Is It Really Possible To Deter Companies From Shipping U.S. Jobs To Other Countries?

Let’s Review A Few Of The Schemes

By David Grace (www.DavidGraceAuthor.com)

A major part of Donald Trump’s campaign pitch was that he would keep American companies from shipping U.S. jobs abroad.

In previous posts I’ve complained about the U.S. government allowing U.S. jobs to be moved abroad without imposing a financial penalty on the companies who choose to do so.

I would still like to see that happen, but now I’m having second thoughts that it is reasonably practical to make that happen. The more I think about the mechanics of it the more I wonder if it can actually be done.

Let’s look at some of the schemes to see if they could actually work.

A Special Tariff On U.S.-Made Products Whose Production Is Shipped Abroad

Trump supposedly told Ford that if it shipped car production to Mexico that he would not let them import any of those Mexican-built cars back into the United States without paying a per-vehicle tax.

That sounds great, but for the following reasons I don’t see how it can be made to work.

A Special Law For Each Item

You would need a special law imposing a new tariff for each such product. As a practical matter Congress can’t pass a special, specific Customs Act taxing the importation of each of hundreds or thousands of different products.

Maybe you could make a general law that gives the President or the Secretary of Commerce the administrative power to designate which products are going to be qualify for the tariff but how much will each tariff be, but how would it be calculated across hundreds of different products?

How do you identify these products? How are you going to learn about them? How can you tie the closed factory here to a similar product being made elsewhere?

But let’s assume you can somehow create a database of these “special tax” products.

Identifying The Products At The Border

Ignoring the bureaucratic problems of even generating the lists of those products, how do the customs agents flag them?

Will Ford give the U.S. the serial numbers of the “replacement” cars it’s now producing in Mexico?

Even if the U.S. got a list of the serial numbers, is Customs going to hand-check hundreds of thousands of serial numbers against every one of the millions of cars imported into the U.S. every year? That’s physically impossible at current Customs staffing levels.

What if you have hundreds of such barred products? Or thousands? In a practical sense, how can you you find and tax them?

Replacing The Offending Products With Ones Produced Elsewhere

Even if that could all be made to work, all Ford would have do is send the cars from the Mexican plan to Asia and send replacement cars from Ford’s China plant here.

Products That Are Components Inside Other Products

And even if all of that worked, it doesn’t even begin to deal with products that are components of other products.

Suppose Ford wanted to send an engine production line to Mexico. How are you going to trace those Mexico-produced engines after they’ve been installed in vehicles built in Australia or wherever?

Make Closing A U.S. Factory Then Opening A Foreign Factory Taxable?

What about levying a big tax penalty on a company that closes its factory here and sends the jobs to a new factory in a foreign country?

A manufacturer could get around that by just closing the factory here and buying the parts it once made from an “independent” manufacturer located in China.

Or, it could sell that entire division to a foreign company, let them build the product in their existing factories abroad, and then buy the finished or semi-finished goods from them.

And how would you track all this? How would you prove that the products previously made by the factory that closed here were now being made by a factory you opened there? How much would it cost to enforce such a law? How would you calculate the penalties if you did identify such a move?

Require Continued Salary Payments To Fired Workers?

How about requiring the employer to pay the salaries of the displaced employees for some number of months or years after the plant closes?

What if my business is suffering and I want to simply close down some of my production units? Is every business that lays off any employees going to have to continue to pay those former employees’ salaries for months or years? That won’t work.

OK, you say, this rule would only apply to businesses that move jobs to foreign countries.

Again, the company could just close the factory here and then buy the parts it used to make here from a third party in China that it has contracted with as a new supplier or to whom it has licensed its intellectual property.

Connecting the closed facility here with the new vender abroad isn’t a trivial matter and then you’d have to prove the connection in court in order to enforce the payment.

And that doesn’t really fix the problem because it’s a one-time payment. If the company figures it can save $50M per year in wage costs it might be willing to pay a one-time $50M tax.

Your Payroll Here Has To Equal Your U.S. Share Of World-Wide Sales

What if we adopted the principle that if you sell here you must hire here, that your payroll here needs to mirror your gross sales here.

Suppose a company (Big Corp) has world-wide sales of $1B which are comprised of $600M sold in the U.S. and $400M sold outside the U.S.

Further assume that Big Corp’s world-wide labor costs exclusive of highly-compensated executives are $250M composed of $150M for its U.S. workers and $100M for its foreign workers.

OK, 60% of Big Corp’s sales are in the U.S. and 60% of its payroll is in the U.S. Great. The percentage of U.S. payroll matches the percentage of U.S. sales.

One day Big Corp takes a close look at its labor costs. Here’s what it sees:

The average burden cost of labor for the 1,000 people in its Indiana factory is $34/hour. The burden cost for foreign workers to perform those same jobs in Mexico would be $6/hour. That’s a saving of $28/hour X 8 hours/day X 5 days/week X 52 weeks/year X 1,000 employees or a savings of about $58.25M per year by moving production to Mexico.

Here’s how the numbers would look after Big Corp made the move:

Savings = $34/hour X 8 hours/day X 5 days/week X 52 weeks/year X 1,000 employees = $70.75M reduction in U.S. labor payments or a reduction of the U.S. payroll of $150M — $70.75M = $79.25M new U.S. payroll.

New foreign labor costs = $6/hour X 8 hours/day X 5 days/week X 52 weeks/year X 1,000 employees = $12.5M increase in non-U.S. labor payroll or $100M + $12.5M = $112.5M new non-U.S. payroll.

$79.25M new U.S. payroll + $112.5M new non-U.S. payroll = $191.75 new world-wide payroll.

$79.25M U.S. Labor/$191.75M world-wide labor = 41.33%

Now Big Corp is still making 60% of its gross sales in the U.S. but it’s only paying 41.33% of its world-wide wages in the U.S. when under this principle it should be paying $191.75M world-wide wages X 60% U.S. sales = $115M.

Keeping the same percentage of wages as sales of Big Corp’s products in the United States, U.S. wages should be $115M but instead Big Corp is only paying U.S. wages of $79.25M.

If the principle is that a company’s percentage of U.S. wages should equal the company’s percentage of domestic sales then Big Corp is now short $115M — $79.25M = $35.75M.

Put another way, if Big Corp is making 60% of its money from sales in the U.S. and if it should therefore be spending 60% of its labor budget in the U.S., it should have a U.S. payroll of $115M instead of only $79.25M. Under that logic it’s U.S. payroll is $35.75M short.

The government might levy a tax on Big Corp equal to the $35.75M payroll shortfall.

But remember that Big Corp calculated that it would save $58.25M/year by sending those 1,000 jobs to Mexico, so even after paying the tax it would still make more money by sending the jobs to Mexico.

The penalty would only cut Big Corp’s savings from $58.25M to $58.25M — $35.75M or $22.9M so that even after paying the tax Big Corp would still make about $23M more each year in profit by closing the U.S. factory.

In other words, the tax still might not be enough to discourage Big Corp from closing its U.S. facility.

Also, such a policy could easily spur retaliatory legislation from other countries against U.S. companies that build their products in the United States but sell them in foreign countries.

How many jobs would Intel and IBM and Facebook and Google have to move to dozens of other countries around the world in order to avoid similar taxes imposed by other countries?

Using Tariffs To Equalize Labor Costs

OK, how about this scheme: you calculate the hourly burden cost of labor in the producing country and the hourly burden cost of labor in the U.S. for the same kind of work.

You subtract the two and multiply the difference times the number of hours of labor that would be required to make that same product in the U.S. That result is the tariff you would levy on that foreign product in order to equalize labor costs between the foreign workers and U.S. workers.

For example, if it takes about 25 hours labor to assemble a mid-level vehicle in the U.S. and if the burden cost of labor in Mexico is $6/hour and $34/hour in the U.S. or a difference of $28/hour then multiplying that wage difference by 25 hours = $700 tariff on each car made in Mexico and imported into the U.S.

Negatives To This Scheme

  • What if other countries retaliated by enacting similar laws? Then the U.S. might have tariffs applied to American-made goods.
  • Also, the calculation of these numbers would not only be exceptionally complicated, it would also be a moving target, changing not just year-by-year but quarter-by-quarter.
  • The litigation these rules would generate would be massive.

Every manufacturer would want to file suit against the U.S. saying, “No, my hourly labor cost isn’t $X it’s $Y. No, the U.S. labor cost for similar work isn’t $A it’s $B. No, I only use C hours of labor per unit, not D hours of labor.”

And by the time the suit got to court years later, all the numbers would have changed four or five times each. How would you go back and calculate the tariffs for each year during all the years that the suit was pending?

This scheme would be complicated, inexact, volatile and subject to retaliation by other countries.

Summary

In obvious situations like Carrier, Nabisco, and Ford, we can identify specific factories, production lines, and products that are being moved out of the U.S. In those clear cases we could probably collect one-time fees, fines, penalties or payments for each job lost as either a disincentive or to fund retraining or unemployment payments, but it wouldn’t take too long for the clear-cut cases to disappear.

Pretty quickly the lawyers would be brought in and the companies would find ways to blur the connection between the plant that was closed here and new hiring elsewhere, for example, switching from in-house manufacturing here to external vender sourcing abroad.

Once that happens it would become much more difficult to exact a financial penalty.

As much as I would like us to be able to create a realistic disincentive to move good jobs abroad I’m more and more skeptical that a system can be devised that will withstand the machinations of hundreds or thousands of corporate lawyers and years of litigation.

What other tactics or solutions have I missed?

Is there a practical way to make moving the jobs so expensive that the U.S. manufacturers are financially forced to keep these jobs here?

–David Grace (www.DavidGraceAuthor.com)

To see a searchable list of all David Grace’s columns in chronological order, CLICK HERE

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