Can Protectionism Save Auto Jobs in the US?
Did Ford make the right decision moving production from the US to China?
As part of his campaign, President Trump vowed to prevent US manufacturing jobs from moving to Mexico, America’s neighbor country with lower labor costs. Last December, after industrial manufacturer Rexnord Corp. announced a new investment in Mexico, President Trump tweeted, “Rexnord of Indiana is moving to Mexico and rather viciously firing all of its 300 workers. This is happening all over our country. No more!” – an example of President Trump’s attempt to shame companies into keeping jobs in the US. This tactic did not prove completely unsuccessful: last December, Carrier, a subsidiary of United Technologies, agreed to keep more than 1,000 jobs in Indiana after negotiations with state officials.
However, it is worth asking how successful President Trump’s pressure to keep jobs domestically has been exactly. Tecma Group, a consulting firm that guides companies through offshoring in Mexico, “has [in 2017] more business than ever in its three decades doing relocation.” Notably, the auto manufacturer Ford, after scraping plans to build a new plant in Mexico, decided to nonetheless offshore production of its US-marketed, small-car Focus line from the US to China. What explains this?
Mainly, human capital costs and talent appear to be behind this move. Ford’s Focus line, and “small vehicles in developed markets in general,” are challenging segments of Ford’s business facing pressure to control costs. The move to China then “reflects the harsh reality that most carmakers lose money on small cars” and that there is a never-ending incentive to reduce costs in this segment of the business. Ford CEO James Hackett himself stresses in one of this year’s earnings calls that the decision to produce the Ford Focus in China “meets the preservation of capital and it’s going to deliver significant savings.” Even after accounting for transportation costs from China to the US, making small cars in China appears to be the most cost-effective solution.
Given President Trump’s rhetoric against offshoring, did Ford make the right decision moving production to China instead of keeping it in the US? After all, Trump has threatened US carmakers such as General Motors with establishing a “big border tax” if they move production abroad.
Ford’s production move to China is a risky move, since the US government can decide to indeed impose tariffs at any time on cars produced abroad. Though the prospect of retaliation from World Trade Organization member countries might dissuade the US from hastily pursuing this option, the current US administration can nevertheless decide to impose such a tariff simply to send a strong message.
That said, Ford’s actions, though risky, are smart. Ford is not moving production to China just because of the lower labor costs there. Ford is moving production to China because it can also access talent that can work with robots and can help advance the company’s automation initiatives. Ford is keeping the production of its “larger, more profitable,” and likely more technologically complex, vehicles in the US. This is likely due to the highly-skilled talent needed for these types of vehicles. On the other hand, Ford moved the production of smaller, and likely less complex, cars to China not only because Ford can access cheap labor in China for the construction of such cars but also because it can access cheap but sufficiently skilled labor for the improvement of the automation technologies the company has implemented in the Asian country. After all, an effective strategy in an environment where protectionism is increasingly popular and pressure to control costs is high is to pursue the reduction of labor costs through automation. Ford has realized this, and it is using China as its automation innovation test center before it can implement such technologies in the US.
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 “Everything President Trump has tweeted (and what it was about).” Los Angeles Times, 7 May 2017, http://www.latimes.com/politics/la-pol-updates-everything-president-why-did-trump-just-tweet-about-1494200206-htmlstory.html. Accessed 15 Nov. 2017.
 Goldstein, Steve. “Opinion: Ford’s Mexico shift shows Trump’s bully pulpit has some value.” MarketWatch, 3 Jan. 2017, https://www.marketwatch.com/story/fords-mexico-shift-shows-trumps-bully-pulpit-has-some-value-2017-01-03. Accessed 15 Nov. 2017.
 “Here’s How Much Indiana Is Paying to Keep 1,000 Carrier Jobs.” Fortune, 2 Dec. 2016, http://fortune.com/2016/12/02/indiana-carrier-jobs-tax-breaks-mexico/. Accessed 15 Nov. 2017.
 Black, Thomas. “Even a NAFTA Collapse Won’t Keep Companies From Moving to Mexico.” Businessweek, 24 Oct. 2017, https://www.bloomberg.com/news/articles/2017-10-24/mexico-s-2-50-an-hour-wages-lure-jobs-south-amid-nafta-talks. Accessed 15 Nov. 2017.
 Vlasic, Bill. “Ford Chooses China, Not Mexico, to Build Its New Focus.” The New York Times, 20 Jun. 2017, https://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html. Accessed 15 Nov. 2017.
 Ford Motor Company. “2016 Annual Report.” http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/annual-report/2016-annual-report.pdf. Accessed 15 Nov. 2017.
 Kiley, David. “Forget Mexico: Ford Moving Focus Production From U.S. To China, With Eye On Profitability.” Forbes, 20 Jun. 2017, https://www.forbes.com/sites/davidkiley5/2017/06/20/ford-will-move-focus-production-from-michigan-to-china/#6ad54b794ef5. Accessed 15 Nov. 2017.
 Ford Motor Company. “Q2 2017 Earnings Call.” http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/events-and-presentations/2017/07-26-2017-Q2/Q2-2017-Earning-Final-Transcript.pdf. Accessed 15 Nov. 2017.
 Vlasic, Bill and Boudette, Neal. “Even Before He Takes Office, Trump Knocks Automakers on Their Heels.” The New York Times, 3 Jan. 2017, https://www.nytimes.com/2017/01/03/business/ford-general-motors-trump.html. Accessed 15 Nov. 2017.
Student comments on Can Protectionism Save Auto Jobs in the US?
The article’s title suggests that trade and auto workers’ jobs are related. Of course, as the Ford decision illustrates, in some instances they are. However, it might be worth noting that premise of the discussion (especially in regards to the U.S. administration’s new policies/threats) is up for debate: the plight of American auto workers may have much less to do with free trade than is popularly believed. Robert Lawerence, an economist at the Harvard Kennedy School, convincingly argues that manufacturing job loss over time has mostly been the result of (1) increased productivity (i.e., technology change displacing the need for certain labor), and (2) a relative shift in U.S. consumer demand away from goods and towards services. Analyses show that trade (e.g., the decisions of companies like Ford) account for a small fraction of labor displacement (see: https://sites.hks.harvard.edu/fs/rlawrence/ShatteringMyths.pdf). This is all to say: if we’re interested in helping the American auto worker, our parochial focus on trade — and spotlighting companies like Rexnord and Ford, as the President has a habit of doing — may be a distraction from the real reasons behind their displacement.
“China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.” 
I think a key point here is that China’s value as a producer is no longer just cheaper costs, but it’s ability to bring innovation into the supply chain. China’s workforce has strengthened its knowledge capital through years of foreign investment across many industries – like automobiles – that require high-tech operations and innovation. But, can China sustain its position as an innovation hub? And will their costs stay low enough to make economical sense to move factories there vs. other emerging countries (e.g., SE Asian countries like Malaysia)?
There are question marks around China’s growth potential. In the past years it has failed to meet expectations around GDP, output, and investment growth .
 Roth, Erik, et al. “Gauging the Strength of Chinese Innovation,” McKinsey Global Institute, October 2015, accessed November 2017, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/gauging-the-strength-of-chinese-innovation.
 “China’s Economic Growth Dials Back,” Bloomberg Markets, August 13, 2017, accessed November 2017, https://www.bloomberg.com/news/articles/2017-08-14/china-s-economy-slips-some-as-factory-output-investment-slow.
Great writeup. I believe that Ford still did make the right decision moving the manufacturing to China. In China, where there is now more expertise in similar manufacturing operations, Ford will likely be able to find efficiencies at a quicker rate to offset losses from border tariffs.
While I initially thought that it was conceivable to start selling some of their cars in China as well, it seems that consumer demand for vehicles is down  . Given that, it perhaps was a riskier move than anticipated.
I really enjoyed this write up! In addition to the political risks you included, I’m curious to know more about the technology transfer concerns. Specifically, I think it’s important to understand how Ford is monitoring risks around Chinese manufacturers leveraging Ford’s patents and technology innovations. Even though Ford executives say they have “no concerns relative to the amount of I.P. that has to be shared,” I’m not sure what they are doing to prevent possible transfers . As stated in the write up, most of the outsourcing is for less complex cars, which may be the solution. Nevertheless, the more simple models are still property of Ford and therefore an important compoment of their business. Because Ford will likely continue this outsourcing given the talented labor and low cost of labor, it will be important for the company to properly monitor the work on an ongoing basis.
 Keith Bradsher, “China’s Electric Car Push Lures Global Auto Giants, Despite Risks,” The New York Times, September 10, 2017, https://www.nytimes.com/2017/09/10/business/china-electric-cars.html, accessed November 26, 2017.
I agree with what you have mentioned about automation becoming the driving factor in companies choosing low cost production centers. With that said, if automation does become the new normal- it might make sense to build factories closer to your markets.
Currently, alot of isolationist policies are directed towards providing local industry with a competitive edge. However with increase in globalization, it is inevitable that production centers will eventually run to the lowest cost country- and that would not be dictated by labor, but by automation. As automation begin to replace manual labor, the question of labor costs will begin to become obsolete . However, if automation does become the new normal, then I would even go further to argue that the next factor that will play a big role will be logistic costs. Hence, I would also argue that production in the next few years will move closer towards the market it is servicing in order to reduce logistic costs. Maybe, it might not be a bad idea after all to build that factory in the U.S.
I agree that outsourcing the production is always a good way to reduce cost. But if that is the only purpose, then I will argue that outsourcing to countries other than China could be even better. My experience in several multinational companies in China taught me that the production cost in China nowadays is not cheap already. A lot of the multinational companies are now facing bottom line pressure in China because the cost is increasing year by year.
But the benefit for outsourcing in China, from my perspective, is bringing cost saving by being close to the market. China is a big market for Ford. By producing cars in China and selling them to Chinese market directly, a lot of transportation cost can be saved and Ford can also be more responsive to the market demand.
I also strongly agree with Grant. The manufacturing job loss is fundamentally not because of the threat from others countries, but because of the economic trend of US as well as the world. Similarly, China is also facing the problem of manufacturing job loss because of the economic restructure. So the solution to the job loss is to train people and make them more skillful in new kinds of jobs.
Great write-up, which raises very interesting questions for US manufacturing in general. As Clare mentioned, many companies today don’t simply want to move their production abroad to save cost, they have to because of the flexibility and industrial skills in countries such as China. This reminds me of Apple, which recently asked its key manufacturing partners to assess whether relocating iPhone production from Asia to the United States was feasible and concluded that it would be extremely costly and inefficient to do so.
Awesome write up. I do believe that Ford made the right decision in moving production to China and in essence, calling President Trump’s bluff. One thing that wasn’t mentioned was that if Ford’s costs increase it will be reflected in their price which is then cost passed on to the U.S. consumer. This is lies in the essence of capitalism, find the most efficient way to do business to win over consumers. If Ford kept manufacturing for smaller cars in the U.S. they would have higher costs and would have to have a higher retail price. This would also be the case if Trump implied a tariff on them for producing in China. As such a large and critical company, I believe that Ford knows that the government won’t do anything to increase their costs because millions of Americans will get effected by higher prices.
Your point about accessing sufficiently skilled labor in China in additional to the labor costs is an important piece. Manufacturing executives in the U.S. are quick to point out that in many instances there are not enough American workers with the requisite skill-set to fill the jobs that are currently available. President Trump invited a number of manufacturing executives to the white house in February (2017). While Trump focuses on tax, trade and regulatory reform to bring jobs back to the U.S., these execs overwhelmingly highlighted the lack of advanced skills as the bigger issue . Protectionism will do very little to save auto (or any manufacturing) jobs if the country is not making the necessary investments to ensure its workforce has the skills required to work in an increasingly automated world.
I think it’s appropriate for countries to establish a modest border tax when importing goods from other countries to protect their own workers’ rights and their own production. However, the tax has to be modest, say 5-10%. If you prevent all jobs from moving to areas of the world where labor is cheaper by creating very high import taxes, then costs for all products will rise dramatically and the end-consumer is ultimately punished. I think there should be more discussion and debate on what an appropriate ceiling is for import taxes. Once that number is established, companies can easily decide whether it is in their and consumers’ economic interests to keep jobs and factories in the US or to move them abroad where labor is cheaper. This article does a good job outlining the benefits of moving a factory overseas and clearly questions President Trump’s effectiveness of keeping jobs in the US. I think it’s interesting that Ford chose to keep the more highly-skilled jobs in the US.
I think that we are missing the key drivers in the auto industry by focusing on globalization. It doesn’t matter where you manufacturer it, autonomous will be a much greater concern. Also, trump has had limited success in keeping jobs in the U.S.  Additionally, the current tax proposal make us less competitive overall rather than more.
I agree with your perspective that Ford made the right decision given the current business environment in the US vs. China. I also question the ability that President Trump can effectively pass a “big border tax” which he has threatened automakers with. He would have to get lawmakers in Congress to draft and pass a legislation supporting this plan, which they have not done to date . Even if Congress drafted such a bill, big business lobbies would speak out strongly against it and use their influence with representatives to thwart this plan.
In response to the title of the article, I don’t believe that protectionism will improve the livelihoods of auto workers and other lower-skilled workers at scale. President Trump’s taunts have only resulted in one-off efforts of compliance so far, and will continue to have limited effectiveness unless he’s able to transform the current economic environment that entails higher productivity/labor costs and a shift in demand away from goods to services. His time would be better spent on incentivizing companies to reinvest in the communities that they are in or have abandoned, and investing in better preparing talent in the US for workforce demands of the future. The displacement created by automation will continue, and its impact will dwarf any benefits that protectionist trade policy might have.
It’s interesting to compare the auto industry, where cost and technical expertise concerns may continue to drive production out of the US, to the apparel industry where production is beginning to move back to the US in some instances. This reversion to domestic production in apparel is a result of the pursuit of ever shorter product development timelines (fast fashion) and mass customization in smaller batch runs. Today, it is difficult to imagine a world where consumer demands for automobiles more closely reflects those seen in apparel in thus necessitate that production moves closer to the consumer. Still – if auto production does shift – sustainably – back to the US, it won’t be because of protectionist policies, but rather due to business needs.
I think the response of manufacturers to Trump’s policies and rhetoric is pretty fascinating. Still, I wonder if we sometimes overplay the importance of Trump in decisions on where to build a plant. Manufacturing plants like this obviously involve costs and revenue that span a significant period of time, and I think (though perhaps this is my personal bias) that the likelihood of the US staying as protectionist or more than today is pretty low. Thus, while it might seem that these policies have massive implications for these decisions, I would tend toward the idea that automation and macro-economic changes are more important to companies than their read on the likelihood of any of Trump’s policies actually materializing.
I believe Ford made absolutely the right call in outsourcing its production – given that it is cheaper – and must disagree with the author when he/she states that this move was a risky one. The article states two main concerns about moving production away from the US: public shaming by the POTUS and a potential future big border tax. The first I don’t consider significantly impactful to Ford’s image, much less bottom line, and the second I find highly unlikely given how increasingly difficult it is for Trump to move his policies through Congress . For me the real question is why did Ford switch from Mexico to China?
 Trump’s Republicans have a tough Hill to Climb https://www.ft.com/content/0951d58a-096c-11e7-97d1-5e720a26771b
I think these types of debates are always a question of not whether we want to keep jobs in the US, but what types of jobs do we want to keep in the US. The move to manufacture in China, if it creates a healthier business for Ford overall, puts them in a better position to grow and expand and perhaps create additional jobs in the US. In my opinion, globalization will continue in the long-term despite any efforts to stop it, so I think its important for companies and governments to see how jobs can evolve in the US, how we can train and educate our workforce rather than fight to save traditional ones.
This is a great article. As you’ve pointed out, China is a more cost effective manufacturing location and Ford is able to leverage technical expertise in China which is not available in the USA. From a production point of view, this absolutely makes sense. Furthermore, Ford’s sales outside of North America are less than 65%% of its total sales. Import tariffs would hurt its business in the USA but it’s a cost the company will incur through inefficient and less value-adding process if it choose to manufacture in the USA anyway. Furthermore, as emerging markets continue to grow and Ford continues to pursue higher global growth, it’s important for it to position itself best to take advantage of this growth, especially with the backdrop of an increasingly competitive global environment. In what has been widely criticized as a US political crisis (which hopefully is a short term issue), and with the pursuit of more cost-effective production and increased innovation to compete better in the global market, moving manufacturing to China makes sense. I think Ford made the right decision.
I do not necessarily agree that Ford’s migration of its Focus production to China was a risky move. In my assessment, I think the net benefit in tapping into the country’s technological talent and cheap skilled labor far outweighs any political backlash received in the U.S. The relocation better positions Ford to remain competitive in an industry that is becoming increasingly innovative and that requires a certain human capital profile to spur it along. As Grant mentioned, the American automotive industry has become less competitive over time due to increased technological productivity and a shift away from manufacturing. However, protectionism, which proved effective for Trump in Carrier’s case, can only be an ephemeral prescription to a more insidious problem in the American economy. The government’s focus should instead be on retraining workers who have lost their jobs to obsolescence for the jobs of the future: renewable energy, autonomous vehicles, cutting-edge biotechnology, software engineering, food sustainability and the like. Latching on to the past only delays the inevitable…
The idea of piloting “automation innovation” in China before deploying it in markets like the U.S. is interesting but also a bit confusing. Would it not be more efficient and cost effective from a knowledge transfer standpoint to pilot those capabilities in the markets in which they are intended to be used? I think of Toyota’s production system and the difficulty the company had in replicating its process in the U.S. While it’s U.S. and Japan facilities were set up identically, there were significant challenges in implementing that model due to the cultural differences between countries. We have seen in many cases across all of our classes that communication is at the heart of many organizational issues – why would Ford be able to do this better than Toyota, or any other company for that matter? I would argue that the company should avoid this production innovation strategy and focus on building those domestic capabilities upfront.