Smarter Iran Policy Could Give Trump Leverage to Protect American Jobs
Last week, President-Elect Donald Trump and Vice-President Elect Mike Pence traveled to Indianapolis, Indiana to save American jobs. In a speech at a manufacturing facility of Carrier Corporation, a subsidiary of United Technologies Corporation (UTC), Trump announced that the company would preserve approximately 1000 jobs it had planned to outsource to Mexico and would make a new investment to preserve the competitiveness of its Indiana manufacturing facility. In exchange for its compliance, UTC would receive significant tax incentives.
The Wall Street Journal editorial board called the Carrier intervention a “shakedown,” and it was shocking to many that President-Elect Trump would go so far as to interfere in the decision-making of a private enterprise in order to preserve a small number of jobs.
By a similar token, members of the business and policy communities were dismayed to learn that the Trump administration may seek to interfere in the Iran Deal more deliberately and quickly than previously thought. While Trump was making his announcement at Carrier in Indianapolis, the U.S. Senate voted unanimously to renew the Iran Sanctions Act. The following day, it emerged in a report in the Financial Times that the Tump transition team is exploring new non-nuclear sanctions.
But what if Trump is missing out on the chance to win big on both job creation and Iran policy by connecting the two efforts? The potential nexus of Iran policy and jobs policy is clear. Either Iran can be a direct destination for American-made goods, unleashing a new and highly valuable export market, or, Trump can use his powers to permit non-U.S. companies to more freely trade with Iran, offering a growth opportunity that may enable executives to forego cost-saving layoffs in the US.
Indiana, where Trump and Pence stood up for American jobs, illustrates the salience of Iran to American business interests quite well. Nearly every major multinational corporation with operations in Indiana, counting among them many of the state’s largest employers, have had or currently maintain business dealings with Iran.
When Trump met with Gregory J. Hays, CEO of UTC, at Trump Tower to negotiate the preservation of the jobs at Carrier in Indianapolis, he probably did not realize that instead of offering a tax incentive, he could easily use his future executive powers to enable Carrier and UTC to resume doing business in Iran, a market that was once highly lucrative.
In 1972, Carrier invested USD $2.4 million (equivalent to nearly USD $15 million today) in order to acquire 50% of Carrier Thermo Frig (CTF), an Iranian manufacturing joint-venture. CTF operated until the Islamic Revolution, growing steadily and paying its shareholders a dividend of just over USD $1 million in 1978 (equivalent to nearly USD $4 million today). While the numbers may seem small, it is worth considering the unrealized growth potential. In neighboring Turkey, Carrier Corporation currently owns 50% of Alarko Carrier, a manufacturing venture similar to that of the former CTF. In 2016, Alarko Carrier generated USD $131 million in revenue.
Today one can still find Carrier air condition units in Iran. Some are old models from the CTF days, others are newer models imported via the grey market. These are serviced by Sarma Afarin Industrial Co. a publicly traded company, which emerged from CTF when Carrier pulled out from Iran in 1979. Sarma Afarin still manufactures climate control units based on Carrier designs.
A couple of days after announcing the Carrier outcome, Trump turned his attention to Rexnord, a diversified industrial company.
Just like Carrier, Rexnord had direct business dealings in Iran prior to the Islamic Revolution, and then continued supplying Iran through non-U.S. subsidiaries. The company only began to completely wind down its trade with Iran through in 2009, according to regulatory filings. Iranian companies continue to source and service Rexnord systems through the secondary market.
The incoming administration should realize that the Carrier and Rexnord cases are not exceptions when it comes to Indiana or America's Iran business ties. For example, Indiana is a leader in the American pharmaceutical industry. One of the state’s largest employers is Eli Lilly, which has its global headquarters in Indianapolis. According to regulatory disclosures, the company currently supplies “medicines for patient use in Iran.” The company exports to Iran and conducts related activities “in accordance with our corporate policies and licenses issued by the U.S. Department of the Treasury's Office of Foreign Assets Control.” The encouragement of the Trump administration would certainly help Eli Lilly penetrate the Iranian market, which is becoming a goldmine for European pharmaceutical companies. American firms are being left out.
Indianapolis is also home to the sprawling North America headquarters of Switzerland's Roche Diagnostics, which researches, develops, and manufactures laboratory equipment for the analysis of medical samples. Under licenses and exemptions for medical equipment, Roche exports diagnostic equipment to Iran through its local agent, Akbarieh. While Roche products manufactured in Indiana are not imported directly to Iran, the research and development performed in Indianapolis informs the rollout of products in the country. Other sections of Roche’s business are operated locally by Roche Pars, a wholly-owned Iranian subsidiary established in August, 2013. Roche Pars is currently the fastest growing pharmaceutical company in Iran, registering 50% annual sales growth as it approaches 5% market share.
Indiana boasts a proud history of transportation manufacturing. The state is home to the world’s sole manufacturing plant for Toyota’s midsize Highlander SUV. While the Highlander is not currently sold in Iran, Toyota’s RAV4 and Corolla models are strong sellers with nearly 4,000 models sold since March of this year. The Highlander would likely do very well, as two of its direct competitors are among the most popular imported models in the country. The Hyundai Santa Fe is Iran’s top selling imported car, followed closely by the Kia Sorento. However, if the Trump-Pence team did decide to unleash Indiana’s mighty Highlander on the Iranian market, they would have to extend an olive branch first, as Iranian legislators have blocked the import of US-manufactured automobiles in retaliation for the US renewal of the Iran Sanctions Act.
According to a 2012 filing to the Securities and Exchange Commission, Cummins, a world-leader in diesel engines and generators, continued exports to Iran via its European subsidiary until 2010, when sales totaled approximately USD $1.3 million. Just two years earlier, sales were USD $5.7 million. As sanctions have tightened, third party importers have stepped in to divert generators produced in Cummins’ factories in places like Chongqing, China and Pune, India to Iran. Neither Cummins, nor the workers at its Seymour, Indiana factory, now benefit from what was once a promising market.
Rolls Royce’s Indianapolis facility produces “more Rolls-Royce products... than anywhere else in the world” according to its website. While this facility primarily produces small to medium civil aircraft engines and marine and helicopter engines that are not currently exported to Iran, the company has expressed that it welcomes Iran Air’s pending acquisition of Airbus aircraft that will be powered by the larger Rolls-Royce Trent-series engines. In addition, the company is reportedly in talks with Iranian energy authorities to determine whether Rolls-Royce diesel and gas generation systems can be acquired as part of upgrades to Iran’s power infrastructure.
There are almost certainly other companies in Indiana that would benefit from an enabling of trade ties with Iran. In 2014, NIAC, an advocacy group, published a report that examined the total value of US export revenue to Iran forgone between 1995 and 2012 due to the imposition of sanctions. The researchers found the total value of lost exports to be as high as USD $175 billion. In addition, the lost exports translate to an average of 66,000 jobs lost each year.
Even in the American heartland of Indiana, the economy depends on the success of major multinational corporations, some headquartered locally, others operating foreign outposts. For nearly all of these companies, Iran is a market of significant interest. If the Trump administration wants to be known for its business acumen, it should think more creatively as to how best to incentivize global corporations to preserve American jobs. Rather than using public pressure and tax incentives to compel global companies, Trump should offer opportunities that encourage growth and ambition.
Given the renewal of the Iran Sanctions Act, it remains the prerogative of the executive branch to green-light Iran trade through the provision of OFAC licenses. Donald Trump has clearly realized that his new role as President-Elect gives him immense influence over some of the world’s largest corporations. He should use that leverage to give big business what it wants—new markets in which to compete. For the workers at Carrier, Rexnord, Eli Lilly, Roche, Toyota, Cummins, and Rolls Royce, anything that reduces the pressure on their executives to slash costs could make all the difference. Currently, European products dominate Iran's marketplace. Products made in Indiana—and indeed in all fifty states—could find a hugely receptive market in Iran. The Trump administration would be wise to take heed.
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