Foxconn factory in Wisconsin

Foxconn factory in Wisconsin

The ramifications of Foxconn’s $10 billion will depend on whether the deal will be a success or a failure. If the deal succeeds, it will have positive ramifications, but if it fails, it will have severe negative consequences on both the company and the state. Some of the pros of this deal, if it succeeds, is that it will increase jobs in the United States, reduce the shipping costs of expensive screens from Asia, and boost the US economy. However, if Foxconn does not hit its investment and hiring targets in the decades to come, it will not be able to receive incentives as promised as the US government may wind down some of its commitments on the deal. However, if Foxconn hits its hiring and investment targets, the state will be burdening the taxpayers.

Ramifications

Benefits

As stated earlier, as long as Foxconn hits its investment and hiring targets, this deal will be beneficial to the US economy. First, there has been increased unemployment in the country, and if the Foxconn deal is anything to go by, the company has promised to hire around 13,000 employees. Provision of 13,000 jobs Americans will be a big boost for Trump’s administration promise of reducing unemployment in the country. However, the 13,000 jobs will depend on whether the company will succeed in delivering the initial plan. However, the company will still create employment even if it reduces the number of employees that it had initially promised to employ. If the developments of the plan are closely examined, the company has kept reducing the number of employees it will hire from 13,000 to 1,500. This has been resulted from Foxconn switching from building Gen 10.5 plant to building Gen 6 LCD factory.

Another benefit, if Foxconn can deliver its initial project, is that it will reduce the costs for shipping screens from Asian, especially from China, which has been in tariff war with the US. This will serve the Trump’s administration perfectly well as the president will continue imposing tariffs on Chinese products, as Foxconn will not need to rely on TV screens and other IPhone supplies that cost the company and the US in general billions for shipping them from Asian. This will reduce the imports, especially from China, and therefore, the United States will be able to benefit from trading with Asian countries by reducing its net deficit.

Another benefit that the United States will get from this deal is that the $10 billion investment will boost the country’s economy. First, if the Foxconn deal is successful, it will improve the US balance of payments. This is because Foxconn’s investment will be a direct flow of capital into the country’s economy, and it will promote exportation as well as substitute importation. Despite the company receiving huge subsidies, it will also act as a source of tax revenue as its profits will be taxed just like other organizations. As a result, the taxes will add a valuable source of revenue to the US government, and this would boost the country’s economy. Additionally, the US technological market will also be boosted as Foxconn will introduce new technologies and production methods that were not previously used in the United States. The employees that the company promises to employ will be trained on how to use the new technologies and methods of production, which would result in technology transfer to the United States.

Finally, Foxconn is a multinational corporation that has several partnerships with other big companies. Therefore, its investment in the US will enhance the country’s reputation, and this may attract other big corporations to be interested in investing in the US to obtain the same subsidies as Foxconn. This would further increase employment, increase the government’s revenue, improve the US balance of payments, and facilitate more technological transfer in the country.

Cons

The large incentives that are promised to Foxconn depend on whether the company will hit its investment as well as hiring targets. If the company does not hit these targets, it will not receive the huge incentives promised by the government, and this means that its operations in the US may be severely affected. In retaliation, the company may decide to end its operations in the US, and this would affect not only the country’s economy but also its reputation to other potential multinational corporations that maybe will invest in the United States. Jobs will also be lost, and the US economy will also be severely affected.

Additionally, Foxconn seems to have a lot of influence and political pressure on Trump’s administration. This means that the company may still receive lucrative incentives despite not hitting its targets. This will become a burden to the US taxpayers as they will have to subsidize 17% of their salaries to the employees at Foxconn and 15% of the company’s capital expenditures in the country. As a result, the US government may need to reassess the deal to avoid burdening its taxpayers for the sake of a company that will not hit what it had promised.

References

Statt, N. (2017). Apple supplier Foxconn unveils plan to build a $10 billion LCD factory in Wisconsin. The iPhone supplier is coming to the US. https://www.theverge.com/2017/7/26/16034394/apple-iphone-manufacturing-foxconn-wisconsin-plant-donald-trump

Bloomberg Businessweek (2019). Inside Wisconsin’s Disastrous $4.5 Billion Deal with Foxconn. https://www.bloomberg.com/news/features/2019-02-06/inside-wisconsin-s-disastrous-4-5-billion-deal-with-foxconn

Mitchell, M. D., Farren, M., Horpedahl, J., & Gonzalez, O. (2020). The Economics of a Targeted Economic Development Subsidy. Mercatus Research Paper.