Foxconn aims to break the bank

July 22, 2017
mm

Foxconn aims to break the bank

Foxconn aims to break the bank

While the head of the illegitimate Trump regime makes multiple headlines telling the New York Times that he is above the law, we have to remember that there are plenty of other issues of concern to the middle class. One of the most striking is the latest huge bidding war for a gigantic Foxconn manufacturing plant (h/t David Haynes), slated to employ a massive 10,000 workers.

The linked article interviews an American consultant based in Beijing, Einar Tangen, who says that Foxconn’s standard procedure is to get as much incentives out of state and local governments as possible; indeed, he says, “You can expect Foxconn to get as close to zero cost as they can. They can do it because they bring so many jobs.” Yes — and no.

Yes, 10,000 jobs is a lot of jobs for a single U.S. investment project. But Foxconn has strong motivations to invest in the United States, most importantly the fear of protectionist trade policies that will keep their iPhones and other electronics out of the country. This mirrors the mid-1980s, when exactly the same fear spurred most Japanese automakers to build at least one assembly plant in the United States. If the company has to have a presence in the U.S. market, especially as competitors were doing during the 1980s, the firm does not actually have that strong a bargaining position vis-à-vis the United States.

The problem, just as in the 1980s, is that as long as individual states do not coordinate their bidding (as happens in the European Union), the dynamic of bidding wars will induce them to offer outrageously high location subsidies, sometimes even in excess of 100% of the cost of the investment. Individual states do not take into effect what happens in other states when they do their cost-benefit analyses of economic development projects. The fact that the new investment will directly or indirectly destroy jobs at competing facilities is of no concern to policymakers in, say, Wisconsin, who will not adjust their cost-per-job estimates to reflect this dynamic.

While the United States has a strong bargaining position, individual states bidding against each other do not have a strong bargaining position. Foxconn believes it *has* to come to the United States, but it does not have to locate its new manufacturing plant in Wisconsin. Nor does it have to put it in Michigan, another state apparently in the hunt for this factory. But we can see that there will be a bidding war with at least two states pursuing the facility, and it will drive up the cost of location subsidies spectacularly. Perhaps we’ll see a new all-time record.

Oddly enough, even the states have a factor increasing their bargaining power, a low unemployment rate. In May 2017, Wisconsin’s unemployment was down to 3.1%, while Michigan’s was 4.2%. For Michigan, this represents a decline of 10.7 percentage points(14.9% to 4.2%) since the peak in July 2009. All other things equal, both states should be less desperate to get these jobs than they would have been in 2009.

Call me cynical, but I’ll believe it when I see it for the states to refrain from a bidding war.

(Why?)

Category: Taxes/regulation

Article Categories:
General Economics Blogs

Leave a Comment

Your email address will not be published. Required fields are marked *

Close