Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Thursday, August 10, 2017

Why subsidize protectionism motivated foreign investors?

The already infamous case of Foxconn in Wisconsin illustrates a dynamic we are likely to witness more before we are rid of the illegitimate Trump regime. One of the regime's hallmarks has been a set of unpredictable trade policies with a definite protectionist tilt. The United States was withdrawn from the Trans Pacific Partnership agreement on January 23. On May 19, the regime officially announced it would renegotiate the North American Free Trade Agreement (NAFTA).

If you're a company dependent on exports to the United States, these are worrisome developments. Given that the country had $2.7 trillion in imports and an overall trade deficit of $502.3 billion in 2016, there are quite a few companies dependent on exporting to the United States. Therefore, the environment is threatening for them at present.

The classic response, as I wrote before, is to protect access to the U.S. market by making your product in the United States. This is what foreign automakers did in the 1980s, in the face of so-called "voluntary export restraints" on Japanese cars. Being committed to a particular site means that a company's bargaining power with the host government is sharply reduced. However, thanks to U.S. federalism, all is not lost for a company that really needs to locate in the United States.

Since each state has access to large revenues and budgets, and because the U.S. Constitution has not been interpreted to mean that location incentives violate the Commerce Clause (read: Cuno v. Daimler-Chrysler), state and local governments are able to reward companies for doing something they would have done anyway: Come to the United States. Even in the Foxconn case, where the firm obviously wanted to be in House Speaker Paul Ryan's district, it created the illusion that it might go elsewhere, which was all it had to do to get Wisconsin to cough up an obscene $3+ billion subsidy. (We won't know how much in total until we find out the cost for local tax increment financing.)

How can this happen? Probably the two biggest reasons are that the company is mobile, especially when it hasn't committed any money yet, and that there is a tremendous information asymmetry working against governments. Lots more information is available on governments and their officials than is available about a company and its true preferences. Even when a corporation is strongly telegraphing its preferred site, you never can be 100% sure that site will be the winner, or that it will be the winner even if it gives no investment incentives. Corporations make up competing sites even when there aren't any (a site location consultant tells me he always recommends that; see Competing for Capital). They exploit their information advantage well. As a result, governments give them investment attraction subsidies and the average taxpayer pays for it.

How do we know that Foxconn is coming to the United States because it is worried about protectionism? Because it made no economic sense for Foxconn to build here otherwise. There are good reasons Foxconn makes all iPhones in China: land, labor, and just about everything else are way less expensive than in the United States, *and* provincial and municipal governments will give them generous location incentives to favor one over the other. You can't beat that with a stick. But you can beat it if market access is in question.

As long as U.S. protectionism remains ascendant, a growing number of foreign companies will follow Foxconn and hedge their bets to guarantee access to the U.S. market. Due to fiscal federalism, however, the potential advantages from foreign investment (which may not be that great, depending on job losses at existing competitors' facilities) will be diluted or even overwhelmed by the amount of subsidies the newcomers receive. State and local governments need to resist temptation -- to be more precise, we need to find a way politically to make them resist temptation.

H/t to Greg LeRoy for suggesting this article.

Cross-posted at Angry Bear.

No comments:

Post a Comment