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December 4, 2016

Trump tweets carrots and sticks to keep factories in the United States

By Thomas Lifson

In his latest series of tweets, Donald Trump addresses companies that might be considering shipping jobs to Mexico or other low wage bases.  He starts with incentives, but invokes a contingency:

 

 

He then delivers both the offense and hints where the retaliation will come:

 

 

He then actually uses the word “retribution.”

This going to set off his critics on crony capitalism rants, with the more fevered conjuring up Mussolini.

 

 

He fills out the details of the threat:

 

 

 

 

And in closing reiterates the stick, but finishes with the carrot, in all-caps:

 

 

As long as the new administration relies on categorical tax and regulation relief, I don’t worry so much about crony capitalism or a tariff wall with Trump.  He does specifically want to use tariffs to prevent factories from abandoning production facilities in the United States. There will be a lot of problems in defining what qualifies for those tariffs. What if a company abandons entirely the manufacture of a product when its American production facilities are uncompetitive and it can’t afford to invest in new technology manufacturing approaches? Would that company be subject to a tariff if it then used its marketing resources to buy similar products overseas – called OEM (Original Equipment Manufacturing) -- and sell them here? Lots of companies have done that over the years.

What about Vizio, an American company that does a lot of headquarters functions in this country -- engineering, marketing, distribution, and the like – but never even built a factory in the US? It relies on OEM suppliers, as does Apple for its iPhone and many other products. Would companies following this strategy not face a tariff, but their American competitors that hypothetically shut down a US factory for similar products would face a tariff?

This could send that message that opening a factory in the United States carries a huge future obligation to keep investing money in the factory, even if better alternatives exist. That risk could be avoided by following the Vizio model and keeping manufacturing out of the US. It woulod be a perverse incentive.

There are a lot of problems in defining who and who isn’t covered. I am not certain they can be solved in a way that makes sense and avoids unintended consequences. In fact, my guess is that this is a bargaining stance of the PEOTUS, a stick that he won’t have to use. His final words are the real point. He’s going to make it attractive to manufacture in the US again.

So let the ranting begin. It makes for a more powerful imaginary stick that will never be used.

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