Why Was Carrier Considering Moving to Mexico in the First Place?
Trump won't be able to make "deals" with every company that seeks to relocate because of onerous federal regulations. Here's why Carrier nearly left.
Donald Trump stepped on stage at the Carrier plant in Indianapolis on December 1 and took credit for keeping 1,000 jobs in the state.
That's the part of the story that everyone knows. In the days that followed Trump's announcement, the airwaves and WiFi signals of America were crammed with explanations, criticisms, and defenses of Trump's "Carrier Deal." Depending on your perspective, it was either solid proof that Trump would be the protectionist deal-maker he promised to be during the campaign, or a short-sighted example of crony capitalism that looked good on television but foreshadowed a presidency where executive power would be wielded against private business in a disturbing way. (Here at Reason, we were, and remain, firmly in the second camp.)
In all the hubbub surrounding The Carrier Deal, though, there was one question that went unasked. Why did Carrier want to move those jobs out of Indiana in the first place?
There's probably not a single, definitive answer, of course. Any business decision as significant as the relocation of a major production facility is the result of many factors. Still, one factor stood out when the Carrier executives met with Mike Pence, then the governor of Indiana, in March of last year. After the meeting, Pence told an Indianapolis TV station that Carrier CEO Robert McDonough said decision to relocate had nothing to do with the business climate in Indiana, but that they were frustrated with the "rising red tape" in Washington D.C.
Around the same time, Jim Schellinger, president of the Indiana Economic Development Corporation, wrote a letter to Sen. Joseph Donnelly, D-Indiana, claiming that "extensive federal regulations were the leading factor of the decision to relocate 2,100 manufacturing jobs" to Mexico, according to The Washington Post.
This is the story behind the Carrier story. Federal regulations, and lots of them, helped push the company towards Mexico. Those same regulations could push other companies to do the same—the "deal" that saved those 1,000 jobs in Indianapolis did nothing to make life easier for other, similar businesses.
"People don't realize how much that affects not just manufacturers but consumers as well," Francis Dietz, a vice president for the Air Conditioning, Heating, and Refrigeration Institute, a trade group, said in a phone interview last week. Trump's deal with Carrier should put more of a spotlight on those regulations, he argued, calling them "something that usually flies under the radar."
Dietz said the U.S. Department of Energy has approved 52 new regulations since 2009 that affect the manufacturing of heating and air conditioning products. A list he provided to Reason includes rules for everything from industrial-sized boilers and rooftop A/C units to ice machines and pool water heaters.
It's unlikely that any single one of those regulations would have forced Carrier's hand, or would do the same for another company. In the aggregate, though, they drive up costs and limit what manufacturers can offer to consumers.
"It's not like these regulations are creating new classes of products, they're just forcing people to buy a certain efficiency level," Dietz said. "That's not to say that people wouldn't get around to doing that on their own, but our members want their customers to have a wide range of choices with a wide range of price points."
Most of the DOE rules approved during the Obama administration apply to any heating or cooling equipment purchased or sold in the United States. That means that moving production to Mexico would not relieve a company from having to comply with these regulations, assuming they wanted to continue selling their products in the United States.
Still, facing higher regulatory costs can force businesses to find other ways to save money, including looking for cheaper labor overseas.
The federal government is aware of the potential costs of these regulations, but that doesn't seem to have stopped the list from growing. Small businesses—ones that don't have the clout to negotiate special deals like the one that saved Carrier's Indiana plant—seem to have been particularly hard hit by some recent rules.
"It is possible that the small manufacturers will choose to leave the industry or choose to be purchased by or merged with larger market players," wrote the Department of Energy in an analysis of new regulations issued in January 2016 for air conditioners and furnaces.
In set of rules for residential heaters issued in March 2015, the DOE noted that regulations would cost small businesses an estimated 18 percent of their revenue while larger companies would take a 3 percent hit.
A September 2015 rule-making from the DOE setting new standards for vertical air conditioning units estimated that 65 percent of existing products would not meet the new standards. While larger companies would be able to adjust to the changes, regulators noted, smaller manufacturers would "need to redesign it entire product offering or leave the market."
Air conditioning and heating manufacturers have lost one-third of its workforce since 2001, according to AHRI. Those losses aren't all due to federal regulations, the group says, but regulations played a significant role.
Trump's deal with Carrier—the details of which are still a bit hazy—included $7 million in taxpayer-funded incentives from the state of Indiana and a vague promise of regulatory reform at the federal level. There's already some doubt whether the government intervention will really save those 1,000 jobs, as Trump promised last month.
In a broader sense, this is a foolish way to run an economy. The United States gained more than 178,000 jobs in November (December's numbers aren't available yet). In a country of 300 million people, jobs will come and go by the thousands on any given day. A president can't play whack-a-mole with every company that seeks a better situation somewhere else.
What Trump could do, and what he's promised to do, is fix the underlying conditions that caused Carrier to look to Mexico.
"There's no reason for them to leave anymore because your taxes are going to be at the very, very low end, and your unnecessary regulations are going to be gone," Trump promised in Indianapolis to roaring applause.
A special deal stopped one company from moving and earned the president-elect cheers from thousands of workers. Millions more could benefit from a broader, less cronyist approach from the White House.