Carrier: The Tariff Issue

In February, 2016, Carrier, a subsidiary of United Technologies, announced it was relocating its Indianapolis, Indiana, manufacturing facility to Monterrey, Mexico.  The move would occur over a three-year period, but baring not even a miracle, it would occur.  That is, until it became a political issue.  This announcement was used as a lightening rod for the advancement of not only Donald Trump’s campaign, but Bernie Sanders’ as well.  As this is being written, negotiations between the company and Mike Pence, the incoming Vice-President, are ongoing.  Of course, the incoming administration is attempting to play the hero, when in all reality, their efforts are no more than an exercise in self-aggrandizement and political profit.  If Governor Pence’s efforts were placed in their true context, it is that of a major waste of time, money and resources that will ultimately harm the vast majority of US residents.

During Saturday night’s Republican debate, Trump said if he were president, he would approach Carrier officials and give them two choices.

“I’m going to tell them, ‘Now I’m going to get consensus from Congress and we’re going to tax you,'” Trump said. “‘So stay where you are [in Mexico] or build in the United States.’ Because we are killing ourselves with trade pacts that are no good for us and no good for our workers.”

Trump would tax Carrier air conditioning units for moving to Mexico, Reuters, February 14, 2016

President-elect Trump is saying to everyone, either produce in the United States or you will be punished.  As a business owner seeking to provide the best value for your customers, and competing to even stay in business, you cross union members, Bernie Sanders and Donald Trump, and you will be on the receiving end of the water boarding equivalent of commercial and business torture; a tariff.   He has clearly stated this to Carrier, that if they pick up and move, the products they produce outside the country, but try to sell in the United States, will be slapped with a tariff.  One would assume the tax to be high enough to prevent the sale of those products in the US.  Otherwise, the “crime” would go unpunished.  As we will see, Carrier and the impacted union members, ironically, are now in a position to profit handsomely from this.  First, though, let’s understand what a tariff really is.

Tariffs

Under a tariff regime, a specific business, industry and/or labor union, will purchase from politicians what is often the sole and exclusive right to sell a certain good or goods in a given local, state or national boundary.  A small fraction of a tariff is actually paid directly to the government that legislated the privilege.  That is not the point.  The tax received by the treasury is the gravy, or the cherry on top.  The politicians are being paid by the special interest group that hired them.  Contrary to popular belief, or what you might read elsewhere, tariffs are not a revenue generating tool for government.  It might be true that small customs duties, or tariffs, are revenue generating and compensate for the operations and security of state-owned ports or facilities, but much of what customs authorities enforce, and an overwhelming portion of the tariff, go towards ensuring that competing products do not reach domestic customers.  The bulk of the tariff tax is paid in the form of higher prices on the protected goods.  This tax, or additional income, is divided among the protected owners of capital and their labor force.  While the purchaser of a product subject to tariff privilege might be free to purchase the product, or not, they are not free to avoid the tax paid to the business or industry if they do make the purchase.  In essence, their customers are the tax payers.

But, wait, Milton, prior to an income tax, the primary tax relied on by the US federal government, from its inception, was the tariff.  Are you telling me that our founding fathers participated openly in a system of extortion and bribery, which is exactly what this is, to fund their operations?  Of selling favors to special interest groups?  Yes, in part, that is what I am telling you.  This is the very same mercantile system prevalent in Europe, simply adopted in the colonies, and eventually the states.  The Crown, the State, the government, they grant privileges for a fee.  The special interests are happy to pay as they are in a stronger position than they would have otherwise been.  As stated above, not all tariffs and not 100% of tariffs were, or are, earmarked for commercial, industrial and labor interests.  Funds were and are required by government to enforce the tariffs and small tariffs or customs duties can serve as a fee-for-service at government-owned ports.  Far and away, however, tariffs were and still are a device to protect domestic business and labor interests at the expense of their customers.  In other words, to protect consumers from low prices.  This strikes right at the heart of a scary precedent that can be set in the Carrier case if the new Trump administration is “victorious”.  Everyone and anyone will descend on Washington, DC, for political favors under the threat of moving their production outside US borders.

The Seen and the Unseen

The immediate effects are clear and visible; at least 1,400 workers will lose their current jobs.  What of the value of the land, plant and equipment the company leaves behind?  If not worthless, worth much less.  And, the rest of the town?  The people?  They will be impacted as well; lower wages and fewer jobs, at least for now.

“If you saw the people, because they have a video of the announcement that Carrier is moving to Mexico, they were laid off,” he said. “They were crying. It was a very sad situation.”

Donald J. Trump, February 13, 2016

What else is sad?  If not for our current politicians, government in general and union leaders, the impacted workers would not have to contend with this situation in the first place.  If these employees, at Carrier, lived in a state and country where politicians and union officials were more concerned with the people and less with their own aggrandizement, financial power and political ambitions, they, and millions of others, would not have to worry about losing their jobs and their standard of living would be far greater than it is now.  More accurately, if they had the incentive to be more concerned with the people, the people would be better off, but the historical evidence is crystal clear; the strategy of competing with industry and business interests for political favor, while a success for a very small minority of union members in the last 100 years, has been a total and complete failure for labor in general.  Seeking to dismantle the American System, home-grown mercantilism, would have been a far more effective and long-lasting labor strategy than buying political favors.  In the end, unions have been outbid by industrial and commercial interests and, labor, in general, has no political voice.  The plight of labor and African-Americans, coincidentally, is due to a failure of the same (political) strategy.

What is not seen are the secondary effects.  Some impacted Carrier workers may be able to retire or fill other positions but, yes, 1,400 are negatively impacted.  On the flip side, Carrier will continue to manufacture products at a competitive price.  American consumers will continue to have access to these products at lower prices.  The money they save on buying carrier products will be spent on other consumer goods or invested in other business ventures, creating or maintaining other US jobs.  Carrier, under a lower-cost structure, may be able to maintain and even grow their international market share, ultimately expanding, potentially, their remaining US-based workforce.  Also, it is unclear to me what debt or obligation other Americans, in particular non-union members, have to these 1,400 union members.  At the risk of sounding insensitive, and I clearly am insensitive, have they been, or will they be, any less self-interested than the rest of us?  If they get to keep their jobs will they supplement the purchase of their products?  May we share in their wages and pensions?  If I lose my business, will they send me money?  If I were a betting man I would not hold my breath in anticipation of any of these unlikely occurrences.

The Carrier business is owned by United Technologies Corporation (UTX) which, in turn, is owned via voluntary public organization.  Ultimately, individuals directly, or indirectly, through pensions, mutual funds, and other financial instruments, own UTX.  The shares of UTX represent individual property interests and any attempt by Trump, government in general, or union members, to interfere with the right of management to conduct its affairs to benefit those share/property owners is a clear violation of property rights.  If you don’t own the business, run it, or purchase their products and services, it is none of your business.  Besides the protection of basic property rights, management has a duty to current shareholders, remaining employees and customers to produce the best product it can at the lowest cost.  This is not out of benevolence or patriotism, it is simply out of survival.  As it is unclear whether Carrier could even survive without cost-cutting measures and if they do not operate for profit the value of its shares would drop to zero.  The impacted employees would lose their jobs anyways, along with every other Carrier employee.  So, we cannot view this matter in a vacuum, of first effects only.  We must consider the secondary impacts and alternatives to the current Carrier plan.

Compared to What?

What are the alternatives?  What if Carrier is prevented from re-establishing the impacted plant in Mexico, as planned?  Blocking the proposed move ensures one, or a combination of, the following:

  1. If Carrier is forced to continue manufacturing in the United States, and no other accommodations are made, they will go out of business.  The only option, assuming no reductions in the costs for labor, government, regulatory compliance and capital, will be to institute a tariff on competing imported products.
  2. Carrier will be unable to sell any domestically produced HVAC units abroad.  Clearly if the goods can be produced more cheaply in another country someone else will do it and will be able to out compete Carrier outside the US.
  3. The loss of, or reduction, in demand from foreign sources will lead to fewer jobs at Carrier.  While the 1,400 workers might keep their jobs in the short run, the long-term employment opportunities at Carrier will be diminished.
  4. This impact will be economy wide.  The foreigners who would have worked for Carrier will now have no money in which to purchase any US products.
  5. US consumers will be forced to pay higher prices on any and every heating and air conditioning (HVAC) unit purchased, Carrier or otherwise.  Any tariff will act to elevate the minimum prices of those goods directly and will leave less money in consumer pockets for the purchase of HVAC units or any other goods.
  6. The standard of living for those subject to privileged tariff protection will increase at the expense of Americans not eligible for tariff protection.  The entire economy will shift in favor of domestically produced HVAC units, and away from everything else.

Ultimately, if the incoming administration is successful in this Carrier case,  all Americans will be losers.  In the short run, yes, the workers at Carrier who do not lose their jobs will be better off, they will have more disposable income.  Other labor and land owners around that plant will be better off as well.  The rest of the country will be worse off.  Putting money in one persons hands, means taking it out of someone else’s hands and not always taking it from the intended target, such as the rich.  More often, it is other laborers who suffer.  Send Carrier, labor, local, state and federal government officials, back to the negotiating table.  If local, state and federal tax, regulation and compliance can be reduced enough, labor might be able to avoid any job loss or drop in income.  Otherwise, some reduction in wages is possible.  While this is unfortunate, is it any less fortunate that other citizens are punished with higher prices because union members at Carrier are unwilling to lower their wages to keep their own jobs?

Conclusion

If this, erecting tariffs to protect jobs, were applied economy-wide, and you would have to under a doctrine of fairness, it would result in a completely closed economy with everyone awarded the US market through legislation but virtually no ability to sell abroad.  Consumers, all consumers, would be left paying higher prices on everything.  Anyone currently exporting would lose their businesses and jobs as foreigners would be forced to close their economy as well.  Entrepreneurs, management and labor, from current export businesses, would be forced to compete with producers who were already supplying the domestic market.  This would put pressure on wages and, between the increase in prices and this downward pressure on wages, it is clear that, taken as a whole, labor would be no better off, and the population, in general, would be worse off.  This is not conjecture or hyperbole.  If President-elect Donald J. Trump gets his way every industry, business and special interest, will descend on Washington, DC, in search of their own “Carrier deal”and our future will officially begin to unfold.


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