A generally overlooked but significant news item appeared in the pages of the New York Times this past June, buried in a lengthy discussion about the relationship between globalization and tariff policy in the age of Trump. It noted in passing the response by US multinational corporations to the president’s trade war with China, a response that should tell Americans everything they need to know about both the Donald’s simplistic neo-protectionist notions and the real workings of the world economy.
First, some background. The Trump macroeconomic strategy was supposedly designed with workers in mind, especially blue-collar workers, who would gain most from the latent beneficence of corporate America waiting to be tapped by the president’s leadership genius and business acumen. “We have the greatest companies anywhere in the word,” Trump enthused in summertime remarks issued from the White House. “They’re all coming back now. They’re coming back to the United States.”
Not really. In 2017-18, according to the group Reshoring Initiative, American companies responded tepidly to Trumpian haranguing and tax cuts by announcing intentions to relocate a mere 145,000 overseas jobs back to the US — a drop in the bucket compared to the estimated 2.5 million manufacturing jobs lost to Chinese import competition between 2000 and 2010 alone.
News reports also indicate that American pharmaceutical firms, which had moved production plants to countries like Ireland and Switzerland to avoid higher domestic rates of taxation (the “inversion” scam), have few plans to shift them back to the US, even after the radical Trump reduction in their corporate income taxes. Under so-called repatriation, company profits formerly held in foreign tax havens are now returning home for accounting purposes (the maneuver known as “tax shifting”), but the jobs themselves are staying put where labor is cheapest.
Which brings us back to that little-noticed news item in the the Times. The report referenced in-house polling done last May among member companies of the US Chamber of Commerce (AmCham), through its Asian affiliates AmCham Shanghai and AmCham China. The results make clear that America’s multinationals have indeed been affected by the Trump tariff war against China, but not in the way you might think — and certainly not in the way White House spokesmen have been suggesting.
The poll, which surveyed 250 American-based companies interacting economically — I won’t say trading — with the Middle Kingdom, indicated 75% of them felt the trade war was having a negative impact on their bottom lines. (Of these 250 firms, 62% were in manufacturing, 26% in services, 4% in retail and distribution, and 10% in other areas of business.)
Unsurprisingly, tariffs were the major culprit, hitting corporate manufacturing subsidiaries in China the hardest, with eight out of 10 experiencing disruptions. Other impacts flowed from increased Chinese inspections and regulatory oversight, and slower licensing and customs clearances, all of which led to higher manufacturing costs, higher retail prices in the US market, and consequent lower demand for imported company products.
In the mind of Donald Trump, the foregoing will translate directly into jobs for Americans as American companies give up offshoring their manufacturing to China and reestablish their plants in the U.S., while Chinese companies cease trying to penetrate the American market. The Donald hasn’t reckoned on one of the facts of capitalist life under globalization. The American companies he hails as the world’s greatest are not really American at all; they’re rootless multinational corporations with no fixed national loyalties and no need or desire to come home.
Adam Smith, the patron saint of laissez-faire economics, saw this reality as early as 1776. “The capital of a wholesale merchant,” he wrote in his classic treatise “The Wealth of Nations”, “seems to have no fixed or necessary residence anywhere, but may wander about from place to place, according as it can either buy cheap or sell dear.”
The corporate response to Donald Trump’s trade war with China bears out this timeless observation. Over 40% of the nominally American firms answering the AmCham poll had already moved factory production out of China, or were on the verge of doing so — but not back to the US. Rather, they were shifting operations to Southeast Asia (25%) or Mexico (11%), where costs are unaffected by a trade war and labor remains cheap. Vietnam and Malaysia are particularly favored destinations. On the other hand, fewer than 6% of polled AmCham members were even considering relocation back to their purported home country.
In truth, American firms exiting China actually predates Trump’s tariff war; it’s a function of rising Chinese wages, as Fortune’s Eamon Barrett pointed out in a June 2019 article. Minimum hourly wages in the factory venues of Guangdong province, he noted, have more than tripled since 2008. Those wages started from an admittedly low base line — shockingly low by American standards — but in a capitalist world engaged in a globalized economic race to the bottom, wages in slowly modernizing China are increasingly no longer low enough, especially with the added cost factor of the Trump tariffs.
American-based companies anxious to keep a foothold in China to benefit from its growing consumer market (second only to the US) have found still another way around Trump’s tariffs short of returning stateside. That tactic is to continue basic manufacturing operations inside China, then ship the raw components to another cheap-labor country (say, Vietnam) for modifications or final assembly, thereby earning the finished, US-bound products a new country-of-origin label and avoiding import tariffs on “Chinese” manufactures.
There’s one more reason why American multinationals want to keep their factories (and jobs) abroad besides cheap labor and immediate access to China’s vast market, and it’s the irony of ironies. Under Trump’s own tax changes enacted two years ago, US corporations not only get to repatriate their stockpiled foreign profits at a bargain-basement 15% income-tax rate, their future foreign earnings will henceforth be assessed only 10.5% (half the official domestic rate) minus an 80% credit on any taxes paid to foreign governments. Why come home?
Donald Trump continues to insist his trade war will cripple evil competitors like China and revive US manufacturing employment; it won’t. If there’s an economic enemy, it’s not any one foreign country, but unregulated transnational corporations. Only targeted import taxes on corporate America’s intra-firm trading (see “The Mythology of Trade,” 6/1/18 TPP) will slay that dragon.
Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.
From The Progressive Populist, October 15, 2019
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