The new US car factory exposing the contradictions and perils of Trump’s trade war

“Yeah, it was all pretty much just woods around here,” says a Berkeley County police officer. Then Volvo came.

The Swedish-Chinese car manufacturer last Wednesday officially opened a new assembly plant near Ridgeville, some 30 miles north of Charleston, South Carolina.

With some help from the state government, a 6,800 acre space in the tall pine forest in Berkeley County was cleared and the shiny new factory was erected.

The plant, Volvo’s first manufacturing facility in the US, has created around 900 jobs so far, many of them for locals. The number of employees is due to rise to around 1,500 by the end of the year as it ramps up production of the S60 sedan; and then possibly to 4,000 if, as hoped, Volvo starts manufacturing its popular XC90 SUV there too.

The estimated $ 1.1bn (£ 831m) investment constitutes a major economic boost for the rural community of Ridgeville – and also for the state, which already boasts a major BMW assembly plant further north in Spartanburg.

“The south will one day be the ground zero for US auto manufacturing,” predicts Kevin Graham, the Volvo plant’s director of assembly, in a cheeky warning to the “motor city” of Detroit.

Yet Ridgeville could also be ground zero for collateral damage from Donald Trump’s kamikaze trade war.

The US president fired up Twitter last Friday by going public with a new threat to impose 20 per cent tariffs on European Union cars and car part imports to the US.

Volvo imports around half of its parts for Ridgeville, including engines from Sweden and batteries from China. A 20 per cent tariff would inflict serious economic damage on the new Ridgeville plant.

But that’s not all. Volvo intends to export around half of the cars it manufactures in South Carolina. If the EU or China hike tariffs in response to Trump’s, this European-Chinese company could get doubly walloped.

“Good thing they built it before the threats, because they may not have come otherwise” says Frank Hefner, an economist at the College of Charleston.

Volvo’s CEO Hakan Samuelsson tried to be upbeat at the factory’s inauguration last week, saying he was hopeful that sense would prevail in the trade dispute and citing Trump’s leftfield suggestion at the recent G7 meeting in Canada that he would ultimately be in favour of eliminating all tariffs.

Yet the underlying message from Samuelsson and his team was clear. New tariffs on auto imports could well mean the full planned investment in Ridgeville not proceeding – and that this would be bad news for jobs in places like South Carolina.

“If we go back to the 19th century when everyone wanted to protect their own market, that is definitely not good for the wealth of nations. That would really be bad – not just for Volvo,” Samuelsson told The Independent. The Swedish ambassador to the US, Karin Olofsdotter, who was also at the launch, was even more direct.

“We are extremely worried when it comes to possible car tariffs – a plant like this does not need that. We are all part of global value chains and that’s what creates the jobs we have today and that’s how the economy works,” she said.

And, looking in the direction Nikki Haley, the former South Carolina governor who has been appointed as Donald Trump’s UN ambassador, who was sitting on the front row, Olofsdotter implored: “Those of you who have possibly a little influence, I really hope you can bring this message forward.” Two days later Trump took to Twitter to threaten the EU with auto tariffs.

Buy American Volvos?

One of Donald Trump’s preferred slogans is “America First”, and he has urged households to “buy American and hire American”. Hardly auspicious sentiments for a foreign car company like Volvo.

But Claire Gibbons, director of global marketing and communications at the Charleston Regional Development Alliance (CRDA), says there need be no contradiction.

“Is it less American when they’re made in America, and they employ hundreds and thousands of Americans?” she asks. “BMW has been in upstate South Carolina for 30 years. We live in a global economy and I would be proud to buy a car made in my community by neighbours. The fact that it may be owned by somebody in Sweden or China is irrelevant to me.”

Davd Ginn, the CRDA’s director, also insists that buying Volvo can be a patriotic choice, even in Trump’s America. “When Volvo announced they were going to add the XC90 to their line here, my wife and I went out and bought one. As I host guests here, they say ‘this is a nice car’ and I will be able to respond in about two years’ time that ‘it is made in Charleston’.”

Volvo was bought from Ford by Hangzhou’s Geely group, controlled by the tycoon Li Shufu, in 2010.

“We were in pretty rough shape,” admits Lex Kerssemakers, Volvo’s chief of Europe, Middle East and Africa. “We were making fewer than 400,000 cars, Ford had said we couldn’t use their engines and platforms because they wanted to cut all connections with us, our models were getting old. [Geely] brought a sense of entrepreneurship. We launched new factories, new cars on new platforms, decided to go for electrified cars. Nobody ever does so many things together in the automotive industry, it’s just too dangerous. We had no choice and Geely trusted us.”

But though Volvo executives are willing to acknowledge their debt, others seem less keen to publicise the Chinese connection. Henry McMaster succeeded Ms Haley as South Carolina’s governor last year and was the first statewide elected official to endorse Trump in 2016.

Speaking at the Volvo factory launch, he declared that “the combination of Sweden and America and South Carolina is as strong as it gets”. There was no mention of China, the country that President Trump regularly accuses of “raping” the US on trade and purloining American corporate intellectual property.

On Monday Trump appeared at a rally in support of Governor McMaster, who is facing a tough primary run-off election challenge.

Pineapple town

Pineapples are everywhere in Charleston, or at least carvings of them are. They represent Charleston’s trading history. In the era when the Carolinas were British colonies, sailors brought them back from their voyages and skewered the tropical fruit on fence posts to signify to neighbours that they had returned safely.

A statue of a giant pineapple squats in a fountain in the city’s waterfront park. Last week, it was full of children trying to keep cool in the 35C heat and 80 per cent humidity.

In the shadow of the fountain, three Charleston municipal gardeners were taking a well-earned break from trimming the palm trees. They knew about the new Volvo plant – everyone in Charleston seemingly does.

But not the threat posed to it by Trump’s tariffs.

“I’ve seen the [trade story] on the news, but tariffs won’t affect this plant if the cars all made here will it?” one asked. They were all also surprised to learn Volvo is Chinese owned.

South Carolina, like almost all the southern states, voted overwhelmingly Republican in the 2016 presidential election.

“This is a state where if you’re a walking Republican you will get the election. Now you can be a walking Republican but if you’re not a Trump supporter, we’re not too sure what’s going to happen to you,” says Professor Hefner of Charleston College.

So how do people feel when a major new local employer says the president’s trade policy is dangerous? Workers at the Volvo plant clam up when talk of tariffs comes up. “That’s part of politics that we don’t engage in,” says Mr Graham, the director of assembly.

Claire Gibbons of the CRDA explains that people tend to focus on their jobs, rather than the news. “The global implications don’t necessarily trickle down immediately. Once the negotiations [on trade] happen and things are put in place, then you start to see the ramifications and the cost implications. It’s too soon to know [at the moment]”.

Charleston is certainly not some hollowed-out ex-steel town. And across South Carolina one does not see the “rusted-out factories scattered like tombstones across the landscape of our nation” referred to by Trump in his almost apocalyptic inaugural address last year.

“For Charleston things are booming and for South Carolina things are going well,” says Professor Hefner.

The state’s unemployment rate is 4 per cent, barely higher with the national average of 3.8 per cent.

Hefner says locals are not suffering economically but they still buy the zero-sum Trump logic on trade.

“The typical reason that people would vote for Trump would be non-economic issues – immigration, abortion, conservative lifestyle kinds of things,” he says. “They like his conservatives views on social issues and they swallow the views on trade hook, line and sinker. But it’s not because they’re afraid for their jobs but because they think what he’s saying is right! It seems logical.”

Lessons from history

The word is that Trump himself was invited to the launch of the new Volvo factory. And why not? On one level, its existence ticks the major boxes of the Trump economic doctrine.

It is a new factory on US soil, creating new jobs. And old-fashioned manufacturing jobs at that. The decision by Volvo to invest in Ridgeville was taken before Trump launched his White House run, but that need not have stopped him at least trying to take credit.

Yet all the evidence suggests the president’s tariffs would be as welcome as a slug of petroleum in a dish of traditional Charleston she-crab soup to Volvo’s global operations and to Ridgeville in particular. They might well end up destroying some of the jobs in the state that have been created, or cancelling those that have been promised.

Volvo in South Carolina is a microcosm of the US economy’s vulnerability to an automotive trade war that fractures global supply chains and discourages foreign investment.

US tariffs could conceivably encourage Volvo to source more parts in the US, which is presumably what the Trump team would want. But that would not help the company if wants to export its vehicles in the midst of a global trade war. The more likely result is less US investment, not more.

EU-owned car companies  – firms including BMW, Renault, Volkswagen – account for more than a quarter of US car production, supporting an estimated 120,000 jobs. As well as in South Carolina, there are production facilities in Alabama, Mississippi and Tennessee – all Republican states.

Recent work by the Peterson Institute for International Economics, a respected Washington think tank, estimates Trump’s auto tariffs could cause 195,000 US workers to lose their jobs in total over three years and that this cost could rise to 624,000 if other countries retaliate.

The plight of Volvo also demonstrates some wider ironies and contradictions of Trumpism.

Volvo was a dying brand under the ownership of the all-American auto giant Ford. It was rescued by Chinese ownership. With no Geely rescue there would have been no Volvo investment in the US. With no Volvo investment there would have been no new jobs for Trump voters in this part of rural South Carolina

Frank Hefner says South Carolina’s own history demonstrates why trade barriers will only end up harming those they are supposed to protect.

“When I first moved here in 1988 the general sentiment was [concern] over textiles and apparel manufacture moving offshore. The buzzword then was to keep textiles in the state,” he recalls.

“Looking backward 30 years you’d have to say thank goodness we didn’t have trade barriers that stopped international trade to protect an old, outdated industry.”

The global implications don’t necessarily trickle down immediately. Once the negotiations on trade happen and things are put in place, then you start to see the ramifications and the cost implications

#automotive #DonaldTrump #tariffs #volvo

Serious questions are being asked about what we want from central banks – and not before time

What numbers should central bankers like Mark Carney, Mario Draghi and Jerome Powell go to bed thinking about? Inflation? The rate of unemployment? GDP growth? Productivity? In other words, what should the target of an independent central bank be? After several years of lying dormant, this old question has, if not quite exploded in a volcanic eruption of debate, at least begun to rumble again.

Labour broached the issue last week with its publication of a report for the party by GFC Economics which suggests the Bank of England’s mandate ought to be modified to include a target of 3 per cent annual productivity growth. This follows a paper earlier this month from Lawrence Summers (the veteran US economist who came close to being appointed by Barack Obama as the chair of the US Federal Reserve a few years ago) suggesting the Fed ought to move to a “nominal GDP” target.

Although droves of politicians in the UK, the US and across the EU have moaned and even raged about the decisions of central banks in recent years – including Theresa May – virtually none have called for decisions on interest rates to be put back into the hands of politicians. Indeed, scarcely any have even called for the mandate of those banks to be changed. Like Stanley Baldwin’s 1920s press barons, they seem to prefer the power of the bully pulpit without the tedious responsibility of actually having to do any thinking about the sensitive trade-offs inherent in their simplistic demands.

So, in this depressing context, this flicker of fresh thinking about central bank mandates is welcome.

Such a debate can help to clarify that central banks, despite the impression given by the populist agitators, are not a law unto themselves. Policymakers do not arbitrarily decide what is good for the public and what is to be avoided, who should be subsidised and who should be penalised, who should be made richer and who should be made poorer.

The banks are operationally independent only – they work to achieve broad goals set for them by elected governments. That’s true of the Bank of England, the Federal Reserve, the European Central Bank and indeed all of the independent monetary authorities across the Western world, from Sweden, to Canada, to New Zealand.

But what should the democratically selected target of those institutions be? They have all traditionally been given (roughly) the same target of 2 per cent annual inflation, and told to aim to hit it over the medium term. However, there is no macroeconomic reason why 2 per cent inflation, as opposed to, say, 4 per cent, should be the magic number consistent with full employment, steady GDP growth and macroeconomic stability.

And indeed the Summers argument is that this old framework, which seemed to work reasonably well before the global financial crash, is now breaking down. In an era when both interest rates and inflation are apparently being chained down by powerful secular economic forces, monetary policy is left potentially impotent to restore growth in the event of a downturn. Summers wants a nominal GDP target (inflation and real growth added together) of 6 per cent.

For similar reasons, Simon Wren-Lewis of Oxford University prefers a primary target of maximising GDP growth, with an inflation target transformed into a backstop. Others have previously suggested simply raising the inflation target from 2 per cent to 4 per cent.

The objection of Bank of England policymakers and officials to GDP targets is that growth data from statistics agencies, unlike inflation data, is often revised over time, sometimes dramatically, and that setting this metric as the target could result in wild and damaging policy swings.

Advocates see this as an exaggerated technical quibble. It also fails to engage with the central objective of the reform, which is to shift the mindset of central banks so that policymakers and staff will no longer consider miserable productivity and weak GDP growth acceptable merely because inflation has been quiescent.

The usual response of institutional conservatives to the idea of raising the inflation target to 4 per cent is that it would shatter the central bank’s credibility and befuddle the public although, in truth, there’s not much real evidence to believe this. Reasonable people can differ about the relative strength of these mandate proposals and the various objections. Yet all sensible people should welcome the rumbling of a radical debate here.

It’s true that it’s unhealthy to expect central banks to solve all of a society’s economic problems. These institutions cannot please all the people all the time. Yet it is healthy to talk seriously and constructively about what it is we want our central banks to do.

#nominalGDP #inflation #centralbanks #BankofEngland #productivity #MarkCarney

The myth of the ‘wasteful and inefficient’ NHS

NHS “efficiency savings” have been the lodestar of politicians for the best part of three decades.

Kenneth Clarke introduced the “internal market” in 1990. Tony Blair launched a crusade for “foundation hospitals”. David Cameron and Andrew Lansley rammed through GP commissioning.

The objective of all these organisational shakeups was, to a large extent, to bear down on inefficiencies within the health service.

And now we have the demand from Theresa May in her speech yesterday that the pretty modest increase in resources for the NHS over the next five years must be accompanied by a new clampdown on waste.

It’s taken as a given in Westminster – particularly in the Treasury, who probably insisted that this section be included in May’s speech – that there are enormous inefficiencies in the health service.

And, in one sense, this view is almost certainly correct. Total UK public health spending is around £155bn a year. Any budget that size will have myriad expenditure lines where more is being spent than strictly necessary.

Around 1.7 million people work for the NHS, making it the world’s fifth largest single employer, behind the US and Chinese militaries, McDonalds and Walmart. That vast workforce all but guarantees that there will be inefficiencies in how many of these human resources are deployed. And all those inefficiencies will add up to a large-sounding number.

A review of NHS productivity by Lord Carter in 2016 duly identified £5bn of possible savings in acute hospitals in England. This included savings from better staff rostering practices and sourcing medical supplies more cheaply.

Yet note that this was in the context of the NHS being forced to make an estimated £22bn of efficiency savings due to ministers deliberately holding funding supply below rising demand. So there would still be a huge gap even if all Carter’s identified savings were achieved.

One newspaper yesterday wheeled out the familiar diatribe that the NHS is “a wasteful, inefficient and largely unreconstructed behemoth”. Yet the facts show that by international standards the NHS is not, actually, distinguished by its wastefulness.

Those convinced that the NHS is byword for inefficiency should consider the US health system, where total health sucks up more than 16 per cent of GDP (compared with 10 per cent in the UK) but where health outcomes in a host of areas are no better and in some cases worse than in peer economies.

What does distinguish the NHS internationally is its relative lack of resources. In 2015, the UK had just 2.8 doctors per 1,000 people, compared to 4.1 in Germany and 3.3 in France. The UK also had just 2.6 hospital beds per 1,000 people, compared to the OECD average of 4.8. The fact that we get broadly comparable health outcomes despite this shortfall, points to the NHS’s relative efficiency, not the opposite.

NHS managers should, of course, be required to continually identify savings, minimise waste and stamp out needless inefficiencies. Any manager, whether in the public or private sector, has the same responsibility.

But we should banish the myth that efficiency savings can be anything more than a relatively minor offset to the secular spending pressures of rising longevity and the development of expensive new health technologies.

So how to pay for the extra resources that the NHS needs? Higher taxes are the obvious answer, picked up by the older population who will, initially at least, benefit from the higher spending.

Yet there is concern among ministers about the ability of Theresa May’s fragile administration to get the necessary tax hikes through the Commons, especially in light of the fiasco last year when the chancellor tried to remove a tax loophole benefiting the self-employed.

So the suggestion in Westminster is that extra borrowing might take at least some of the strain. This wouldn’t be a disaster, but the silence from the usual suspects in response to this idea is palpable. The denunciations of unfunded spending by the right-wing media and Tory backbenchers have mysteriously gone missing. The righteous yearning for an absolute balancing of the government’s books at the earliest opportunity has seemingly evaporated.

The fact that the NHS spending has been (quite ludicrously) presented as a triumphant delivery of the Brexiteers’ red bus promise to spend £350m a week more on the health service no doubt has something to do with it. The cult of Brexit has eclipsed the cult of the budget surplus on the right.

There are parallels here with the US Republicans, who screamed blue murder about the sustainability of the public finances when there was a Democrat in the White House, but who cheerfully voted for large tax cuts last year, despite the fact that official projections show these are set to blow up the US budget deficit.

How easily the austerity fetish is forgotten. One could be forgiven for wondering how genuine it was in the first place.

#efficiency #NHS