Many Donald Trump voters and patriotic Americans have cheered recent decisions by American companies to create American jobs rather than relying on foreign labor in Mexico, China and elsewhere. President Trump has heavily pressured companies to keep these low-level jobs right here in the United States. Unfortunately, bringing unskilled labor jobs back into the United States isn’t as simple as it may seem.
It’s More Complicated: Foxconn Example
For starters, the decision for American companies to use foreign labor is not arbitrary. U.S. labor laws and wage standards make American labor much more expensive than foreign labor. According to the New York Times, the average Chinese factory worker makes roughly $424 per month.
On Sunday, Apple Inc. AAPL 0.23% supplier Foxconn Technology Co announced plans to build a $7 billion display-making plant in the United States. The plant will hire up to 50,000 U.S. employees. At a $14/hour pay rate (the average U.S. wage for electronics assembly), Foxconn’s labor costs will be roughly $1.46 billion per year for those 50,000 employees. The same 50,000 Chinese employees would cost roughly $254 million per year.
In other words, Foxconn’s U.S. labor could come at an extra cost of roughly $1.21 billion per year. Of course, those higher costs will be passed on to Apple, which will likely pass them on to U.S. shoppers via higher iPhone and iPad prices.
Looking At Auto
The same process is likely to play out in the auto industry as well. It’s no coincidence that auto makers Nissan Motor Co Ltd (ADR) NSANY 0.48%, General Motors Company GM 0.26%, Ford Motor Company F 1.05% and Fiat Chrysler Automobiles NV FCAU 0.56% have been targeting Mexico for new plants in recent years. In addition to cheap Mexican labor, Mexico has free trade agreements with more than 40 countries that make up 60 percent of the global economic output.
When BMW ships cars from its Spartanburg, SC plant to Europe, it must pay a 10 percent duty. For a $50,000 car, that means a $5,000 hike in ticker price. Of course, Trump is attempting to eliminate NAFTA, the current free trade agreement that allows Mexico to ship cars to the United States duty-free. Once again, the move may force U.S. companies to manufacture in America, but they will likely have to make up those costs savings by raising prices.
Where Would Higher Labor Costs Come From?
Of course, companies could always choose to find other ways to eat the higher unskilled labor costs than raising prices. They could let higher labor costs take a bite out of their profits, which would be bad news for the SPDR S&P 50 ETF Trust SPY 0.39% and any Americans with 401(k) retirement accounts.
They could also simply opt not to hire or even to cut their current work force.
The Center for Automotive Research estimates a U.S. withdrawal from NAFTA would result in a net loss of about 31,000 U.S. auto manufacturing jobs. U.S. auto makers generate a significant portion of their sales from foreign countries, and these sales could be severely impacted by a disruption in international trade.
Professionals, Experts Weigh In
Oxford Economics economist Gregory Daco said states with the most auto manufacturing jobs, including Michigan, Texas, North Dakota, Kentucky, Indiana, South Carolina and Alabama could see the largest job losses if there is a significant slowdown in U.S. auto exports.
Trump claims he will replace NAFTA with much more favorable trade agreements. It remains to be seen how long U.S. companies will wait for a new deal before they start laying off workers.
It’s not just unskilled labor jobs that are at risk. On University of California Davis study found that reducing the undocumented immigrant worker pool in the United States, another major Trump initiative, by 50 percent would result in a 0.57 percent rise in skilled worker unemployment rate. When companies are forced to pay more for low-level workers, they will likely choose to eliminate costs higher up on the corporate ladder.
There’s no question that NAFTA, the Trans-Pacific Partnership (TPP) and other free-trade agreements have made foreign labor a very appealing option for U.S. companies. However, trade relationships are…
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