Can A Manufacturing Revival Be Fueled By Tax Reform And Robots?

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Alan Daley Writer, American Consumer Institute
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Most consumers like meaningful, well-paying jobs and lower tax rates.  Those end results are typical of what our political candidates promise, but those results are not the automatic result of an election victory.  They depend on implementing the right policies.  In the recent election, one piece of a tax proposal for businesses was a “border adjustment tax” or BAT.  Just this morning, President-elect Trump tweeted that GM will be hit with BAT taxes, unless they manufacture the Chevy Cruze in the U.S., instead of Mexico, as proposed.

The BAT proposal surfaced at the same time as a major announcement by Foxconn, Apple’s primary iPhone maker.  Put together, these ideas could reinvigorate the U.S. manufacturing sector.  Under a border adjustment tax, “companies would no longer be able to deduct the cost of their imported goods, and the sales of their exports would no longer be subject to U.S. tax. That means American companies could reduce the prices for products they sell abroad.”  That results is much friendlier to the U.S. than adopting tariffs, which act only to increase the price of imports.

Under a BAT, “Initially, imported goods would be more expensive, and exported U.S. goods would be less expensive,” but “those price changes would be fully offset by a quick rise in the value of the U.S. dollar,” and “Americans would pay higher prices for things they buy, but their money would go further because the dollar would be stronger.”  The devil is in the specific price points and percentages, but so far there is bipartisan interest in BAT.

Meanwhile, Foxconn announced that competitive pressures force it to replace its iPhone factory workforce almost entirely with Foxbots, i.e. robots.  Foxconn will need to keep some specialty employees for “production, logistics, testing, and inspection processes,” but the production redesign will displace almost a million Chinese workers.  Perhaps as apology, Foxconn announced it will build a new flat display factory in China.  Foxconn’s retention of specialty workers at the iPhone plant is similar to the demand for specialty factory workers in the U.S. today.

Low skill workers in the U.S. cannot compete with the dramatically lower cost of overseas workers.  Twenty percent of U.S. factory workers lost their jobs during the big recession and to date have been unable to find a replacement job.

Foxconn’s plan is relevant to U.S. workers because it was Foxconn’s low labor prices that won fabrication contracts instead of U.S. firms.  Now, competitors like Vietnam, Bangladesh, Madagascar, Pakistan, and Sri Lanka offer labor at prices even cheaper than China, but the effective hourly price of robots allows Foxconn to compete with those lowest prices.  Robots can operate around the clock, achieving higher productivity than three shifts of human workers.

If Foxbots can compete successfully against the lowest price labor, then U.S. fabricators can use the same strategy and achieve almost the same productivity.  We can buy robots at the same price as can Foxconn or other Asia electronics manufacturers.  Aside from labor, other production costs are about the same here and in Asia.  For many consumer goods, U.S. firms also have an advantage in U.S. distribution logistics.

BAT’s exemption from tax on exports might create a slim advantage in export prices that will help U.S. employment and economy grow.  A BAT component in any tax proposal is promising and worth studying.

Alan Daley writes for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.  For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.