Why Some U.S. Companies are Fleeing to Mexico and Trump Cannot Negotiate Us Out of this Mess

In my recent 1 March post Making America Great and Donald Trump, I said

the primary reason the opening of new trade markets around the world has not led to the growth of the American economy is because the American government does not allow American businesses to be competitive.  He notes the importance of corporate tax reductions, but only after implying that bad trade negotiations caused job loses in America.  The job losses in America are due to excessive taxes, paperwork, and regulations that American businesses are hobbled with, thanks to Washington.  Business expenses are very high in America compared to many other countries in the world.  To compete, we need to be free to take full advantage of our design and innovation capabilities, while shedding governmental burdens that provide no or insufficient benefits.  We should be taking advantage of our abundance of inexpensive and reliable energy, not trying to make it more expensive as Obama has done.  We should be taking advantage of our great banking and financial companies, not smothering most of them in disabling requirements under Dodd-Frank so-called reform.  We should not be raising the cost of business with governmental dictates of minimum wages, paid leave benefits, the highest corporate and personal taxes in most of the developed nations, ObamaCare, NLRB rulings favoring forced unionization, and EPA regulations based on exaggerated claims of mercury or catastrophic man-made global warming.

The lead Opinion article in the 4 March Wall St. Journal was titled Trump on Ford and Nabisco.  Trump has been claiming that Mexico hijacked both Ford and Nabisco plants resulting in plant closings in the U.S.  Trump says this is why he "Does not mind trade wars."

The Wall St. Journal response to that is:

That's one way of looking at it.  Another way is that both companies made rational decisions to move some of their operations to Mexico because the tax and regulatory climate in the U.S. under President Obama has become increasingly hostile to business.  Before picking destructive trade fights with the world, maybe the next President could work to make America great for doing business again.

Nine production lines at the largest bakery in the world, in Chicago, are to be closed by Nabisco to build a higher technology plant in Salinas, Mexico.  Nabisco will save $46 million a year with the new plant.  Nabisco gave the labor union at the Chicago plant the opportunity to match that annual savings.  The labor union brought in a Bernie Sanders campaign official to help them.  Operating a business in Chicago is especially tough.  Illinois has unusually high corporate taxes and property taxes, not to mention very high worker's compensation expenses.  Underfunded city employee pensions are forcing taxes upward rapidly.

Nabisco is hardly alone in abandoning Chicago or Illinois.  In 2015, Illinois bucked the increase in manufacturing jobs in other nearby states by losing 56 jobs a working day.  Meanwhile, Michigan gained 74 manufacturing jobs a working day, Ohio gained 58, Indiana gained 20, and Wisconsin gained 18 manufacturing jobs a day.  The unfriendly business climate in Illinois has dire consequences.

Both Ford and General Motors are doubling their production in Mexico by 2018.  Ford is building two engine and transmission plants in Mexico and will manufacture small cars and hybrids required to meet the federally imposed fuel standard fleet requirements on all Ford vehicles manufactured.  These required small cars are money losers, so it is particularly hard to manufacture them in the U.S.

The United Auto Workers Union has won an agreement that will raise the hourly cost of wages and benefits for its members to $60, from the already very high cost of $57/hour cost for Ford and a $55/hour cost for GM.  In comparison, foreign-owned automakers in the U.S. have labor costs of about $50/hour.

In addition to lower labor costs, Mexico has free-trade agreements with 45 countries, while the U.S. has free-trade agreements with only 20 countries.  Trump clearly wants to reduce our free-trade agreements, hurting the U.S. still further in this competitive advantage.  He will drive still more plants to Mexico following his trade-war policies.

The Wall St. Journal says the way to make the U.S. economy great is to

• lower corporate and marginal tax rates
• reform pensions and entitlements
• institute right-to-work laws
• repeal ObamaCare

This sounds rather similar to what I was saying in my 1 March post.  It is not the case that we are losing jobs because China and Mexico are better negotiators and Trump can just make better deals with them.  Our problems are mostly self-made and owe to our penchant for big government that acts as a parasite sucking the life out of businesses.