During his 2016 election campaign, Donald J Trump spoke consistently of bringing back the United States' (US) manufacturing jobs. His rhetoric on "declaring America's economic independence" earned him significant wins in America's rust belt states of Ohio, Michigan and Wisconsin.
Now, being the President-elect, the underlying phenomenon that he plans to take on is Globalisation and the fast approaching "Fourth Industrial Revolution" and he may find his planned policies being unable to combat either.
If the Carrier deal where Trump claims to have saved 800 jobs is an example of how he plans on keeping manufacturing companies in the US, then a re-analysis of his manufacturing and tariff policy should be undertaken. Despite Trump's perception, the biggest threat to the US' blue collar workers is not just the simple underlying truth that it is cheaper for companies to make many products in Mexico, China and other countries than in the US, but also rapidly advancing digitisation and automation technology of the Fourth Industrial Revolution.
- Donald Trump plans to bring back manufacturing jobs to the US by urging companies to keep their factories in the country.
- This plan doesn’t factor in the Fourth Industrial Revolution, where companies are moving towards automation technology.
- Trump’s stance against global trade deals wouldn’t help in bringing the jobs back either.
- Furthermore, if the US companies are taxed heavily for outsourcing manufacturing, prices would increase for American consumers.
- America must look at engaging with the world to adopt new agreements to allow for a smooth transition into the Fourth Industrial Revolution.
The Hypocrisy of the Carrier Deal
In February 2016, Carrier announced plans to relocate two Indiana plants, sending 2,100 jobs to Mexico. In late November 2016, Carrier's parent company, United Technologies (UT), received $7 million in tax breaks from the state of Indiana (with a deal struck through Trump's Vice President and governor of the State of Indiana, Mike Pence). In return, UT agreed to keep one Carrier plant operational and 800 blue-collar plant workers in work. United Technologies also earns 10 percent of its revenue from US government contracts which no doubt factored into discussions.
Trump’s plan therefore seems to revolve around a combination of providing tax breaks, selectively awarding government contracts and (if his tweets are to be believed) imposing a 35 percent tax on companies (both American and foreign) that manufacture abroad, while significantly lowering taxes for those that manufacture in the US.
However, in an interview with CNBC's financial pundit, Jim Cramer, the CEO of United Technologies, Greg Hayes, mentioned that the company now plans to invest $16 million into automation technology for future factories in the same state of Indiana.
Factoring in the Fourth Industrial Revolution
The Fourth Industrial Revolution is driving advances in computing and technology, allowing for decreased transportation and communication costs as well as improved automation in manufacturing. This is allowing manufacturers to take advantage of countries with the most preferable regulatory framework and lower labour and manufacturing costs.
In the domestic manufacturing sector, robotics and the rapid advances in automation signal that even if manufacturing-based firms were to return to the US, they would be much more likely to pursue a plan (similar to UT’s) of investing in automation. This has contributed to the disappearance of many middle-skill, middle-income, middle-class jobs.
The jobs that have emerged are either well paid for highly skilled work or poorly paid for low-skilled labour-intensive work. For example, the services sector now accounts for 81 percent of all US employment, while mining was the only primary industry sector that has shown an increase in employment (of 1 percent) since 2004.
Tearing up Trade Agreements
Trump's stance against "exploitative" trade deals such as the North American Free Trade Association (NAFTA) and the Trans-Pacific Partnership (TPP) are also not the answer to reclaiming American manufacturing jobs. In fact, they might have the opposite effect of ushering in automation (like we saw with UT's plans) at a much faster pace.
At the same time, protectionist measures in the form of rejecting trade agreements that link the US to the global economy will never be practical considering the fact that in the last five years foreign-held investments in the US have risen dramatically from $2.5 trillion to $8 trillion (in a nation that has a GDP of roughly $18 trillion) and are a source of employment.
Furthermore, if US companies are taxed heavily for outsourcing manufacturing while tariffs are imposed on foreign-manufactured imports, prices would increase across the board for the American consumer, leaving him with highly taxed foreign-made goods or its American-made expensive substitute.
This might also bring trade-based retaliation from other countries that would hurt American exporters as well as manufacturers that rely on components made abroad.
America's manufacturing will never again be the source for a vast number of high-paid blue-collar jobs as it was in the past. Between 2004 and 2016, America's manufacturing employment has fallen by more than two million, now accounting for just over 7 percent of total employment. Propping up its carcass through selective tax breaks and preferential government contracts is a steep slippery slope to "crony capitalism". It creates the incentive for companies to announce plans to move abroad just to avail millions in tax breaks.
The real kicker of UT's announcement to automate American factories is that even if machines were put in place, the costs will still be higher than if the plant was simply relocated Mexico. America must look to adapt its economy by engaging with the world to create and adapt new international agreements to allow for a smooth transition into the Fourth Industrial Revolution.
(The author is a research intern at the Institute of Peace & Conflict Studies, New Delhi. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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