November 8, 2017 The Multinationals’ Supply Chain Hypocrisy

Now that the Trump administration is seeking to raise some U.S. barriers to foster domestic production the multinationals are complaining.

It’s widely contended in coverage and commentary about President Trump’s efforts to renegotiate the North American Free Trade Agreement (NAFTA), some of his administration’s key proposals could disrupt the global supply chains that multinational companies from all over the world have set up in recent decades to produce their goods at the lowest possible total cost. The same criticism has come up in connection with a provision of the (current) Trump tax reform plan that would impose a levy on the cross-border purchases of goods purchases by these companies’ domestic operations from their foreign operations (e.g., parts and components of manufactures that are turned into final products).

On the one hand, this is all understandable. If new tariffs are approved to penalize production outside the NAFTA zone, or if new tax code provisions accomplish the same tasks, networks of factories and other facilities that multinationals have spent big bucks setting up could need to move – in the process saddling the firms with yet more expenses.

On the other hand, these claims make no sense at all – at least if you’ve taken seriously the conventional wisdom about multinationals that’s prevailed since these supply chains came into being. For this notion insisted that, because of the natural evolution of the global economy, and of business, and of the interaction between the two, these companies had become free to hopscotch around the world seeking countries to host their facilities that offered the most favorable business environments. And if those environments deteriorated, the “footloose” multinationals would simply pick up stakes and move to more inviting locations.

As a result, countries at the very least needed to keep on their economic policy toes. At most, they’d need to keep improving their business environments – because countries all over the world were competing for the precious capital, jobs, growth opportunities, and knowhow that they offered. The most vivid expression of this idea was the “Golden Straitjacket” theory advanced by New York Timesuber-pundit Thomas Friedman. As he wrote, countries that ran their economies based on free-market (aka U.S.-style) rules and practices (roughly his definition of the Straitjacket) would be rewarded with abundant investment that would fuel their economic development and raise their living standards. Those that ignored these rules would be shunned.

Indeed, Friedman even colorfully called the sources of this capital “the electronic herd” – an image that connotes both high levels of mobility generally, and a strong inclination to move to greener pastures whenever they beckoned. (In fairness, this electronic herd, strictly speaking, referred to high flying financiers who commanded vast amounts of “hot money” – highly liquid capital that could be sent across borders with the click of a mouse. But for his Straitjacket theory to achieve its promised benefits, businesses in the less mobile real economy would need to adopt much the same model, too, and indeed pursue the opportunities created by the Herd, however fleeting they might be.)

And since Friedman is one of the world’s primo thought leaders, and since his influence largely depends on his access to what the captains of finance and industry think (or want us to think), you can be sure that the Golden Straitjacket analysis – and all its implications for trade policy and economic globalization writ large – was one that was adopted and actively propagated by the world’s political and business establishment.

But the outcries prompted by the Trump NAFTA and tax reform proposals point unmistakably to conclusions that hardly flatter the Straitjacket theory, either in its actual or publicly conveyed forms. The one that I believe conforms most closely to how the global economy actually works? As I’ve been documenting since my book The Race to the Bottom came out in 2000, contra Friedman – and the bipartisan globalist American leaders who drank and sold this kool-aid – governments all over the world, big and small, have long been attracting investment with a wide array of interventionist policies that combine mixtures of trade barriers sticks and subsidy carrots. That is, the Golden Straitjacket theory in all its forms was self-serving corporate garbage – a particularly cynical version of “Heads, I win. Tails, you lose.”

Of course, economies that attracted investment needed to be relatively well governed (at least for the multinationals’ purposes) and politically stable. But as long as the main effect of these national investment conditions was consistent with corporate cost-cutting, and resulting greater profits, the multinationals didn’t publicly protest being jerked around. Indeed, they complied with foreign governments’ dictates pretty meekly.

The only difference, then, that could be made by the Trump NAFTA and Republican tax proposals? The multinationals face being jerked around in ways that will likely narrow their profits. And since they naturally view that as anathema, they’re suddenly claiming that they can’t easily hopscotch across national boundaries very quickly after all.

That’s not to say that the companies are wrong in noting that supply chains will be shaken up if the Trump NAFTA and Republican tax proposals become policy. But remember – the multinationals have for decades been highly successful at moving these chains out of countries like the United States. Surely they’ll manage to move them back if need be just as successfully. And those that can’t meet this challenge? Anyone truly believing in capitalism and its virtues will be confident that others will emerge to fill the vacuum and service a near $20 trillion American market (in pre-inflation terms). Unless those “creative destruction” and entrepreneurship things are just fakeonomics, too?

ALAN TONELSON
Alan Tonelson is Founder of the blog RealityChek – www.alantonelson.wordpress.com – which covers a wide range of domestic and international policy issues along with political and social trends.

For 18 years before leaving to launch RealityChek, Tonelson followed the impact of globalization on the U.S. economy, domestic manufacturing, and U.S. national security for the U.S. Business and Industry Council. This national business organization represents nearly 2,000 domestic American companies, most of them small and medium-sized manufacturers.

Alan Tonelson is a regular columnist with Industry Today.

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