President-elect Donald Trump warned Sunday that U.S. companies considering moving operations out of the country may face “retributions or consequences” for doing so. The most specific consequence mentioned so far is a 35% tariff on goods shipped back to the United States.
As is normal with Trump the warning came in a series of early morning tweets. Trump’s approach seems to be something of a carrot and stick approach with the promise of lower corporate taxes being the carrot and the aforementioned tariff the stick.
Related: AN INTRO TO FINANCEBOARDS
The Carrier Example
Trump and running mate Mike Pence have already started the process – although so far it seems the carrot was all that was needed. Carrier, an Indiana company that makes heating and air conditioning units had announced plans to shift production to Mexico. Carrier is a subsidiary of United Technologies (NYSE:UTXC).
Trump said he negotiated a deal to keep the plant in Indiana in exchange for about $7 million in incentives (provided by the state). The company said it would invest $16 million in the factory over the next two years.
Approximately 800 jobs scheduled to move to Mexico will remain. Up to 1,300 other jobs will still be cut.
The Tariff As A New Tax
Some, including Sen. Ben Sasse feel a 35% tariff would just be passed along to American families by companies, making products more expensive, especially for low income taxpayers who tend to spend more of their income on products and services.
Others suggest the threat of a tariff may be enough to keep companies in the U.S. and prevent them from leaving or moving operations in the first place. Unfortunately, nobody knows what will happen until a law is in place.
A Potential Arms Race
Trump’s suggestion that U.S. companies stay home and negotiate with different states to lower costs, obtain tax incentives and use to competition to gain favors has some tax experts warning that this could lead to an arms race between jurisdictions.
Trump sees this as an advantage and part of what he calls a new ‘Industrial Revolution.’ That revolution could become expensive to state budgets that are ill-equipped to grant huge incentives in order to keep jobs within state borders, according to some observers.
One Company Under Fire
Among companies in the process of deciding what to do, Ford Motor Co. (NYSE:FC) CEO Mark Fields indicated his company would move forward with plans to shift production of the Focus small car from Michigan to Mexico.
“We have made the decision to move the Focus out,” Fields said, “and we’re making that investment now.” Fields added that zero jobs would be affected and zero jobs impacted.
Economic Counsel Being Sought
Companies on Trump’s radar have huge international operations with thousands of employees and all could be impacted by any change to corporate tax laws as well as potential tariffs or an ensuing trade war.