Donald Trump has put carmakers on notice that they’ll be denounced on his 20-million-follower Twitter account any time they announce plans to open factories in Mexico or close them in the United States. Given the vast powers of the president, that could be a powerful disincentive for outsourcing over the next four years.
Of course, Trump’s tweets don’t eliminate the powerful economic forces that have driven so many companies to globalize their supply chains over the past couple of decades. At least not directly. But Trump’s Twitter war against outsourcing could change the political culture around trade, transforming it into a high-profile, hot-button issue like abortion or same-sex marriage. And that, in turn could give political momentum to efforts to change the trade institutions that have made globalization seem like such an irresistible force.
But that would come with high costs for the American economy. Right now, many companies have global supply chains that straddle borders. New trade restrictions could force companies to cut the US out of those supply chains, making US manufacturing less competitive in the long run.
Trump is trying to change our political culture around outsourcing
Economic nationalism is not a new force in American politics. For decades, politicians have railed against multinational companies shipping jobs overseas. But until Trump’s election, complaints about outsourcing were often made with an air of resignation. Even people who criticized companies for outsourcing jobs and shuttering American plants didn’t have a serious plan for preventing them from doing so. Globalization was treated more like a force of nature than a matter of human choice.
Of course, globalization isn’t a force of nature. The global economy has become more and more integrated because of policy decisions that world leaders made over the course of several decades — culminating in the 1990s with the signing of NAFTA and the creation of the World Trade Organization.
A major goal of these institutions was to take trade out of the realm of politics, creating a technocratic system that would function about the same regardless of who was in power in any particular country. That system has become so firmly entrenched that it’s almost invisible, which is why conventional politicians treated rising trade as a force of nature rather than a policy decision.
Trump is waging a concerted campaign to undo those changes and make trade political again. He has been on a car-related Twitter tear over the past couple of weeks. He threatened Toyota with a “big border tax” if it followed through on plans to build a factory in Mexico and blasted General Motors for selling Mexican-made cars in the United States. He then praised Ford and Fiat Chrysler for announcing investments in the United States.
Trump is not only trying to change how people think about trade — putting long-discredited protectionist policy ideas back on the table. He’s also trying to change how people feel about trade. He’s trying to foment a populist backlash not only against the trading system as a whole but also against individual companies that choose to shift production overseas.
“I don't think he's changing a lot of decisions” about the location of car factories, says auto industry analyst Edward Niedermeyer. In many cases, car companies are just letting Trump take credit for decisions they were planning to make anyway.
However, Niedermeyer argues, “He's very clearly changing the culture around these issues.” Car companies are “going to think twice about whether Mexico is ultimately going to be as attractive as the US. It’s not just a tariff. A lot of it is cultural. If the president is raising awareness about where cars are made, it's going to become a bigger issue.”
Focusing on individual companies and factories helps ordinary voters become more emotionally invested in this issue. And by keeping his attention on companies like Carrier or Ford until they give him the outcome he’s asking for, Trump is trying to establish a new social norm — that closing an American factory isn’t just regrettable, but outrageous.
Many commentators — including me — have argued that these kinds of one-off deals can’t move the needle in an economy as large as the United States. The US economy has 120 million workers, and it has shed 5 million manufacturing jobs since the turn of the century. It would take literally thousands of deals the size of the Carrier and Ford announcements to reverse those losses or significantly increase manufacturing employment in the country as a whole.
But what I didn’t appreciate was the potential for Trump’s campaign to change America’s political culture. Trump frames each of his confrontations with manufacturers as a self-contained morality play with a hero (Trump) and a villain (the company trying to outsource). Each time a manufacturing company capitulates to Trump’s pressure campaign, it reinforces a norm against outsourcing. Within a few months, this will be a script that’s familiar to every American voter.
There’s a parallel here to recent campaigns to establish a norm against discriminating against LGBTQ people. Advocates for marriage equality have conducted pressure campaigns against photographers, bakers, and others who refused to cater to same-sex weddings.
It might seem like waging these battles one bakery and pizza parlor at a time would be a hopeless battle. But of course the point of these campaigns isn’t just to get one business to change its policy. It’s to raise the profile of the issue and put other companies on notice that they’ll face a backlash from their customers if they adopt the same policy. It also helps to galvanize same-sex marriage supporters, so that if shaming and boycotts don’t work, there’s a base of support for a nondiscrimination law.
Trump is trying to create a similar dynamic in the outsourcing debate. Companies considering outsourcing will fear that they could become Trump’s next target and think twice about it. A string of Trump victories will energize Trump supporters and get them more emotionally invested in this issue.
And as more voters become more invested in the issue, companies will start to fear a grassroots backlash in addition to unwanted attention from Donald Trump. Employees within companies who oppose outsourcing will have a stronger hand.
Most important, Trump is building a base of support for policy changes if companies continue to move factories overseas despite informal pressure. If outsourcing stops being seen as sad but inevitable and starts to be seen as genuinely outrageous, then every outsourcing announcement will trigger cries to do something about the perceived problem. Few voters are going to become experts on NAFTA and the WTO, but a lot of voters could become energized to support any change that ends the outsourcing crisis.
Curtailing North American trade would hurt the US economy
If Trump manages to create a climate of fear among companies that do business across the US-Mexico border, many Trump supporters will see that as a victory. But the integrated nature of the modern economy means that this kind of policy could also have huge costs. Indeed, fear of future changes could dampen cross-border investment — and job creation, both in the US and Mexico — even if treaties like NAFTA and the WTO are never actually dismantled.
For the past 20 years, companies have been making long-term investments in Canada, the United States, and Mexico based on the assumption that the three countries will be an integrated market for the foreseeable future. A lot of companies now have global supply chains in which parts are manufactured in one country and shipped to another country for final assembly.
Trump’s team has floated the idea of a general 10 percent tariff on imports. That would be a disaster for companies whose supply chains straddle borders.
The current car manufacturing process is “like having a factory that spans the borders" from Canada to Mexico, argues Dan Ikenson, a free trade advocate at the Cato Institute. The US doesn’t just import finished cars. It imports a lot of car parts that go into American-made cars. So erecting across-the-board trade barriers could hurt the very manufacturing industries Trump says he’s trying to help.
And if America’s free trade deals face growing political uncertainty, that will make companies more reluctant to make investments that depend on these deals. Companies will be more likely to build American factories to manufacture goods for Americans — which is, of course, the whole point of Trump’s campaign. But crucially, they will also be less likely to build factories in America for goods destined for export overseas.
Indeed, Niedermeyer argues that the trend toward outsourcing car manufacturing to Mexico isn’t only driven by low wages south of the border.
“Yeah, their labor is cheaper, but what makes Mexico especially attractive with a lot of automakers is that they have agreements with the United States, Central America, and Mercosur” — a trade block that includes Brazil, Argentina, and Venezuela. Most importantly, it has a trade deal with the European Union.
Niedermeyer argues that this gives car companies more flexibility, which is important in an industry with long investment lead times and volatile demand. If the European car market is weak in a particular year, the Argentinian or Brazilian markets might be strong. And so rather than shuttering a factory that was making cars for the European market — and taking big losses — it can redirect those cars to South America.
If the US starts to close its economy, Niedermeyer warns, that could actually increase Mexico’s competitive advantage for the global car industry. Car companies could be forced to locate some factories in the United States to serve the American market. At the same time, it would become uneconomical to build cars in the United States for export overseas. The greater economies of scale made possible by a global market would give Mexico and other non-American manufacturers a big competitive advantage.
So in the short run, Trump’s agenda could create turmoil by unexpectedly raising costs for many US-based manufacturers. In the long run, then, it could cement Mexico’s status as a major car manufacturing center for the global market, while turning the US into something of a regional backwater for car manufacturing.