Protectionism and Labor By: Gabriel PotterMBA, AIFA® 2017.01.04

For the next few weeks, all of the market commentators will be trying to read the tea-leaves to see what sort of impact Trump’s fast and loose style will have on global commerce.  Within the space of a few hours yesterday morning, we got some insights. 

To explain:  Donald Trump tweeted out a threat to General Motors about their car manufacturing practices.  Some GM cars, including in this case, the Chevy Cruze, are made in Mexico where labor is less expensive and imported into the US.  Trump, condemning the practice wrote, “Make [cars] in the USA or pay a big border tax!”  We understand that Trump wants more US manufacturing to boost US payrolls, so Trump is threatening to make imports more expensive to compensate for cheaper foreign labor costs.  Thus, if Trump gets his way, GM products are going to get more expensive either as a passed through protectionist tax or higher labor costs built into the car.

So far these threats seem to be working for Trump.  Only a few hours after Trump’s threat, Ford announced it was cancelling plans for a $1.6 billion manufacturing plant in Mexico. The timing is probably coincidental for Ford’s announcement.  Ford’s decision must have been considered for weeks and today’s release is probably not just a direct reaction to Trump’s threats from yesterday morning.  However, in a broader sense, the environment and policy directions of the new administration are probably a huge factor in Ford’s decision to forgo the Mexico plant.

There’s another way this can go, and it’s a little disconcerting that it hasn’t penetrated American consciousness.  Sure.  In the short term, manufacturing capacity can be forced into the US with punitive tax measures.  Trump will take a victory lap because money is now being invested in Ford’s Michigan plant instead of Mexico, but the net result is still a decrease in total manufacturing and global commerce.   The US will lose competitive advantages as we embrace protectionist tendencies, but we might slow job losses temporarily.  However, US laborers are not just competing with workers in China and Mexico.  Wages are increasing in developing world salaries as their standard of living improves and their economies become more sophisticated.  The bigger threat, both to US laborers and the treadmill process of converting a frontier market into a sophisticated economy is automation replacing low-skill jobs.  Increased automation and smarter robotics are a much greater threat than cheap foreign workers.  Trump hasn’t proffered as many solutions for dealing with this complicated and mounting pressure on US workers and international stability.  Perhaps a rejuvenated anti-technology movement will become a key component of the new populist GOP. 

 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

More about Gabriel Potter
Sign up for our Newsletter
Sign up for our Newsletter