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The flawed labour logic of Trump's reshoring agenda

Lexellent managing partner Sergio Barozzi unpacks the implications and limitations of US President Trump's efforts to return jobs to the American workforce.

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Even before his inauguration at the White House, Donald Trump had already committed to make an immediate economic impact by threatening to tax duties on imports of vehicles produced outside of the US (namely in Mexico).  This threat has already pushed three major automakers to change their North American investment plans.

The first change came when the Italian-American FCA Group announced an investment of US$ 1 billion (and an estimated 2000 new jobs) in Detroit to produce new Jeep models instead of increasing the production capacity they already have in Mexico. A few days later, Ford cancelled a US$ 1.6 billion investment they had been planning in Mexico. On 11 January, the Japanese colossal Toyota announced it would be investing US$10 billion dollars over 5 years in manufacturing in the United States – again, another multinational snubbing Mexico.

Technically, what Trump is instigating is called ‘reshoring’, the contrary of ‘offshoring’. In fact, his threats (yet to be formerly implemented) have led some multinational companies to return production to the United States which had previously been moved elsewhere.

The threat of disruption

There are no laws against threats (at least when bodily harm is not in the mix), and President Trump has seemingly done well. By threatening duties on imports despite treaties in force – in this case, the North American Free Trade Agreement (NAFTA) between Mexico, Canada and the United States which was established in 1994 – he has catalysed a verbal, for now, form of protectionism. At the time of writing the NAFTA, as well a larger global trade treaties, are still intact. However, the threat of disruption lingers.

We could say that the verbal threat is ‘seemingly’ working, as jobs are tangibly now leaving Mexico for the United States. However, for the voters in the Midwest that helped hand victory to President Trump, the question of success is pricklier. Alongside the signs of reshoring is the growing sense that these newly created American jobs will not necessarily headed to workers in the ‘Rust Belt’, but instead in those in the more economical Texas.

Reshoring in a federal republic

The differences in the cost of labour between the two areas are such as to justify a choice of this kind. The predicament is similar to what also happens in the European Union, where there are frequent transfers by businesses in Western European countries such as Germany, France, and Italy that move their production or service facilities to Eastern European countries like Poland, Hungary, and Slovakia where labour costs are lower.

There are some similarities between the United States and the European Union that should not be underestimated: the legal framework is in fact very similar.  Some regulations, equal for all, are of an overriding State character (on one part the European Union community regulations and on the other part the body of Federal Law) and then there are the local laws with which they may clash. The latter are, in both cases, State law, given that the United States is a federal republic.  

For example, regulations on collective dismissals are more or less similar throughout the European Union due to a directive which has imposed minimum standards on all member states. However, at the micro local level one finds many different legislations in terms of contributions, salaries, worker protection, and the regulation of individual dismissals.  The same thing happens in the United States.

It appears that overcoming the problem of outsourcing to Mexico will not ultimately solve the depression and crisis that has gripped the regions that once constituted the heart of the American industrial system. The truth is that the work runs away whenever economic and legislative conditions can be found in another area which has a fast-enough payback to justify a divestment and corresponding investment to set up.

Flawed policy logic

The above leads to the conclusion that the resolution of social problems due to unemployment cannot be solved with the introduction of customs barriers, unless one wants to return to a regional duty system akin to that which was used in feudal times. Obviously, it’s quite hard to believe that this is the desired outcome.

Despite the Schengen Agreement, there are some intangible barriers within the European Union in terms of the transfer of workers from one state to another. Language is one such barrier. However, language is not usually a concern for Americans looking for work in another state. In any case, although the United States is a country where social mobility and relocation for a job is a common occurrence, making a family move from Michigan to Texas in view of a lower wage, could represent a serious obstacle.

Mandate for policymakers

Tackling the conundrum of jobs that disappear or transfer to a geographic area where labour costs are lower requires a new approach that takes into account the different economic contributions, treatments and guarantees within unitary economic areas. A more general reflection is required. Is the main economic policy objective to ensure that everyone has the highest level of guarantees, securities, and wages? Or is it fair to leave the choice of the best allocation of the labour force to the free market? To deny that the two goals are often in conflict is no longer possible.

Posted by:

Sergio
Barozzi

08 March 2017

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