Earlier this week, Donald Trump (who isn’t the President yet) threatened a Japanese automaker, Toyota, about a plant they were building in Mexico. Specifically, Trump tweeted: “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.” Now, irrespective of the fact that Trump got a number of facts wrong:
- Toyota’s factory in Baja assembles Tacoma trucks, according to the automaker.
- The new Toyota new plant in Guanajuato, Mexico, will manufacture Corollas.
- The new factory is shifting work from a facility in Canada, and there is no change in employment and production in the United States as a result of the new operations.
Further, irrespective of the fact that Toyota is a Japanese company, and thus has global operations and can (and has) manufacture its parts in Japan, as it would want to bring income to Japan.
As I said, irrespective of all that, Trump is demonstrating that he doesn’t understand business, in particular, the global automotive and manufacturing business. That’s actually not a surprise — his expertise (if he has that) is in real estate development, which is a very different beast. Any manufacturing he has done has been outsourced (often to foreign manufacturers).
What is Trump missing? Here are a few of my thoughts:
- First and foremost, why do you presume that a plant in Mexico is making cars for the US market, especially with a manufacturer like Toyota? There are car-buying adults living in Mexico, Central and South America, and none of those countries have domestic automakers. Toyota could very well be building cars in Mexico for the Mexican market, which the Mexican government might encourage because, you know, domestic jobs and all that stuff.
- If you impose a larger tariff on cars imported from Mexico than cars manufactured locally, then you raise the price of those cars sold in the US (because — and you’re a businessman and should realize this — the company won’t eat the costs out of the goodness of their shareholder’s pockets). If you do that, you’ll sell fewer of those cars in the US marketplace. When you are talking economy entry-level cars, that’s a big deal. It might not matter on a Cadillac Escalade, but for a Toyota Corolla or Ford Fiesta, you’ll make the car overpriced for the features. Who will pay for this? Not the manufacturer: in the car business, the manufacturer sells the car to the dealers (which is when they make their money). The dealer sells the car to the public, so it is main street — your local car dealers — that will be hurt. Eventually, they will order less cars of that variety, and the manufacturer will sell that production in other, growing, countries.
- Especially for vendors like Toyota, the profits from sales (and they make their money in sales to dealers) goes to Japan. Not taxed — which you should know as you operate foreign companies. The dealers will make less money, which will impact the local, state, and federal tax income.
- Unlike real estate, car manufacturing is a global business. This means that what you consider “manufacturing” is often no more than the final assembly and possibly painting. The parts themselves are manufactured all over the world; in fact, a car assembled in Mexico could be assembled from predominately US-manufactured parts, transported to Mexico by US companies purchasing US gasoline. So how does manufacturing in Mexico cost US jobs?
- Further, as you pull manufacturing from Mexico, what happens to the jobs in Mexico? You probably don’t think about that, with your focus on US-first. But as those jobs — good paying jobs, from the Mexican point of view — go away, unemployment increases in Mexico. What happens when there is lots of Mexican unemployment? Let’s put it this way: Why are you building your wall? That’s right: taking jobs from Mexico effectively forces people in Mexico to want to come to the US (often illegally) for work.
In short, your simplistic analysis of the situation, built upon jingoism and your limited expertise in real estate (which is always manufactured locally of primarily locally sourced materials) leads to overly simplistic answers of increasingly complex situations.
Mr. Trump: This isn’t 1917. We live in an era with a globally intertwined economy. “Domestic” companies sell globally; “Foreign” companies sell domestically. Manufacturing occurs across an increasingly diverse and global supply chain, and assembly is different than manufacturing. Manufacturing jobs are increasingly lost not to foreign workers, but to technical advances in automated manufacturing — machines may cost more initially, but don’t require breaks, sick leave, vacation, or medical benefits. Machines also take fewer people (higher paid, requiring degrees) to support them. This means different approaches on corporate taxation — both on income and investment. As for free trade: often the problem with deals like NAFTA and the TPP is not the free trade aspects, but in all the side trade-based negotiations that are essentially earmarks for special interests. Free trade itself is beneficial: it permits domestic corporations to sell to a growing global market without the competition-hurting tariffs, and permits foreign corporations to attempt to sell in the US (and their sales-critters are domestic employees, paying taxes on their markups, on income that might not otherwise have occurred).
In short: economics today can’t be done in 140 characters. Government by Twitter is overly simplistic, and a sign of a grownup that just doesn’t understand. That may have worked for you in your real estate, casino, and other business ventures that can go bankrupt and stiff suppliers, but the Nation cannot go bankrupt.