Fortune: Here’s What Trump Doesn’t Get About American Manufacturing
Published on January 14, 2017
If the Roman emperors ruled by edict, President-elect Donald Trump appears poised to rule by tweet. Even before taking office, Trump has discovered he can move the world’s largest global corporations with simple, 140-character tweets. And though his aggressive approach is winning politically, good politics doesn’t necessarily mean good economics.
Voters see Trump fulfilling his campaign promises to close America’s borders and bring jobs back home. He is using the bully pulpit to stand up for workers by taking on the most powerful American companies, including Ford (F, -0.24%), General Motors (GM, -0.88%), Toyota (TM, -0.03%), Boeing (BA, +0.20%), Lockheed Martin (LMT, +0.89%), and United Technologies (UTX, -0.61%)/Carrier.
Thus far, no CEOs have had the courage to stand up to Trump. General Motors CEO Mary Barra has said the company’s small-car production will remain in Mexico, but it could only be a matter of time before she’s forced to change course. Trump’s sudden tweets likely worry many CEOs who fear they may be his next target. Right now, most have just tried to stay out of his way. Some, like SoftBank’s Masayoshi Son and Fiat’s Sergio Marchionne, have put forth peace offerings to invest more in the U.S.
Most striking was Ford’s recent decision to reverse plans to build a $1.6 billion plant in Mexico to produce small cars. Then Trump rattled Japan’s leading automobile producer, Toyota, and its CEO, Akio Toyoda, by threatening to slap a “big border tax”—which he has referred to as 35%—on any automobiles the company assembled in Mexico and imported into the U.S.
Shortly thereafter, Marchionne committed to invest $1 billion in two existing U.S. plants and create 2,000 new jobs—investments that were already part of Chrysler’s plans. He said it is “quite possible” his company will abandon Mexican production altogether if Trump’s tariffs are too high.
Trump didn’t stop with the automakers. He jawboned Carrier into keeping jobs in the United States, threatened Boeing for the cost of Air Force One and Lockheed on its F-35 aircraft, and pharmaceutical companies on their high drug prices.
There is no doubt that Trump is winning the political game and shaking up America’s largest companies. But there is real danger that his pressure may corrode the competitiveness of U.S.-based global companies and cause retaliation by foreign governments.
One of America’s greatest strengths is having global companies that dominate their markets around the world through innovation, quality, and marketing. That’s why American companies lead a wide range of industries, from information technology, e-commerce, and social media to finance, pharmaceuticals, medical technology, consumer products, automobiles, farm equipment, and aircraft. They do so profitably with global supply chains that enable them to design and produce products to achieve optimal costs and deliver the greatest value to their customers around the globe. In many countries, they are required to produce a portion of their products locally.
The global strategies of our corporations have enabled them to compete effectively with Chinese, Japanese, German, and Korean manufacturers—all vigorous competitors striving to win share in global markets. At the same time, they have been profitable enough to reinvest substantial portions of their profits in research, innovation, and product development. When they do so, they stay ahead of their global competitors and increase their market shares. This positive cycle allows them to justify large capital investments in their facilities and provide substantial returns for their shareholders, as share prices for these global companies are at all-time highs.
Trump has learned how to reach the American people directly through his tweets, thus bypassing mainstream media. With his threats of large tariffs on imported goods, he has succeeded in forcing these giants to make uneconomic decisions—such as Carrier paying $25 per hour to its workers in Indiana to do work that can be done by Mexican employees for $2.50 per hour. However, in the long run, this will be a losing strategy for American workers if it forces Carrier to sell its air conditioners on the world market at non-competitive prices, or replace its production workers with robots, as Tesla (TSLA, +2.72%) has done in producing its electric cars. In either case, Carrier will be forced to reduce its Indiana workforce, with its workers ultimately becoming the losers.
The same logic applies to Ford, General Motors, Chrysler, and Toyota. Toyota has created 136,000 American jobs through direct employment, and has invested $21 billion in the U.S. What appear now to be significant “wins” for Trump may turn into pyrrhic victories, as America loses its competitive edge and hiring declines instead of increasing.
Trump has also repeatedly threatened to levy large tariffs on imports from Mexico and China. If he is serious about doing so, he will quickly learn that other countries can also play this game, and are quite willing to do so. This could trigger a trade war that will disadvantage American companies and their employees. Decades of progress in opening up foreign markets to American-made goods could quickly vanish.
Behind all of the threats and CEO responses lies a much deeper issue: the vital need for America to upgrade its workforce so that American employees can compete for jobs of the future. While there are 7.5 million unemployed Americans as of December 31, 2016, the irony is that there are 5.5 million jobs unfilled, many due to a lack of skilled workers. This situation will get worse in the years ahead as jobs become more complex and require more education and training. Filling these jobs with qualified Americans is essential for the competitiveness of U.S. companies.
Rather than jawboning companies to make uneconomic decisions, Trump and Congress should instead work with major employers to train and educate workers. Americans might even find a real strategy that emphasizes preparing for the jobs of the future vs. trying to save the jobs of the past.
If Trump’s tweets turn into an industrial policy, this may signal that the U.S. is headed into an era of “crony capitalism,” similar to the systems of France and Russia. In contrast, American business has been built on free market principles of market-based competition, free trade, meritocracy, and diversity. For five decades, the U.S. government has worked to ensure U.S. companies are free to sell their goods around the world on a level playing field with local competitors.
Now it appears the focus may shift to negotiation with the U.S. government over jobs, factory sites, and a host of other issues. If this becomes the prevailing norm, global companies will be reluctant to create new jobs and invest in new factories for fear of being locked into unprofitable decisions. This is a primary reason why France’s current unemployment rate of 9.5% is more than double the U.S.’s relatively modest 4.7% rate.
Let’s hope the bark of Trump’s Twitter (TWTR, -0.20%) account is worse than its bite. If Trump and his new team are wise, they will use his rising popularity to create transformative policy that fosters real growth for the next generation by making America truly competitive in world markets.
Bill George is senior fellow at Harvard Business School, former chair and CEO of Medtronic, and author of Discover Your True North.
This article was originally published on 1/14/2017 on fortune.com.