Friday, August 21, 2015

Global Economy And The Upcoming Election

I watched "The Donald" perform in Mobile, Alabama last night. He was, well, "The Donald." Holding no punches he launched broadsides at all his favorite targets with Jeb Bush getting more than before and Hillary getting a bit less. Very engaging performance and another solid block in his campaign to be president. Perhaps the most lasting message was that as president he will be a great negotiator for the USA and through this make America great again.

However, in spite of being a businessman with worldwide interests he does not grasp the reality of the global economy. He is still on his campaign against US outsourcing of jobs, being beaten up by every trade agreement we have, being bought out by China, losing our industry to other countries and more. While this makes for good "Jingoism" it falls far short of any understanding of how the global economy functions. His demands would make sense 100 years ago, maybe 50, but they ring hollow today.

Perhaps what he tried to say can be encapsulated in his attack on the Ford Motor Company. He complains that Ford plans to build a multi-billion dollar new factory in Mexico. He said if he were president he would call in Ford and tell them that if they build a plant in Mexico he would slap a 35% tariff on all cars, parts and whatever the company brought into the USA from Mexico. Of course this violates the NAFTA Agreement so he would be in court immediately for merely threatening that action.

What Trump fails to understand is that Ford is no longer an "American" company. It is a worldwide operation that has a headquarters in the USA. But it operates on a worldwide plan that allocates location of factories according to several factors including transportation, availability and cost of skilled labor, markets, availability of suppliers, tax regimes, government supports, government regulations and more. Ford will locate its factories as it determines based on all these factors.

President Obama makes the same mistake when he talks about bringing lost manufacturing jobs back to the USA from abroad. First of all he fails to recognize that more jobs in US manufacturing have been lost to automation of industry than to sending then abroad. All one has to do to understand this is to take a tour of a modern auto factory where you see a forest of robots doing what workers used to do. Second, the jobs that were outsourced were done for sound business reasons and no company will commit industrial suicide by bringing the jobs back.

Before attacking US firms for building facilities abroad and "outsourcing" jobs perhaps Trump should answer why he builds casinos, hotels and golf courses abroad. By doing so he sends US tourist facilities abroad land thus deprives American workers of jobs. You have to have a generous dose of chutzpah to chastise another for doing what you are doing yourself.

Whatever Trump and Obama may say about American companies building facilities abroad or outsourcing jobs, it is not because American workers are more expensive. Consider the following, Toyota has seven factories in the USA, Honda five, Nissan three, Mercedes one, Volkswagen one and BMW one. In fact, BMW's factory has the largest number of employees of any auto factory in the USA. Obviously US workers are competitive with workers in other countries.

As the election heat up we will hear more about the USA and its relation to the global economy. I will continue to try to shed some light on the subject.

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