The car company keeps production in the U.S., but in return for what?
By Review & Outlook
The Wall Street Journal
November 21, 2016
Ford Motor Co. announced late last week that it won’t shift production of its Lincoln MKC to Mexico from Louisville, Kentucky, as planned. This is good news if Ford believes that Donald Trump will make the U.S. more competitive but a bad precedent if it is bending to the President-elect’s political wishes.
The U.S. auto maker had intended to move production of its MKC, a luxury crossover SUV, to Mexico to increase output of the higher-volume Escape at its Louisville plant, which is operating at full capacity. While this cross-border migration would not have jeopardized American jobs (which are protected by the United Auto Workers labor agreement), keeping the MKC in Kentucky could lead to more domestic investment.
In a statement, Ford said that “we are encouraged that President-elect Trump and the new Congress will pursue policies that will improve U.S. competitiveness.” CFO Bob Shanks noted on a conference call that Mr. Trump’s promises to cut taxes and increase public-works spending could “provide an environment where it makes economic sense to build back up manufacturing jobs here.”
This seems to have displeased many progressives who have spent the last eight years denying that the Obama Administration’s tax and regulatory policies have depressed investment. Ford’s decision is also a counterpoint to Mr. Trump’s claim that the U.S. needs to renegotiate trade deals and impose protective tariffs to bring back manufacturing jobs.
Make the U.S. more competitive and more businesses will come—or stay. According to the Tax Foundation, the U.S. marginal effective tax rate on capital investment (35.3%) is the highest in the industrial world and twice as high as in Mexico (17.4%) and Canada (18.6%). The effective rate for U.S. manufacturers is much higher than for, say, real estate.
Mr. Trump has proposed cutting the corporate tax rate to 15% from 35% and allowing U.S. companies to repatriate income already earned abroad at a 10% rate. His plan would also allow manufacturers to fully expense their capital investment. While the details have to be negotiated with Congress, corporate tax reform has broad support among Republicans as well as some Democrats including Senate Minority Leader Chuck Schumer, who has indicated a willingness to cut a deal in return for more domestic spending.
According to the Washington Post, Ford officials also said privately that they believe Mr. Trump would ease fuel-economy standards imposed by President Obama in 2012. This would be more good economic news.
The onerous mileage rules, which require an average fleet efficiency of nearly 50 miles per gallon by 2025, are up for review next year. Ford has been shifting production of its low-margin small cars that are needed to comply with fuel-economy rules to Mexico where labor costs are lower. Scaling back the regulations would improve Ford’s profit margins and allow it to invest more in making more profitable trucks and SUVs in the U.S.
Replacing the Affordable Care Act would also be a boon. Ford’s health-care costs have been rising fast in part due to ObamaCare’s benefit mandates. The United Auto Workers last year estimated that health-care costs per union worker will increase 63% by 2019. The law’s 40% tax on expensive “Cadillac” plans will also take effect in 2018. Escalating health-care costs impinge on business investment and make American workers less competitive.
A major caveat here is that Ford has been the most protectionist U.S. car company and vigorously opposes the Trans-Pacific Partnership, which would reduce the 25% tariff on Japanese trucks. Ford has also been hurt by the stronger U.S. dollar and urged sanctions on Japan for manipulating its currency, though the yen was overvalued for many years.
During his campaign, Mr. Trump accused Japan of “monetary manipulation” and suggested he might impose tariffs on imports. The U.S. doesn’t need politicians dictating where companies can invest, and it would be bad news if Ford’s announcement is one half of an implicit bargain in return for an expectation that Mr. Trump will increase tariffs on imported cars.
Ford’s MKC reversal shows how pursuing pro-growth policies will encourage business investment, but only if it doesn’t herald a new era of politicized investment.
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