Friday, December 2, 2016

Details of the Trump-Carrier deal

Donald Trump’s first big coup as president-elect came this week with the announcement of a deal to save 1,000 jobs in Indiana. A Carrier gas furnace plant, along with a United Technologies Electronic Controls plant owned by the same company, had been slated to move to Mexico. The moves, which would cost more than 2,000 jobs, had been a frequent target of Mr. Trump’s during the campaign.

During the presidential campaign, Trump frequently criticized companies who moved from the United States to other countries. Many of the companies that leave the US do so to flee the US corporate tax rate, which is the highest in the free world. Trump had threatened to punish corporations that moved to other countries with a 35 percent tariff on goods that they imported back to the US.

According to the Indy Star, taxes weren’t the only factor in the move to Mexico. The 1,400 Carrier employees are unionized and make as much as $26 per hour. They can earn $70,000 annually with overtime. Mexican workers would earn $3 per hour. The Indiana employees would have been laid off in three waves starting in 2017. Fortune reports that the company would save $65 million annually from the move.

Early news about the deal, which would keep Carrier in Indiana, but not the other United Technologies plant, was sketchy. The number of jobs staying in Indiana has been described as “close to 1,000” and “more than 1,000” at various times according to ABC News. Fox News reported that “the deal spares about 800 union workers,” citing a federal official who had been briefed by the company.

Unverified reports on the deal in Fortune say that Indiana will retain “800 manufacturing jobs at the Indiana plant that had been slated to move to Mexico, as well as another 300 engineering and headquarters jobs.” The report says that “some 1,300 jobs will still go to Mexico, which includes 600 Carrier employees, plus 700 workers from UTEC Controls,” the other Indiana plant. Affected workers will be offered employment and relocation in UTC’s aerospace division or provided funding for reeducation.

“The incentives offered by the state were an important consideration,” a statement by Carrier said, but exactly what Carrier got in return is uncertain at this point. There is widespread speculation that the deal involves favorable tax treatment by the state and local governments. Mike Pence, the vice president-elect, is currently the governor of Indiana and would have had great influence over any deal between the State of Indiana and Carrier. The Fortune source reports that Carrier received roughly $700,000 annually in state tax incentives for an unknown number of years in exchange for staying in Indiana.

United Technologies Corporation, the parent company of the two plants, had reimbursed the state and local governments for tax abatements and grants in advance of the move. According to ABC News, the company repaid $380,000 to the Indiana Economic Development Corporation and $1.2 million in tax abatements to the city of Indianapolis.

Carrier also cited the changing presidential administration as a reason for its decision. “Today’s announcement is possible because the incoming Trump-Pence administration has emphasized to us its commitment to support the business community and create an improved, more competitive U.S. business climate,” the statement said. This may refer to Republican promises to reform the federal tax structure and lower the corporate tax rate.

While Carrier’s non-move may generate goodwill with the Trump Administration and help preserve the company brand, an even larger factor might be the federal funds that directly affect the company’s bottom line. The Indy Star notes that “United Technologies receives about $5.6 billion a year in federal money, constituting about 10 percent of its overall revenue.” Much of this money comes from federal contracts through Pratt and Whitney, a jet engine manufacturer that supplies engines for the new F-35 Lightning II fighter, and Sikorsky, the manufacturer of the military UH-60 Blackhawk helicopter. As parent to both companies, United Technologies is one of the country’s largest defense contractors.

“United Technologies is a huge company, and the Carrier deal is a very, very small part of it,” said John Mutz, a board member of the Indiana Economic Development Corporation, in Politico. “This is a much different set of circumstances if you’re talking about all of the contracting work that United Technologies does for the federal government. That’s a big deal.”

Claude Barfield of the American Enterprise Institute called the approach “crony capitalism” in Politico. “For market-based economists or analysts, this is really a version of crony capitalism, and it’s the kind of thing you really don’t want to get into or have government get into,” Barfield said. “This gets back to who … actually has the ear of the government. So you get the situation where decisions are not made in terms of their economic sense, but in terms of gaming the political system.”

While using defense contracts as leverage to keep Carrier may have worked in this instance, it does nothing to change the underlying problems that American companies face. Carrier may have won state tax breaks and preserved its federal contracts, but it still faces a high federal corporate tax, high labor costs with its unionized workforce, high turnover rates and a dense regulatory environment. It is these issues that the Trump Administration must address for prevent companies from fleeing the United States.

While the underlying problems for businesses remain, Trump’s deal with Carrier was beneficial for the president-elect. Trump used Carrier to buy time and goodwill for the incoming administration. He has also earned political capital for the deal. It will be interesting to see how he uses these assets once he takes office.

Originally published on The Resurgent

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