Trump trade: Not as easy as it looks

Donald Trump has promised to stop the loss of U.S. jobs due to foreign competition. But in a globalized world, saving U.S. jobs is more complex than slapping tariffs on companies that manufacture goods elsewhere.

Executives talking about the issue highlight that the shift of jobs to Mexico is far from the threat that's been commonly portrayed during the election and since.

Q. How many U.S. jobs are vulnerable to being moved to other countries?

A. It's hard to pinpoint a number but, many offshorable jobs are already gone. A decade or so ago, about 200,000 U.S. manufacturing jobs annually were shifting abroad either because American producers moved overseas to cut costs or U.S. businesses switched from domestic to cheaper foreign suppliers. But that gap has closed. Meanwhile, cross-border trade traffic with Mexico was flat in 2015 compared with 2014 levels, Robert Knight, chief financial officer at Union Pacific railroad said in June at an investor presentation. Union Pacific would know, as it's a key transporter of goods between the countries. It handles 80% of automotive trade traffic, which is one of the most important industries between Mexico and the U.S. Traffic in and out of Mexico accounts for 11% of the Union Pacific's total traffic.

The U.S. lost 2.3 million factory jobs in the recession that began in 2007 and 8 million have been lost since the late 1970s. But the U.S. has added about 800,000 factory jobs since March 2010. Boston Consulting expects more than 1 million manufacturing jobs to be added in the country by 2020, in part because of reshoring.

Q. Does sending jobs to Mexico have any benefits for the U.S. economy?

A.  There's evidence that the U.S. is actually benefiting from trade with Mexico. "There has been tremendous growth in U.S. exports into Mexico," Michael Upchurch, chief financial officer at Kansas City Southern said in November at an industry conference. Agricultural products, such as corn, pork and poultry, are being imported to Mexico from the U.S. at a widening pace, he said. Mexico also imports steel and auto parts from the U.S. so automobiles can be assembled there. "Certainly you can point to examples where plants have closed in the U.S. and potentially some jobs have shifted," Upchurch said. But "with the trade growth, there are a number of estimates that would suggest NAFTA supports roughly 14 million jobs in the U.S. And so we think, net-net, this has been a positive trade agreement for all the countries involved."

Q. But if labor is cheap elsewhere, won't companies move jobs where costs are less?

A. U.S. manufacturing costs have actually come more in line with the rest of the world. The U.S., for several years, has been closing the competitive gap with other countries as a place to make goods sold in America. Chinese wages, which have been lower than even those in Mexico, have climbed about 15% annually since the early 2000’s, says Harry Moser, head of the Reshoring Initiative. Meanwhile, U.S. manufacturing wages are up a total 14% since the recession ended in June 2009. All told, average production costs in the U.S. are only about 5% higher than in China after factoring in reduced shipping costs, says Hal Sirkin, a senior partner with the Boston Consulting Group. Fifteen years ago, the differential was about 20%, Moser says.

Also, U.S. energy is relatively inexpensive, partly as a result of the boom in drilling for natural gas, used as a feedstock for plastics and chemicals. Companies want to deliver products to store shelves more rapidly to meet to shifting customer needs. When products are manufactured closer to where they will ultimately be sold, that helps companies with their goal to get goods to consumers faster.

Q. Do U.S. workers have any advantage?

A. The pool of skilled labor where workers are able to operate technical computer-assisted production equipment in the U.S. is attractive, even to companies that shift low-skill jobs south. Becton, Dickinson is shifting some jobs to Mexico, but adding manufacturing capacity — and jobs — in new ways in the U.S. The U.S. based medical device maker announced in July it was closing a factory in Creedmoor, N.C. and in Tucker, Ga. affecting 185 jobs. Of those, 65 positions were moved to a company facility in Mexico. But 80 jobs were moved to other plants in the U.S., says company spokesman Troy Kirkpatrick. Forty jobs were eliminated in this restructuring, but the company invested $100 million in its plant in Holdrege, Neb., and another $20 million in the plant in Sandy, Utah. The bottom line? The company has more U.S. manufacturing jobs now than it did five years ago.

Q. Can companies find other ways to make goods outside of the U.S. if they want?

A.Even if Trump punishes companies with tariffs, global companies can find ways around them. Regal Beloit, a maker of electric motors, does 40% of its production in Mexico and looks for "low-cost" regions to work along with its U.S. facilities, Charles Hinrichs, chief financial officer at the company, said at a Nov. 30 industry conference. If Trump were to put a 25% tariff on goods coming in from Mexico, the company can make the same goods in India, China, Thailand or the U.S. and avoid the protectionism, he says. 

Q. Are tariffs a big enough threat to U.S. companies to leave Mexico altogether?

A. Some companies and industries, especially automotive, are so established in Mexico that a tariff won't be enough incentive to close down there, said Joseph Massaro, chief financial officer at auto parts maker Delphi in November. Delphi has 70,000 employees in Mexico. "I think the worst case will be, there may be some additional cost to doing business in Mexico from either a vehicle assembly perspective or a parts perspective," he says. "I don't think it would be a cost that would do harm to the industry."  Todd Bluedorn, CEO of heating and cooling gear maker Lennox, said in October before the election, "we've consistently said we're not done moving to Mexico, and we're not." Ford's CEO Mark Fields told the Associated Press on Dec. 9 that Trump's actions would not stop its plans to move production of the Ford Focus from Michigan to Mexico. But he also said no U.S. jobs would be lost since the Michigan plant would be used to make two new models of cars.  

Trump’s threats to slap offshoring companies with tariffs could lead companies looking at Mexican production to pause in the near-term. But Moser says, “Over the long-term, it’s not a sustainable model.”