Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico. I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.

But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.

The revolutions in communications and ability, better education levels, work-force skills, transportation systems, etc — so there are alternatives for investment that didn’t exist 20 years ago. All of that is a good news.

To some extent, foreign and U.S. investment is being chased from U.S. shores because of a relatively declining environment.

But a second reason reflects poorly on the United States. To some extent, foreign and U.S. investment is being chased from U.S. shores because of a relatively declining environment. In recent years, the regulatory environment has become more restrictive; corporate tax rates in the United States are higher than most other countries (certainly, highest among OECD countries); there has been a prolonged period of regime uncertainty with respect to trade, energy, immigration, and other policies.

Perceptions of the existence of corruption and crony capitalism are on the rise. And companies are often berated and threatened by policymakers (including presidential candidates) for their choices — to perform some of their operations abroad or to keep their profits off-shore, rather than repatriating them at near confiscatory rates, to give a few examples.

In The Spotlight

Many companies worry about these threats. Sometimes they react by making “political considerations” a more important determinant of their investment/production location decision. Carrier may have done this, worrying about repercussions. Certainly, a strong case can be made that General Electric’s decision to bring jobs back from Mexico and China a few years ago, after President Obama made a pitch to U.S. companies to “resource” in the United States, had something to do with expectations of political dividends.

One major takeaway is that political considerations become more important as the size of government increases. Instead of investing in economic activity in the Rust Belt or the Heartland, companies are incented to invest on K Street because the political investments pay higher returns. This is among the greatest threats that worry limited government advocates.

But the main point here is that companies have choices and their decisions to locate in Indiana or Mexico, for example, are influenced by policy. Carrier is a big consumer of steel sheet and other steel products in its manufacturing operation. Perhaps the fact that there are numerous and increasing trade restrictions on imported steel has something to do with their original decision to move to Mexico.

Instead of threatening companies with repercussion for outsourcing – hell, they can pick up and leave altogether — or inducing them to stay with tax holidays and other subsidies, U.S. policy in the Trump administration and beyond should be to make sure the United States ticks the most important boxes when companies compare it to other investment location alternatives.

This article appeared at CATO at Liberty.

Daniel Ikenson
About The Author Daniel Ikenson [Full Bio]
Dan Ikenson is an author, speaker and Director of The Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, focusing on WTO disputes, regional trade agreements, U.S.-China trade issues, steel and textile trade policies, and antidumping reform.

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