At the White House on July 26, President Donald Trump, alongside Gov. Scott Walker, announced that Taiwanese Electronics giant Foxconn would build a $10 billion factory in Wisconsin, projected to create at least 3,000 jobs. “This is a great day for American workers and manufacturing and everyone who believes in the concept and label of ‘Made in the USA,’” the President declared.
A skeptical press has covered the deal in less glowing terms, noting that to attract the investment from a company best known for manufacturing phones and tablets for Apple, Wisconsin promised a $3 billion incentive package. One pundit pointed out that this would be enough to buy an iPhone for every citizen of the state. Other skeptical voices picked up on a report from Wisconsin’s Legislative Fiscal Bureau, the office that manages the State government budget. Although it is a state agency, the office appeared to cast doubt on the wisdom of the state government’s own deal, forecasting that Wisconsin would not break even until “the 2042-43 fiscal year.”
And yet, for all the naysaying, the deal is, in my view, far better for Wisconsin than these headlines suggest.
For one thing, incentive packages are common, even in China. Indeed, Chinese cities have long known that luring Foxconn is an expensive proposition. But they’ve also learned that the hefty price tag can be worth it.
Just take the city of Zhengzhou, the provincial capital of Henan province in eastern China. In 2013, the US current affairs program “60 Minutes” ran a segment that profiled Zhengzhou as a supposedly archetypical example of a “ghost city”—overinvested and devoid of inhabitants to populate its gleaming new infrastructure. Zhengzhou’s urban population is about 6.4 million, but the city had spent a decade and billions of dollars building a vast new urban district, which had then failed to draw residents. But even as 60 Minutes went to air, Zhengzhou’s new district was, in fact, beginning to fill with people, and Foxconn was the reason. The new population comprised new hires to staff the city’s new Foxconn plant. Today, Foxconn employs more than 200,000 people at its Zhengzhou facility, and the city’s new district is a thriving community.
But to attract Foxconn, Zhengzhou paid a princely sum. According to a New York Times report, the Zhengzhou government invested over $2 billion upfront to build public housing and production facilities for the company, granted hundreds of millions of dollars worth of tax credits and energy discounts per annum, and pledged to spend more than $10 billion to expand the local airport.
Now extend that analogy to the very different locale of Wisconsin, with its better-developed infrastructure and higher paid workers. The Foxconn plant in Wisconsin will be staffed by only a fraction of the people the company employs in Zhengzhou, so it is unlikely to have the same transformative effect on the local economy. But unlike Zhengzhou, Wisconsin managed to get itself a much better deal. It secured Foxconn’s investment without having to pay significant up-front costs. Instead, Wisconsin agreed only to farm out the perks it promised the company once the state gets what Foxconn has promised.
The best way to think of the Wisconsin incentive package is that it is like a credit card rewards program. In other words, once one spends a certain amount by using a credit card, she can get a percentage of her total purchases back as cash. In this case, the Wisconsin government will reward Foxconn with $17 for every $100 the manufacturer pays a Wisconsinite (assuming that the Wisconsinite is a full-time employee earning at least $53,875 annually) over 15 years. And for every $100 Foxconn pays for capital equipment, the state will reward it with $15 for up to 7 years. Technically, then, what Foxconn is receiving is tax credits; but under the Wisconsin tax code, as a manufacturing firm Foxconn’s effective tax rate is already near zero. So it can swap the credits for cash, which the state will pay out of pocket.
Ultimately, the state seems likely to earn back what it plans to pay Foxconn because of the additional personal income tax it can expect to collect from workers with well-paying jobs that have been directly or indirectly created by Foxconn. But that will take 25 years. In a world of cutthroat competition and changing technologies, a manufacturer can go from being an industry leader to the scrap heap of history within a decade; this is what many firms have experienced in the television manufacturing industry, for example. It’s not a foregone conclusion, therefore, that in 25 years Foxconn will even exist in its current form, or that it will still make sense for the company to be manufacturing in Wisconsin without the lure of more perks.
But at the end of the day, the value of a deal can’t be solely calculated by measuring fiscal revenue. The creation of thousands of new jobs and the injection of billions of dollars worth of investment into the state should have an immediate stimulatory effect on the local Wisconsin economy. Moreover, the Wisconsin government is investing in a company that has a proven track record of having an outsized economic impact on the places where it has built factories. In the case of Zhengzhou, for instance, Foxconn’s presence brought a swath of the city to life, creating new demand for housing and restaurants, while also attracting investment from other companies keen to take advantage of an experienced local work force.
Zhengzhou officials ultimately felt vindicated in their decision to make such a big commitment to attract Foxconn. “There’s an old saying in China: ‘If you build the nest, the birds will come.’ And now, they’re coming,” one Chinese official told the New York Times. As for Wisconsin, Frank Carmichael, a local restaurant owner in Kenosha, may have put it most succinctly in an interview with the Washington Post: despite some concerns, Carmichael said, “[Foxconn’s investment] could change the rural face of the county” in a productive way.