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Carrier International: the beginning of the unraveling of globalization?

Trade & Globalization 
PostDecember 15, 2016
By Jean-Francois Boittin
Dec. 1st may well be remembered in the history books of the 22nd century as the beginning of the end of globalization. This is the day when the President-elect paraded his “victory” over the management of Carrier International, a unit of United Technologies that had announced the move of 2,000 some jobs to Mexico.
December 1st, 2016, may well be remembered in the history books of the 22nd century as the beginning of the end of globalization, the freer movement of goods and capital promoted by the United States over 70 years that has generated economic growth and prosperity across most of the globe. This is the day when the President-elect paraded his “victory” over the management of Carrier International, a unit of United Technologies that had announced the move of 2,000 some jobs to Mexico.

The President-elect is not known for his support of free trade –on the contrary– , but until now commentators were left to try to decipher his thoughts: would he really go after Mexico and China, renegotiate NAFTA, or were those declarations mere campaign rhetoric that the “pragmatic businessman” would conveniently forget as soon as he came into the Oval Office.

Carrier International is thus the first business case study of Trump versus globalization, where analysts can ponder facts, not words. It does not bode well for the future.

The facts, for those non-American readers who might have missed part of the story: Carrier International management announced in February that they were moving 2,100 jobs to Mexico, where labor costs are substantially lower than in Indiana, and the quality of the work force excellent. A video of the announcement, captured on a smart phone, went viral and became an integral part of the presidential campaign. Candidate Trump promised to retaliate with a tariff of 35% on Carrier products made in Mexico if the company persisted with its plan.

Fast forward to the last week of November, when negotiations between the incoming administration and United Technologies took place and altered the initial plan: about 800 jobs will be kept in Indiana, and anywhere between 1,000 and 1,300 still be shipped to Mexico (one can only guess about the support towards the next administration that the losers in the deal will be willing to extend). In exchange for that change of mind, Carrier will get $7 million in tax rebates over ten years. It is widely believed that, on top of the threat of facing 35% tariffs on their shipments from Mexico to the US, United Technologies, the parent company of Carrier, “understood” that their contracts with the US government, to the tune of $5 billion a year –10% of company sales– could be at risk.

What conclusions should be drawn from this particular case, which has since been presented as a paradigm by the ever-tweeting President-elect? Number one: treaties are mere pieces of paper, which can be shredded at will, as the German chancellor Theobald von Bethmann-Hollweg famously said in August 1914 about the neutrality of Belgium. Interestingly enough, the same could be said about the separation of powers enshrined in the Constitution of the United States.

About the international commitments of the US: under NAFTA, Carrier products –air conditioners– enter the US duty free. No safeguard action is possible without the consent of “the party against whose good the action is taken.” The US could withdraw from NAFTA, but, under the terms of the agreement, must give a six months written notice to the other parties. Were the US to withdraw from NAFTA, it could apply its MFN tariff rate to products from Mexico, a mere 2.2% at most, depending on the definition of the product, unless the US withdraws from the WTO, and applies to every country the column 2 tariffs that are currently used only towards Cuba and North Korea. It used to be that an American’s word was its bond, no more under President Trump.

Interestingly enough, although it is obviously not pertinent to foreigners, the threat of a 35% tariff is also in contravention to the US constitution, whose article I, section 8, confers upon Congress the power to “regulate commerce with foreign nations.” Even though the President has, as a result of a series of statutes voted over the years, as well analyzed by Gary Hufbauer at the Peterson Institute for International Economics, extensive powers to raise tariffs, it stretches the imagination that President Trump would invoke the Trading With the Enemy Act of 1917, unless of course he declares war on Mexico, or the International Emergency Economic Powers act of 1977 Act, to impose tariffs on air conditioners, not an essential product for the security of the country, since, according to the future chief of staff of the President-elect, global warming is “a bunch of bunk.” Both statutes actually seem to prevent the raising of tariffs on individual products.

On top of the fact that US commitments also seem to have become “a bunch of bunk”, the Carrier precedent raises a couple of interesting questions for countries that would be foolish enough to enter into negotiations with a government which does not live by its word. The first one is: how to deal with US companies? USTR negotiators have labored long and hard, in the TPP, to elaborate disciplines for Sovereign Owned Entities, SOEs, with the obvious intent of trying to define rules for Chinese companies controlled, in whole or in part, by Beijing. When a US company’s management decision is censured by the State, and when it gets subsidies in exchange for being a “good boy”, doesn’t it also become an SOE, or, at the very least, an EDWUIS, i.e. an Entity Doing Business While Under the Influence of the State, to be disciplined accordingly?

More broadly, should foreign countries still consider that the “rule of law” is being applied in the US, or, more to the point, the new entity known as AUT (America under Trump)? Wikipedia’s definition of the rule of law states: “the rule of law is the legal principle that law should govern a nation, as opposed to being governed by arbitrary decisions of individual government officials.” Looks pretty clear cut. Buyers beware: why would a third country negotiate an agreement with an administration which does not honor its commitments?

Two concluding remarks. No doubt that the Carrier precedent will give arguments to governments all over the world who are only eager to second guess and twist arms of companies’ executives: “Interventionists of the world, unite. You have nothing to lose but the chains of the international order”.  

For years, French Presidents and Prime Ministers, left and right, true to Colbert’s tradition, have tried, at times, to weigh on companies’ decisions to lay off workers or delocalize, until, in 1999, faced with the announcement by the tire company Michelin that it would lay off thousands of workers, although it was profitable at the time, and under pressure from many quarters to intervene, the French Socialist Prime Minister, Lionel Jospin, said sternly: “The state is not all powerful.” A word of French Socialist wisdom to the incoming “capo de tutti i capi”, so prompt to use the word “consequences”, that, one has to assume, he may have learned from his mobster friends in Atlantic City.

Reference:

Carrier “International” Gets Trumped: Global Ramifications, The Globalist, Jean-Francois Boittin, December 8, 2016

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