Can Trump force Apple to reshore? Not if free-market capitalism has anything to say about it.
Is Donald Trump crazy?
This questions may seem rhetorical, but I’m referring to a statement targeting the Apple company: “We’re going to get Apple to start building their damn computers and things in this country instead of in other countries.” Trump made this comment while speaking at Liberty University in Virginia.
Unlike other political personalities, Trump does not seem to have an internal censor or speech writers to prevent him from saying just whatever happens to come to mind.
Americans manufacturing mass-market consumer goods in offshore facilities know that this is a non-issue. The concept of compelling an American firm to reshore Chinese production simply is not going to happen, at least not from the Oval Office.
A hypothetical President Trump could elicit no support from either the Republicans or Democrats in the House or the Senate, making reshoring legislation targeting Apple in particular a non-starter. And as far as I know, there is no executive power that would allow Trump to act unilaterally in a way that could stand up in court.
Even if Trump could convince Apple to manufacture entirely in the US, it would be antithetical to the basic principles of free-market capitalism.
Apple uses contract manufacturers like Foxconn for a reason: they are cheaper and manufacture to acceptable quality standards.
Since both Democrats and Republicans seem committed to the Trans-Pacific Partnership and have granted China most favored nation trading status way back in the Clinton administration, the American stance regarding China is clearly open competition.
If a US-based contract manufacturer can underbid Chinese competition, production will reshore.
Multiple advocates of the tariff idea, which includes Trump when it comes to China, know that US manufacturers are constrained by extensive regulations, high taxation and pricey benefits for their better-paid workers. But so far, no administration has been eager to quantify the costs of these constraints to US manufacturing and use it to apply a counter-tariff that compensates for those disadvantages specifically.
This kind of plan has a lot of advantages when done fairly.
Chinese manufacturers that offer competitive wages, a strong benefits package and manufacture at high levels of worker health and safety could be exempt from these duties. They would compete toe-to-toe with American manufacturers on a level playing field.
But it’s not up to Apple to make this happen. Apple is what economists call a “rational economic actor.” It designs and markets popular consumer products and it builds them in the most cost-effective places do to so.
Could US manufacturing compete without these punitive tariff structures? Possibly, but automation is the key.
Extensive factory automation is rapidly removing the labor cost component of the production equation and with natural proximity to the world’s biggest consumer market, it makes sense to build in the US.
Chinese appliance maker Haier is one example, having recently purchased General Electric’s general appliance manufacturing operations. European tire makers have several US plants and of course major Japanese automakers are heavy players in US manufacturing.
Appliances, tires and cars all have one thing in common, however. They have unfavorable mass-to-volume ratios when it comes to shipping.
With the exception of very large items like automobiles, most consumer goods are shipped by Asia from containerized ocean freight. Standard shipping containers have a maximum allowable weight and fixed volume.
For a 40 ft. container a typical maximum payload might be 75,000lbs.
The most cost-effective shipping strategy would maximize use of the available payload capacity of the container while using up all of its interior volume. In larger consumer goods, however, shippers would say that they “cube-out” before they “gross-out,” being that the volume of the product does not permit full use of the available container payload. This is the case for washing machines and tires, for example.
Simply put, it’s very expensive to ship air instead of product—so for tires and washing machines, US-based manufacturing makes sense. For cellphones and tablets, it’s different. That product is dense and compact so shipping simply isn’t a factor, especially given the high dollar value of individual iPhones and iPads.
Ikea has used this strategy for years: take high-volume, low-mass furniture and flat-pack it to minimize shipping costs.
For Trump and Apple, it’s in the nature of Apple’s product that offshore manufacturing is cost-effective. But like his idea for a wall at the Mexican border, Donald will never let engineering physics Trump a good soundbite.
