Only Bold Trade Policy Moves Can Save the U.S. Auto Industry

Magic City Morning Star ^ | Feb 3, 2006 | Kevin L. Kearns and Alan Tonelson

[Willie Green]

For education and discussion only. Not for commercial use.

The accelerating woes of Ford and GM and the ongoing crisis in auto parts have produced vows from Detroit that business-as-usual won't continue. Yet unless business-as-usual in U.S. trade policy ends, too, and Washington imposes sweeping emergency tariffs on manufactured goods imports, the American-owned automotive industry will soon disappear, and along with it much of the rest of America's core manufacturing. The problem for Detroit is that today's job cuts and plant closings are simply band-aids on hemorrhaging wounds. As financing dries up, development of new products and technologies will become impossible. And health care and pension burdens will be dumped onto the taxpayer.

For a quarter century, Washington has dodged the biggest trade problem plaguing domestic automotive producers: an import tidal wave of vehicles and parts from rivals enjoying a host of advantages unavailable to U.S. automakers. Although Japanese, German, and Korean automotive companies sell freely into the U.S. market, their own home markets have been tightly protected. These governments also use numerous other tricks to promote their auto sectors, such as undervalued currencies, subsidies, and tax rebates and other breaks.

Since the import flood began in the 1970s, U.S. leaders have lacked the will and economic savvy to counteract these unfair competitive advantages. And unfortunately, Detroit has flunked the trade policy challenge, too.

In the 1980s, the United States imposed import quotas in part aimed at forcing foreign automotive companies to produce in America. But because no overall competitiveness strategy accompanied these barriers, they handed the Europeans and Asians not only new access to U.S. markets, but also bargain-basement labor and health cost structures and zero retirement obligations - magnifying the advantages created by one-way trade. State governments added to market distortions by competing for foreign-owned assembly plants with substantial incentives largely unavailable to U.S. manufacturers.

During the 1990s, domestic automotive producers strongly backed NAFTA and other outsourcing-focused trade deals. They believed that, in the absence of effective government assistance, NAFTA would strengthen American manufacturing by enabling labor-intensive operations to be sent to low-cost Mexico, and by requiring Asian and European manufacturers to use high levels of North American content if they wanted to sell here.

Today, however, even though foreign-owned factories produce millions of vehicles in the United States, car and truck imports from these countries keep surging. Between 1997 and 2004 alone, total vehicle imports rose nearly 21 percent from high-wage Japan, more than doubled from high-wage Germany, and jumped nearly five-fold from lower-wage Korea.

Further, despite the transplants' claims of using high and rising levels of U.S.-made parts, imports of these items have increased even faster than vehicle imports. From 1997 to 2004, German parts imports soared more than 142 percent in value terms, Japanese imports ballooned by more than 106 percent, and Korean imports more than tripled.  Imports of the highest value auto parts show many of the biggest rises. Detroit's foreign rivals, in other words, have simply reserved the most lucrative manufacturing for their home economies and NAFTA's domestic content requirements have been too porous to stop them.

So far, Washington has inexplicably ignored the deepening auto crisis. Faced with the demise of a cornerstone American industry, politicians in both parties are apparently betting that pending free-trade deals will magically reverse decades of trade policy incompetence in time to create the mythical "level playing field."  President Bush's recent emphasis on free market solutions for the auto crisis is a perfect example. Without action by Washington to offset foreign interventionism, the president's expectation that GM and Ford acting alone can survive, prosper, and meet their pension and health care obligations is delusional.

Only with an emergency surcharge on imports can Detroit address its internal problems and Washington address unfair foreign automotive competition. Strong medicine, to be sure. But without it, Ford, GM, Delphi and others will keep speeding down the road to receivership, dragging a host of related industries with them, and destroying the middle-class lives of too many hard-working Americans and retirees.

[SmoothTalker]

I really doubt anyone in Japan is clammering to buy an American car.

[Toddsterpatriot]

The auto manufactures ought to follow the lead of the banks and credit card companies. You know, spread a little cash around D.C. , then whine to Congress.

The difference is that everyone uses the bank and credit card products, no one wants to use the GM products.

[investigateworld]

Great wiggle there!

[Toddsterpatriot]

How is the truth a wiggle? Record profits for banks, record losses for GM.

[Extremely Extreme Extremist]

The consumers have spoken, Willie - American cars suck.

All the bloviating against international treaties and tariffs on imports ain't gonna change that.

[capitalist229]

Let's levy a 'defense tax' on all imported goods that reflects the high costs associated with defense of the free world.

If they don't pay then we allow the barbaric hordes to take over their country.

BUMP

[investigateworld]

Record profits for banks?
And they still whine to Congress?

[lOKKI]

I've been traveling to Japan for more than 20 years now and in fact I just spent several weeks there in November of last year.

The story about the trade barriers is 20 years old, and simply isn't true.

I was outside the Tokyo area - in Miyazaki (in Southern Japan). As a car enthusiast, I kept note of the foreign cars I saw-

Perhaps 15 20 BMW's; mostly 3 series
Next were Volkswagens probably close to a dozen.
Next Volvos (Note that this is a "Ford product")
Next but (not too common) Mercedes Benz and Jaguars
I saw two Cadillacs - one an STS and the other a SRX SUV.
I saw one Camaro, and one Buick.
Note that I also saw some Not-for-US-sale brands such as Alfa Romeo, etc.

The bottom line is that there is interest in foreign cars in Japan, but U.S. cars don't sell well.


I'll leave it to you as to why, but suffice to say the argument that foreign cars are kept out isn't true.

[Willie Green]

All the bloviating against international treaties and tariffs on imports ain't gonna change that.

The Anointed One is also deaf to "bloviating" against the federal regulatory bureaucracy that burdens our domestic industries.

Bush is a pseudo-conservative and a fraud who is waging a deliberate and systematic Economic War against the peaceful prosperity of the American People.

[Toddsterpatriot]

Record profits for banks? And they still whine to Congress?

You're right. You should be able to steal from a profitable company because.......well just because.

[investigateworld]

Please show me where I purposed stealing from anyone?

I simply pointed out that the auto makers should follow the path shown by the banks and credit card companies.
Profits not to your liking? Go to Congress!
Show me the difference?

[Toddsterpatriot]

Oh wait, we have lost call centers, IT jobs, most manufacturing jobs

Most? Really?

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Data extracted on: February 7, 2006 (12:28:18 PM)

Employment, Hours, and Earnings from the Current Employment Statistics survey (National)

Series Id:     CES3000000001 Seasonally Adjusted Super Sector:  Manufacturing Industry:      Manufacturing NAICS Code:    N/A Data Type:     ALL EMPLOYEES, THOUSANDS
Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Annual
1993	16790	16806	16795	16771	16766	16742	16742	16741	16768	16778	16800	16815
1994	16853	16862	16896	16932	16962	17011	17027	17082	17114	17144	17187	17218
1995	17259	17264	17263	17278	17260	17250	17218	17241	17246	17215	17207	17230
1996	17206	17229	17192	17204	17221	17226	17222	17255	17253	17268	17276	17285
1997	17298	17316	17339	17351	17362	17387	17387	17451	17466	17513	17555	17587
1998	17621	17627	17637	17636	17624	17607	17421	17564	17558	17512	17466	17449
1999	17426	17394	17368	17342	17333	17294	17319	17288	17281	17275	17283	17277
2000	17285	17285	17302	17299	17276	17297	17325	17287	17232	17215	17204	17181
2001	17105	17029	16935	16801	16659	16519	16381	16235	16120	15973	15828	15713
2002	15589	15514	15440	15390	15336	15295	15256	15174	15125	15059	14993	14911
2003	14861	14781	14723	14613	14555	14493	14407	14368	14344	14328	14315	14296
2004	14290	14280	14288	14317	14340	14332	14332	14348	14329	14320	14308	14294
2005	14268	14276	14268	14256	14251	14233	14224	14213	14187	14196	14214	14213(p)
2006	14220(p)
p : preliminary

14.2 million manufacturing workers think you're wrong.

[Toddsterpatriot]

Please show me where I purposed stealing from anyone?

Hmmmm....borrowing money from a bank and not paying it back isn't stealing? Wanting Congress to stop that stealing is whining?

How did I misinterpret your post again? How about those oil companies? You should be able to fill up your tank and not pay, because they have high profits, right?

Profits not to your liking? Go to Congress! Show me the difference?

Well, for one thing, GM has no profits. So Willie wants to raise the price the consumer pays.

[investigateworld]

The CC and banks lent money on certain terms, even going so far as to give some fools 35 cards. But instead of being punished for that poor judgment, as the auto companies presently are, they spread cash around both Houses, and changed the law. If they did not want the 'risk' (a major word for us capitalists) then they should have used some discretion. You may see me as being a nanny worried about poor folks, but I just don't like Congress being so obvious about having a price tag. and I feel the same about Export - bank guarantees and the like.

[Toddsterpatriot]

The CC and banks lent money on certain terms

I have a sneaking suspicion that one of those terms was getting paid back.

[ghitma]

I agree. On my last trip to China I saw many American made cars. I also saw a Cadillac dealership.

[gogeo]

Gas mileage, of course. American cars are designed for $1.50 gasoline; Europe and Japan cost about $5. Licensing fees are based upon engine displacement.


Small, American made vehicles don't favorably compare on the world market. If you make enough money that you don't care, you're buying a Benz, not a Cadillac.

[Sergio]

The issue is much more complex than most people would like to admit. There is no "one" cause for the mess the auto industry is in and there is no "one" solution.

The government can't create a national business policy, because publicly traded companies like the big three, have stock holders who want their quarterly dividend, no matter what the long term consequences. If the quarterly dividend check is not in the mail, there will soon be a new board of directors. Let me remind you that the stockholder also vote and contribute to political campaigns. What do you think the chances of election or reelection is for a politician who campaigns on a platform of funneling profits back into the company for R&D rather than a dividend check?

Tariffs don't work for the simple reason that the cost is passed on to the consumer. The foreign auto maker never pays the tariff from out of it's own pocket. It turns the issue from a "lets punish the foreign auto maker" to "lets punish American consumers who dare to buy a foreign car." We have a lot of folks here who get steamed about the lack of choice in public schools. If you can't afford a private school or don't have access to school vouchers, you are forced to send kids to a public school that you do not find satisfactory. Tariffs turn the purchase of a car into a similar situation.

The big three also have to make changes. They still produce cars at the same rate as they did during their times of market domination. Unions won't allow the closing of underutilized plants or the layoffs of underutilized employees. Not saying that this is good or bad, just saying that it is a component of the problem the big three now face. You cannot continue to produce more units than the market can bear without depressing the value of each unit.

In addition, the big three have to fight a pretty tough perception problem. Sure Detroit now has models that are reliable, safe, fuel efficient, etc, but they did it after the foreign brands did. So now the Japanese have the reputation for reliability and fuel economy, the Swedes have the reputation for safety, the Germans have the reputation for performance and luxury, though the Japanese are edging themselves into this category as well. As it stands now, none of the big 3 are recognized as a leader (with the exception of a few isolated models) in any of these categories.

And these are just the issues that pop into my mind as someone who has never worked in or for the auto industry. I'm sure that there are many more factors. The bottom line is that it is going to take fixing every one of these issues to turn Detroit around.

This may not be impossible, but it certainly won't be easy or painless.

Best Regards

Sergio

[1rudeboy]

Test me all you want, Willie. The first sentence of this opinion piece refers to an "ongoing crisis." I thought that I should show people that we export 50% more autos and auto parts than we did ten years ago. Frankly, pointing out that auto and auto part imports have grown more rapidly is of questionable relevance . . . or at minimum, I'd like to see you explain why a growing industry is in need of protection, as Messrs. Kearns and Tonelson suggest.

Below you will find a link to my data. The last dozen-or-so times I've posted it to you you've simply replied, "Bah, those are government statistics."

2005 Trade Policy Agenda and 2004 Annual Report

[ex-Texan]

*BUMP* !