State, Local Officials See Pluses, Minuses of Trump's Carrier Deal--2nd Update

12/02/16 07:30 PM EST
By Scott Calvert and John W. Miller 

A day after Donald Trump helped engineer tax breaks to save 800 jobs at an Indiana plant, some local officials worried it set an unhealthy precedent, while business leaders scrambled to decide how to engage with the president-elect.

The deal involving Carrier Corp., which included $7 million in tax breaks, could intensify competition between states to hold on to jobs, and exacerbate a rush to grant tax incentives that have taken big chunks out of state budgets in some places.

"Our prime competition used to be in Central America and Southeast Asia, " said South Carolina Republican state Sen. Wes Climer. "Now, some of our fiercest competition comes from neighboring states."

Subsidies offered by states to companies have been on an upward trend for decades, apart from periodic economic downturns. An analysis by a professor at the University of Missouri-St. Louis about a decade ago found that states offered a total of $70 billion in subsidies annually.

Greg Albrecht, chief economist at the nonpartisan legislative fiscal office in Louisiana, said the Carrier deal could prompt some U.S. companies to threaten to move jobs to Mexico as a way to extract financial benefits. "I think we're creating a moral hazard issue that's bigger than we've got now," he said.

In Louisiana, which hands out about $1 billion a year in annual tax exemptions to companies that meet certain targets, a $1 billion annual budget gap looms, he said.

"At this point in time, I truly have no idea what to expect," said Tom Stanton, chief executive of telecom-gear maker Adtran Inc. "It's unclear how what was said on the campaign trail is actually going to translate into legislation," he said.

The company employs about 1,000 workers at its Huntsville, Ala., factory and mostly competes with overseas rivals. Asked about potential consequences for moving jobs offshore, Mr. Stanton said, "It's probably better to incentivize than to punish."

On Friday, Ford Motor Co. CEO Mark Fields said he would move ahead with plans to shift production of the Focus small car from a Michigan factory to a facility in Mexico, despite repeated criticism from Mr. Trump.

"We have made the decision to move the Focus out, and we're making that investment now," Mr. Fields said in an interview. "That's to make room for new products -- zero jobs affected, zero jobs impacted."

On Friday, Mr. Trump announced that he would take economic counsel from a panel of business leaders that includes CEOs from Wal-Mart Stores Inc., General Motors Co. and private-equity firm Blackstone Group LP.

With the Carrier deal, Mr. Trump showed he was willing to make good on a populist campaign promise to keep jobs from leaving the country, and he repeated plans to impose import tariffs and scrap trade deals. With the CEO panel, Mr. Trump moved to confer with some of America's top companies, many of which have vast international operations with thousands of employees overseas and are proponents of free and open markets.

"Free and fair global trade is important, and it definitely creates U.S. manufacturing jobs," Boeing Co. CEO Dennis Muilenburg said after a speech in Chicago on Friday. "We want to make sure that doesn't get lost in the political rhetoric."

For Todd Becker, CEO of Green Plains Inc., a Nebraska-based company that runs 17 ethanol plants, mainly in small U.S. towns, Mr. Trump's actions show that "there's a path in" for U.S. corporations. "I like having a guy, who's somebody who thinks like we do, in the White House," Mr. Becker said.

David Loveland, a financial executive at Maze Nails, a nail maker in Peru, Ill., with about 60 employees, didn't think Mr. Trump's tactics with Carrier would have broad implications. Carrier is part of United Technologies Corp.

"He can't strong-arm companies into staying here long-term -- jobs for two, three, four, years, that's not going to do us any good," Mr. Loveland said. "Changing the landscape is more important for the business climate, as opposed to carving out these deals with politicians."

In the Rust Belt, U.S. plants often tend to be outdated and need modernization. They are likely to use the threat of moving abroad to request "modernization money," said Charles Bradford, an industry analyst. "I don't think an American steelmaker has built a mill since the 1990s without major state help."

Steelmakers including Nucor Corp., AK Steel Holdings Corp. and Steel Dynamics Inc. have all received incentives from state governments. This year, Big River Steel started making metal at a new $1.1 billion plant built in northeastern Arkansas, thanks in large part to state aid.

The question is whether Mr. Trump will make good on other campaign promises like imposing import tariffs on companies that move offshore. "If we were to put on import duties, I assume China would retaliate and you'd create a series of problems," said Edward Holland, CEO of plastic-resins distributor M. Holland Co. in Illinois, which recently purchased a distributor in Mexico.

Joseph Bartolacci, CEO of Matthews International Corp., a Pittsburgh-based maker of coffins, said his decision to move 500 jobs to Monterrey, Mexico, in 2005 wasn't about jacking up profit margins. It was about competing with Chinese imports.

The full cost of employing each of the 6,000 workers at Matthews's four plants -- two in Indiana, one in Pennsylvania and Tennessee -- is $35 an hour, he said. In Mexico, it is $5 an hour. "And in China, it's way less than $5," he said.

The CEO applauded Mr. Trump's support for U.S. manufacturers. What allows Chinese producers to compete, he said, are generous subsidies from their government. He would like the same help from U.S. federal and state governments.

"We're not making exorbitant profits," he said. "We're just remaining competitive."

Drew FitzGerald, Christina Rogers, Valerie Bauerlein, Andrew Tangel and Kris Maher contributed to this article.

Write to Scott Calvert at scott.calvert@wsj.com and John W. Miller at john.miller@wsj.com

 

(END) Dow Jones Newswires

December 02, 2016 19:30 ET (00:30 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.