Trump's Made in America Could Hurt Investors

Donald Trump is set to be sworn in as the next President of the United States on January 20th. He campaigned on a promise to keep jobs in America and bring home the ones that left in recent years. Trump promised to take a tough stance with companies looking to other markets to create their products - namely Mexico and China. Despite holding no formal power as of yet, the President-Elect has been involved in several companies announcing their plan to keep jobs in American.

The Trump administration offered $7 million in tax credits over 10 years to a subsidiary of United Technologies (UTX) earlier in December in order for them to keep ⅓ of the jobs that they were planning on moving to Mexico.

Sprint confirmed almost a week ago, via a public statement, that they are planning to create 5,000 jobs in customer care and sales that were not previously guaranteed to happen in the United States

Ford Motor Company has canceled their $1.6 billion investment in Mexico and instead plan to invest $700 million in Michigan and create 700 new jobs.

These announcements have gone a long way to help increase the credibility of the incoming President and have excited his supporters about what is yet to come. These investments are likely to follow through and help create jobs in the US - helping the US economy. However there is more to think about than just job creation when you are thinking from the point of view of an investor.

As an investor there are two things that should worry you if your company has decided to pursue American investment over developing market investment: (1) will this increase the cost production? (2) does this decrease the return on investment?

American companies have been moving their production to other countries because these countries have a comparative advantage in production. This could be cheaper labour, better technology, or fewer other opportunities. Traditionally American companies have been moving production from the country to take advantage of cheaper labour. By keeping these jobs in America: Ford pays higher wages to workers -> cost of production increases -> prices increase to offset cost increase -> consumers respond by buying less -> company profits decline if sales drop enough.

Not what investors wants to hear.

Ford initially committed $1.6 billion to investments in Mexico, but since changing their plans to invest in Michigan, has dropped this number to $700 million. Why the change? The answer is likely that they couldn’t find good use for the extra $900 million in Michigan and that money would have gone to waste. Thus, Ford’s planned investment decreased. Because Ford is investing less, they are likely to make less return on their investment. The $900 million is going to sit in cash on the balance sheet. Cash in the bank account earns minimal interest, but cash used to build cars does far better.

Again, not what investors want to hear.

Investors should be concerned if either of these questions are answered with yes. Higher production costs leads to less profits leftover for shareholders and decreased investment means that more cash is being left unused. Creating jobs in America is important, but only if it makes sense in the context of shareholder wealth.