Why subsidize protectionism motivated investors?



The classic response, as I wrote before, is to protect access to the U.S. market by making your product in the United States. This is what foreign automakers did in the 1980s, in the face of so-called “voluntary export restraints” on Japanese cars. Being committed to a particular site means that a company’s bargaining power with the host government is sharply reduced. However, thanks to U.S. federalism, all is not lost for a company that really needs to locate in the United States.

Since each state has access to large revenues and budgets, and because the U.S. Constitution has not been interpreted to mean that location incentives violate the Commerce Clause (read: Cuno v. Daimler-Chrysler), state and local governments are able to reward companies for doing something they would have done anyway: Come to the United States. Even in the Foxconn case, where the firm obviously wanted to be in House Speaker Paul Ryan’s district, it created the illusion that it might go elsewhere, which was all it had to do to get Wisconsin to cough up an obscene $3+ billion subsidy. (We won’t know how much in total until we find out the cost for local tax increment financing.)



As long as U.S. protectionism remains ascendant, a growing number of foreign companies will follow Foxconn and hedge their bets to guarantee access to the U.S. market. Due to fiscal federalism, however, the potential advantages from foreign investment (which may not be that great, depending on job losses at existing competitors’ facilities) will be diluted or even overwhelmed by the amount of subsidies the newcomers receive. State and local governments need to resist temptation — to be more precise, we need to find a way politically to make them resist temptation.

H/t to Greg LeRoy for suggesting this article.

Cross-posted from Middle Class Political Economist.