Some Observations about Trump’s Transition

November 25, 2016

The following are some random thoughts and observations about the unfolding transition of Donald Trump’s presidency.  (I still can’t believe I’m writing those words.)

  • Wow, for a guy pushing 70, this guy has a motor!  I stayed up the night of the election until it was clear he had won, which happened about 3 AM on the morning of the 9th.  I was exhausted for the next several days.  Not Trump.  Two days after the election he was at the White House to meet with President Obama and then on to Capitol Hill for a series of meetings.  The next day he launched into an endless stream of meetings with potential staff members – up to twenty meetings a day – and still had the energy to be “tweeting” at 3 o’clock in the morning.  Yesterday – Thanksgiving Day – he was even on the phone with the CEO of the Carrier Corporation trying to convince them that moving their manufacturing operations to Mexico was a bad idea.  The guy is clearly a workaholic.
  • In order to push forward his agenda, he needs a cabinet staffed with like-minded individuals, not a “team of rivals” as some have suggested.  I’ve been pretty pleased with his picks thus far, but I really hope he doesn’t pick Romney for Secretary of State.  Romney might soothe ruffled feathers among traditional Republicans and calm nerves among foreign leaders with his polished style and globalist outlook, but that’s not what Trump needs.  He needs someone who can look China in the eye and tell them “tough s___” when they complain about Trump’s trade policy.  That’s definitely not Romney.  Giuliani would be a much better choice.
  • Trump has softened his stand on illegal immigrants somewhat, vowing to deport or incarcerate 2-3 million of the worst among them, but expressing a willingness to “consider” the rest.  I’m OK with that as long as he “builds a wall” or takes whatever other actions are necessary to put a halt to illegal border crossings and to immediately deport those who still do make it across.  A pleasant surprise has been his vow to also crack down on some legal immigration, like the H1B visa program which is designed purely to hold down wages.  The program, and others like it, should be completely eliminated.
  • Early on, Obama began assembling a team of economic advisors, mostly academics, largely from Harvard.  No wonder his vow to tackle the trade deficit was quickly abandoned.  So far I’ve heard none of this about Trump’s transition team.  Unless I’ve missed something, there hasn’t been a single mention of an “economic advisor.”  Good.  He doesn’t need any.  His economic plans are right on target and he would be hard pressed to find any economists who wouldn’t steer him in the wrong direction.
  • So far, his plans to impose tariffs on Mexico and China, though a huge step in the right direction, are too timid.  Tariffs on auto parts from Mexico will only make U.S. auto manufacturers less competitive with imports from Japan, South Korea and Germany.  Tariffs on Chinese imports will only move manufacturers to India, Vietnam, Indonesia and other countries with huge labor forces.  To be successful, he needs to extend his tariff plans to include all products from all such countries.
  • I’ve heard some pundits proclaim that some manufacturing jobs won’t come back to the U.S. no matter what he does with trade policy.  That’s absolute nonsense.  If tariffs raise prices to the point where products can be made profitably in the U.S., then someone will seize the opportunity and do exactly that.  For example, if Apple doesn’t move its i-phone manufacturing back to the U.S., then someone else will soon undercut them with cheaper and better phones made right here in the states.
  • Manufacturers who have moved to China might be wise to not even wait for tariffs to be implemented.  They’d be smart to move their equipment back to the U.S. before China prevents such moves.
  • Despite all the fear-mongering by free trade and globalization cheerleaders about the dangers of “protectionism,” investors seem to be betting on the opposite.  In fact, we see the same thing happening in Britain in the wake of “Brexit.”  I’m reminded of an old saying:  “Money talks and BS walks.”
  • The media has been wringing their hands over potential conflicts of interest with Trump’s vast and far-flung business empire.  It’s a potential concern, but everyone knew it when they voted for him and it’s not something he can divest overnight.  Let’s give it time to play out.
  • Trump’s not an inspirational orator like Obama has been.  That’s OK.  I’ll happily trade that trait for someone who can get things done to fix our immigration mess and our idiotic trade policy.

There should be no misconceptions that this will be anything but a wild ride.  It’s going to be absolutely fascinating to watch it play out and, if he follows through on his campaign promises on immigration and trade, we’re going to witness a transformation in the U.S. economy that no one even thought possible.

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.