Caterpillar's Preventable Job Cuts
Economy: No one has pleaded as earnestly for Congress to pass a Colombia free-trade pact as Caterpillar. Now, with earnings down and 20,000 American jobs to be lost, it's obvious why. Trade would have cushioned this blow.
Caterpillar dragged the entire stock market down on Monday after it reported a painful drop in fourth-quarter earnings. Twelve thousand American workers and 8,000 American contractors are set to lose their jobs as a result.
What's terrible is some of these job losses shouldn't have happened. No company, of course, can evade all the ill effects of a global recession, and Caterpillar is just one of many being hit.
But a protectionist climate in Congress is poison to company earnings. Without that protectionism, the impact of the downturn would be far less.
One of the things Congress could do is pass free trade with Colombia. Contrary to populist doggerel, it's a net job creator, not a job-killer. Free trade kills foreign government tariffs on American goods sold abroad and enables companies like Caterpillar, which are hard-hit by them, to sell more.
Caterpillar's results show this. It reported a downturn in sales in emerging markets for its decline in profits.
This is especially bad because some of Cat's biggest growth comes from such countries, in particular those that either have or want free trade with the U.S.
The effect can be quantified. Economist Dan Griswold, director of the Center for Trade Policy Studies at the Cato Institute, found exports were responsible for 6,667 new U.S. jobs at Caterpillar alone.
"Caterpillar is in many ways a typical American company," Griswold told IBD. "It sells more abroad (63% of sales) than here, and it's increasingly a global company. The success of its U.S. workers and shareholders is determined by its success abroad. That depends on free trade, freedom of investment, and strong relations with its commercial partners."
Without free trade, Caterpillar is stuck paying around $100,000 in tariffs for each earthmover it sells to Colombia, a big mining country that's one of Caterpillar's best markets.
There's no doubt Colombians want to buy Caterpillar machines without tariffs, too.
Last year, Colombia's pro-free-trade union leaders told IBD they favored free trade because they want their companies to invest in the higher quality Caterpillar earthmovers.
That would spur more output and hiring of union workers. It also would make mining safer. Caterpillar's own earnings report Monday noted that "capacity in the world's infrastructure, mining and energy industries is still inadequate or outdated," and for that reason it expects continued demand growth.
But Colombian companies won't buy as many Caterpillars if they keep getting hit with huge tariffs on sales of its earthmovers, diggers and giant dump trucks. And the same is true of other countries that don't have free-trade deals with the U.S.
They'll buy from cheaper foreign competitors instead. For Caterpillar, this means lost sales, lost profits and lost American jobs.
Griswold thinks the political climate here is a big part of the problem.
"Unfortunately, the Obama Administration and Congress . . . seem to want to make it more difficult to invest abroad, and Congress refuses to pass free trade," he said. "It's not only the downturn, but a president and a Congress that threaten to raise investment costs and not lower trade barriers."
Griswold and other free-trade advocates concede that Caterpillar and others like it would feel the downturn no matter what. But the impact on all firms is made much worse by the new anti-free-trade sentiment taking root in Washington. "What made the recession of 1929 into a Depression was when the U.S. embraced protectionism," said Bill Lane, director of government affairs at Caterpillar.
At a time when every job counts, it's getting pretty outrageous that Congress refuses to take every step possible to conserve American jobs. Some 56,000 jobs were lost on Monday alone. Free trade is one of the few things Congress can do to stanch this bleeding.