Will the Federal Government Let the “Big Three” Die?

As gas prices have soared, SUV and light truck sales, the only thing keeping the “Big 3” (GM, Ford and Chrysler) afloat, have plummeted. These vehicles were the only models still profitable for them, since there was much less market penetration in this segment by imports, although the Japanese were making inroads. The “Big 3” had basically abandoned the market for cars, since it had become glutted with countless models from Japan, Korea, Germany, Sweden and the U.K. This wouldn’t be so bad if the “Big 3” had access to equivalent markets in those countries. With the exception of Sweden, they don’t – not even close. We have given away America’s auto market and gotten nothing in return.

Now we face the very real possibility of total collapse of our domestic auto manufacturers. (Please don’t point out to me that the Japanese, Koreans and Germans are also “domestic” manufacturers now. Assembling imported parts isn’t the same as designing and building parts and finished cars in the U.S.) When I wrote my “2008 Predictions” in November of last year, many probably thought I was overly pessimistic in predicting the bankruptcy of either Ford or Chrysler this year. It hasn’t happened yet, but now both of these and General Motors as well are running on empty. It’s unlikely that all three will fail this year, but the day when none of these will continue to exist is rapidly approaching. And with the loss of these companies will come the collapse of the parts manufacturers, distributorships and thousands of companies that provide them all with services.  Job losses will be in the millions – added to the millions of manufacturing jobs already lost to free (blind) trade. It’s impossible to overestimate the devastating impact this would have on the economy. It would surely tip this country into depression. Not recession. A depression.

Will the federal government stand by and let this happen? Will it try to arrange some sort of bail-out, or help broker deals for the “Big 3” to be bought up by foreign companies or sovereign funds? Who would want them? Daimler is still paying the price for their failed “merger” with Chrysler, and the private equity group (whose name escapes me) who bought Chrysler from Daimler already regrets it.

That leaves the government only one option – protectionism – which could take one of two forms: 1) limiting imports or 2) imposing tariffs on auto imports. The first option would be a nightmare to manage. How would the quotas be allocated between countries and manufacturers? What would happen when models are dropped and new models added?  Prices would rise and the windfall profits would go directly to foreign manufacturers.

The second option makes much more sense. Tariffs would drive prices higher for imports and the market (consumers) would determine which models thrive and which ones fail. The foreign manufacturers would cut their costs and prices to the bone in a vain effort to offset the tariffs. And all of the tariff money would remain in America, increasing federal revenue and potentially allowing for income tax cuts.  But, most importantly, the higher prices for imports would drive customers to the Big 3’s showrooms.  (Yes, auto prices may rise some, but the rise would be more than offset by rising wages as manufacturing jobs rebounded.)  Domestic manufacturers, American workers and taxpayers would all be the big winners.

It’s not as though we’d be venturing into uncharted trade waters. America thrived under these kinds of tariffs from the beginning of our country until 1947, when we signed the Global Agreement on Tariffs and Trade (GATT), turning our backs on the trade policies that built us into the world’s preeminent industrial power. Tariffs are the only thing that can protect our domestic industry from the predation of grossly overpopulated foreign countries, desperate to sustain their bloated work forces by gobbling up our market while all we get in return is access to markets emaciated by over-crowding and low per capita consumption.

Will the next president have the guts to take such measures and reassert America’s right to set our own trade policies? Or will he let the rest of our domestic manufacturing die and throw us a few more crumbs in the form of job training programs, extended unemployment benefits and more “economic stimulus” checks?

We’ve been locked in a global trade war for decades and have been losing badly because we don’t have the will or good sense to even put up a fight. Will the demise of our domestic auto manufacturing be the final battle in a lost war, or will this battle be the turning point?  Time will soon tell.

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4 Responses to Will the Federal Government Let the “Big Three” Die?

  1. Clyde Bollinger says:

    There was hardly a whimper when the steel industry packed up and left. After all, it was a dirty industry with smoke stacks. It took years for the scope of the loss to sink in with most Americans. Hopefully, the potential impact of the auto industry doing the same thing will mobilize enough of our fellow citizens to take action and write the letters and make the calls before it is too late.
    I do confess to really liking my Toyota and I suspect the bulk of the populace has similar feelings. The crisis of possibly loosing our auto manufacturing base is enough to turn me around. We’ll just have to wait and see about my peers.

  2. Pete Murphy says:

    Just a follow-up: The day after I posted this, Standard & Poor’s announced that it is cutting its debt rating for GM, Ford and Chrysler. As bad as things were, now matters have gotten worse. At this point, GM and Chrysler are totally dependent on borrowing to keep operations running. (Ford is already 100% leveraged and can’t borrow any more.) So their cost of borrowing has just gone up. The situation for them is growing more dire by the day.

  3. Henry Dubb says:

    Eyes on Trade (http://citizen.typepad.com/eyesontrade/) has a post up on a recent NAFTA poll. Its looks like Americans don’t like free trade.

  4. Pete Murphy says:

    Thanks for the “heads up” Henry! Like the old saying goes (attributed to Lincoln? I can’t remember): “You can fool some of the people all of the time and all of the people some of the time (which is where we’ve been on trade), but you can’t fool all of the people all of the time.” The American people are fooled no longer. Now, will our leaders begin listening to the people or continue to aquiesce to the lobbyists and special interest groups who represent the tiny minority of Americans who benefit from these trade deals at the expense of the rest of us?

    Just to reiterate for those who haven’t read my book or followed the discussions, I have no problem with free trade in natural resources or free trade between nations of roughly equal population density. But, when it comes to trade in manufactured goods with nations more densely populated than our own, then trade cannot be conducted freely without committing economic suicide. Such a nation is incapable of offering us an equivalent market (in terms of per capita consumption) in return for access to our market.

    NAFTA is a good case in point. I have no problem with free trade with Canada. They are less densely populated than us, have little excess labor capacity for manufacturing for export, and enjoy high per capita consumption like we do. Such is not the case with Mexico. They are twice as densely populated, are bloated with excess labor capacity and, because they are so crowded, have lower per capita consumption. In addition to insisting upon environmental protection and labor rights equivalent to those in the U.S., we should also be charging a relatively low tariff, effectively compensating the U.S. for their inability to provide us access to an equivalent market. This would enhance the competitive position of American manufacturers relative to Mexicans and eliminate our large trade deficit in manufactured goods with Mexico. (Mexican oil would not be subject to a tariff and a large deficit in oil would probably remain. The only way for the U.S. to reduce its deficit in oil with the rest of the world is to reduce U.S. demand. Stabilizing and reducing our population would be the most effective way of achieving that.)

    Thanks again, Henry. Great information!

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