after the deal was announced, Trump doubled-down on the threat in a series of tweets (consolidated here for readability):

The U.S. is going to substantialy (sic) reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult, but these companies are able to move between all 50 states, with no tax or tariff being charged. Please be forewarned prior to making a very expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS

There are several difficulties with this stick if Trump intends to wield it repeatedly. The first is legal in that it would appear to violate not only NAFTA but U.S. statutory law. As to the latter, Congress could provide authority, but the report in the New York Times indicates that Trump may find that approval beyond his reach.

Authority for raising tariffs on individual companies would  be difficult even to draft if it is to be exercised with some regard for the rule of law. That is to say, raising tariffs even in a punitive way should be done in accordance with objective standards and not merely at the whim of a vindictive president. Consider the Carrier deal. The company proposed to move 2,100 jobs (including the Huntington plant) and eventually agreed to move “only” 1300, which presumably will give rise to no tariff penalty. How would the law deal with moving some but not all jobs, and specify when a tariff increase should be imposed?  How many “saved” might be enough to escape the tariff?

Lawrence Summers recently emphasized the importance of consistently applying objective rules:

Presidents have enormous latent power, and it is the custom of restraint in its use that is one of the important differences between us and banana republics. If its ad hoc use is licensed, the possibilities are endless. Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, to make contributions to the president’s reelection campaign, to hire people the president wants to see hired, to do the kinds of research the president wants carried out, or to lend money to those that the president wants to see assisted?

The other stick available to Trump was the government’s status as a major customer of UT. Sales to the Pentagon amount to 10% of UT’s total revenue. Trump claimed that he had not mentioned this fact in his conversations with UT and that he hadn’t needed to. On the other hand, many observers believed that protection of this business was a major, and perhaps decisive, factor for UT. As reported in Politico:

John Mutz, a former Indiana lieutenant governor who sits on the [Indiana Economic Development Corporation] 12-member board, told POLITICO that Carrier turned down a previous offer from IEDC before the election. He said he thinks the choice is driven by concerns from Carrier’s parent company, United Technologies, that it could lose a portion of its roughly $6.7 billion in federal contracts.

Here, again, however, legal constraints intrude–as well they should. An article in the Washington Post summed them up:

Defense analysts said that Trump could not legally steer contracts to United Technologies or punish the company through the Pentagon’s highly regulated acquisition system. The Federal Acquisition Regulations are thousands of pages long and run through an often stifling bureaucracy that determines requirements, puts out requests for proposals from industry, then embarks on a lengthy selection process that can take months, if not years.Mackenzie Eaglen, a defense analyst at the American Enterprise Institute, said that the acquisition system can’t be used as a bargaining chip: “The short answer is no, and it would be highly illegal. Period.”

Despite the apparently formidable legal restraints, one cannot blame UT for feeling uneasy about the possibility of their being evaded at the direction of the White House.

Whether actual or only feared, the leverage of federal procurement has no legitimate place here. It is, moreover, counterproductive. As the Wall Street Journal put it:

Job-creating capital flows to the United States reflect confidence in American prosperity, property rights and rule of law. Preserving and enhancing those competitive advantages, not selective pressure on politically unpopular business decisions, is how government can best assure growth and economic opportunity.

If Donald Trump ignores that reality, it will be at his and the county’s peril.