Carrier’s Move to Mexico

February 19, 2016

Earlier this week, the Carrier Corporation announced that it would be closing its plants in Indiana and moving production to Mexico.  Carrier said that the move was necessary in order to “remain competitive.”  The move garnered more attention than usual, thanks to an employee who captured the announcement on video along with workers’ angry reaction, and thanks to Republican candidate Donald Trump pouncing on the story to illustrate the need for his plan to implement tariffs in order to bring back manufacturing jobs from places like Mexico, China and Japan.

The above-linked Reuters article makes it easy to understand the rationale behind Carrier’s move.  The Indiana workers are paid an average of $20.00 per hour, while workers in Mexico will be paid $3.00 an hour.  A savings of $17.00 spread over 2,100 workers is a total labor cost savings of about $71 million.

If you’ve been a follower of this blog, you know that the research I’ve done each year into America’s trade results has found that there’s absolutely no correlation between wages and our balance of trade.  For every example of a nation with whom we have a large trade deficit in manufactured goods where wages are low, as is the case with Mexico, I can offer an example where just the opposite is the case.  If low wages cause trade imbalances, how do you explain our trade deficits (which are even larger in per capita terms) with high-wage nations like Japan, Germany, France, Taiwan, Italy, Switzerland and a host of others?  The one thing that all of these nations do have in common is high population densities.

But I have to admit that Mexico does seem to be one glaring exception.  Carrier is just the latest in an almost countless stream of manufacturers that have shifted production to Mexico.  Mexico’s population density is about double that of the United States – enough to be a serious driving force for a significant trade imbalance – but much lower than the population densities of some other nations like those mentioned above.  If I plot population density vs. trade imbalance, Mexico falls pretty much in line with what their population density would predict, but a bit high.

Here’s the thing that puzzles me about Mexico.  They’re actually not that poor of a country.  Wages shouldn’t be that low.  With a purchasing power parity (PPP) of about $18,500 per capita – about one third that of the U.S. – wages in Mexico should be about one third that of Americans.  The wages that Carrier pays its manufacturing workers – about $20.00 per hour – is pretty typical in the states.  So Mexican manufacturing workers should be making about one third of that, or close to $7 an hour.  And, given the rate at which manufacturing jobs have shifted to Mexico, wages there should be rising fast like they have in China and other countries that have a booming manufacturing sector.  Instead, they’re stuck at a measly $3 an hour.

The CIA’s World Fact Book has this to say about Mexico’s economy:  “… growth is predicted to remain below potential given … a large informal sector employing over half of the work force, weak rule of law, and corruption.”  In other words, over half of Mexican workers are “off the books,” beyond the reach of labor laws and standards.  And you have to believe that there is corruption involved in suppressing wages.  Whether or not American companies are complicit in such an effort is a matter of conjecture.  Add all of this up and you have a country that is a virtual slave labor state.  Mexico is America’s plantation of the 21st century.

Again, whether or not American companies are involved in suppressing wages in Mexico is unknown (to me, at least).  Let’s give Carrier the benefit of the doubt.  While everyone is angry at Carrier for making this move, that anger is misplaced.  They’re only doing what makes sense from a business perspective.  Any other business owner would probably do the same.  The real culprit here is the American federal government who, through its misguided blind faith in “free” trade policy, has encouraged this situation.  Our trade agreement with Mexico should be torn up and replaced with one that employs tariffs to assure a balance of trade.  Like his predecessors, Obama hasn’t had the backbone to take this on.  Let’s hope our next president does.


EU vs. China: America’s Worst Trading Partner?

February 8, 2016

In terms of our total trade deficit, China is without question America’s worst trading partner, draining $370 billion from our economy and robbing us of five million manufacturing jobs.  Just look at how bad it is and how fast it’s getting worse:  China.

But China is an enormous country with one fifth of the world’s population, so naturally our trade deficit with them is huge.  But how do they stack up if we put that trade deficit into per capita terms?  That is, how much do Chinese citizens drain from our economy compared to, say, the citizens of the European Union?

The European Union, or EU, is is made up of 26 European nations.  It’s analogous to the United States, where each European country is a “state” in the EU.  Combined, they are a “nation” of 1. 7 million square miles – about half the size of China, with a population of over 550 million people – about 40% that of China.

So here’s the chart of our trade with the EU in manufactured goods:  EU.  Wow, it looks remarkably the same as the above chart of our trade with China, doesn’t it?  In fact, when expressed in per capita terms, our trade deficit in manufactured goods with the EU is $247 per person.  Our deficit with China is $271 per person.  So, in per capita terms, just as it is in terms of the total trade deficit, China is America’s worst trading partner, but I’ll be that this is much closer than you’d have thought.

Why is this?  The two couldn’t be more different.  China occupies most of Asia while the EU, of course, covers most of the European continent.  The EU is significantly wealthier than China, with a purchasing power parity of over $40,000 per person compared to about $12,000 per Chinese citizen.  Aren’t we told that the reason we have such a large trade deficit with China is because of low wages?  So why is our trade deficit with the EU, in per capita terms, almost the same?

It’s because there’s one thing the two have in common.  Both are very densely populated – almost to the same extent.  The EU’s population density of 325 people per square mile is only about 14% less than the population density of China, at 380 people per square mile.  So it’s not just a coincidence that our trade deficit with the EU, in per capita terms, is only 9% less than our deficit with China.

The point of all of this is that, when it comes to America’s trade deficit, all of the focus is on China, their low wages and their (supposed) currency manipulation.  But the fact is that our deficit with China is big merely because China is big.  When size is factored out, our deficit with China is absolutely no different than our deficit with other nations that are comparably overpopulated compared to the U.S. (where our population density is about 87 people per square mile).  The deficit is driven almost solely by the disparity in population density, and other scapegoats like low wages and currency valuations have absolutely nothing to do with it.

No progress toward restoring a balance of trade can ever be made as long as we continue to focus on irrelevant factors.  When dealing with such overpopulated nations, the only way to assure a balance of trade is by using tariffs to offset the inherent bias toward a trade deficit that their population density makes unavoidable.  The middle class in the U.S. is threatened because our trade policy fails to account for the role of population density in driving trade imbalances.


What’s That Smell?!? The January Jobs Report

February 5, 2016

This is perhaps the fishiest, most suspicious jobs report I’ve seen yet.  Nothing about it makes sense or is believable.  This morning, the Bureau of Labor Statistics (BLS) announced that, in January, the economy added 151,000 non-farm jobs.  (See the above link to the report.)  That’s well below economists’ expectations, but not mine.  What’s fishy about this number is the breakdown, which makes you wonder if the real number isn’t much worse.

The BLS would have us believe that, of the 151,000 jobs added in January, 58,000 were in retail and 29,000 were in manufacturing.  Regarding the retail sector, all the data we’ve seen to date indicates that business was strong in November but slowed dramatically in December with sub-par holiday spending.  It dragged GDP growth down to 0.7% in the fourth quarter – a number that will likely be revised even lower.  Since then, the economy has slowed even further.  Before the holidays, you couldn’t shop in a retail establishment without being pestered by aggressive sales people.  After the holidays, you can’t find one to help you.  It’s always been that way.  Seasonal workers are hired for the holidays and let go once it’s over.  The claim that retail added 58,000 jobs in January is just too unbelievable.

Even more difficult to swallow is the claim that manufacturing added 29,000 jobs.  Manufacturing has been in a deep recession, thanks to a virtual shut-down of oil exploration and falling exports.  There’s just no way that manufacturing, which has barely added any jobs in the last twelve months, went on a hiring binge in January in the face of such a dramatic slow-down.  It makes no sense whatsoever.

But the implausibility of these numbers from the establishment survey portion of the report pales in comparison to what we got from the household survey where, it was reported, the employment level exploded by 615,000 jobs while the labor force grew by over 500,000.  Isn’t it interesting how the two numbers jump all over the place month-to-month, but always seem to converge to prevent destroying the credibility of headline unemployment figure?  These are numbers that are completely out-of-line with what’s happening in the real economy for the past two months.

I have my suspicions about what’s behind this.

  • The Federal Reserve is desperate to break the equity markets’ dependence on monetary easing, and to fend off the growing belief that it’s become irrelevant in influencing the overall economy.  Is it possible that they’ve asked the government to generate data that supports its mission to get interest rates back to “normal?”
  • The president is in his final year and wants to keep his job “creation” record intact, in spite of evidence that, as he leaves office, the economy is sinking into recession, just as it did for Presidents Bush (W.), Clinton and Bush (G.W.) before him.  Pulling the economy out of the near-depression of 2008 is a big part of his legacy, which would be tarnished if he leaves office with the data showing an economy that’s right back in recession where he found it when he took office.
  • I don’t know if other states are enacting similar programs, but Michigan has recently begun advertising a new program called “Work Share” whereby employers can cut workers’ hours (up to 45%, if I remember correctly) and the affected workers can collect a proportional share of unemployment benefits without being counted as “layoffs.”

OK, so maybe the first two items above are just speculation from my cynical side, but can anyone blame me when we get numbers like these?