“The tariff issue is a controversial one, but for Puerto Rico, it’s a great opportunity,” said Governor Jenniffer Gonzalez-Colon last week as she explained that manufacturers who relocate their factories in Puerto Rico will not face the tariffs on foreign goods but may still see lower operating costs than in most states.
Benefits for Puerto Rico
If the Island is able to persuade manufacturers to relocate their manufacturing to Puerto Rico, it could be exactly the boost that the territory needs. While manufacturing continues to account for half Puerto Rico’s GDP — far more than in the states, where it averages 11% — some of that could be an illusion. The apparent revenue in many cases comes from transfer payments from mainland companies to their Puerto Rico subsidiaries. The main companies pay fees for intellectual property to their subsidiaries, for example, and then claim that all profits from that IP originates in Puerto Rico. This allows the company to benefit from the Island’s tax deals without actually investing much in the local economy.
For example, the workforce in manufacturing only makes up about 8% of the Island’s employment statistics. In the states, manufacturing accounts for about 11% of GDP and also about 11% of employment. In Puerto Rico, the profit claimed to originate from a factory in Puerto Rico may work out to millions of dollars of profit for each person employed in the factory.
Naturally this means that the territory does not get the economic benefits of additional jobs and additional spending by the workers at the factory. If more companies build factories with a reasonable size of workforce for the size of the profits, those workers will earn more and spend more in the local economy, which the owners of the factories typically do not do.
Actual production of goods in Puerto Rico would not only be a shot in the arm for local economies and a rise in the tax base, but will also incentivize investments in infrastructure, energy, education, and other amenities. Workers are routinely wooed by corporations in states with investments in local roads, schools, healthcare facilities, and even restaurants. This could happen in Puerto Rico as well.
Benefits for manufacturers
Certainly, manufacturers from the states and from other nations around the world will have the chance to escape punishing tariffs if they locate production in Puerto Rico. There are currently significant tax benefits from the territorial government, and operating costs may be lower.
In addition, Puerto Rico offers a large bilingual workforce with, in many cases, experience in factory work beyond the level found in the states. There is also an unusually large number of people familiar with specific protocols for medical devices and pharmaceuticals, making the Island a particularly good place for medical and bioscience manufacturing.
Puerto Rico will also be an attractive place for incoming workers to live, an important factor in recruiting skilled workers to a new facility. The chance to live in a tropical paradise is clearly appealing, and as employers make investments in local communities — which is the norm in the states — the Island will become more competitive with other potential locations for manufacturing.
Benefits for the U.S. as a whole
The trade wars are already causing rising prices and economic uncertainty in the United States. Increased production of needed goods in Puerto Rico would help American brands avoid having to raise prices further.
Enhanced prosperity in Puerto Rico will also relieve some of the tension felt in the federal government over needed support of the territory. This change could also have effects on national security.
Government and industry in Puerto Rico are currently working on a long sales prospects list of manufacturers, explaining the benefits and helping to facilitate details. Time will tell whether the economic upheaval across the nation will lead to economic improvement in Puerto Rico, but it could be an opportunity for the U.S. territory.
