As crazy as it sounds, he’s right, and here’s why. UAW wages and benefits account for about 10% of the cost of a GM, Ford or Chrysler vehicle. If their wages were completely eliminated, the immediate effect would be to reduce production costs by 10%, potentially putting the automakers back in the black. However, in order to truly become profitable, the Big Three would need to boost their volume. To do so, they’d have to take advantage of their new profit margin to cut prices or offer discounts to attract buyers. If they did that, here’s what would happen:
- Foreign auto exporting nations would simply sell their currency and buy dollars, manipulating the exchange rate in their favor, keeping the price of their vehicles competitive without even needing to cut labor costs.
- The U.S. would howl about currency manipulation, of course, but so what? We’ve been doing that for decades and the results – none – have become predictable.
- The Big Three will then have to cut prices once again in a desperate but futile bid to hold onto market share, and they’ll find themselves again on the brink of bankruptcy.
What about the foreign-owned domestic plants? They’re already profitable enough that they can afford to simply cut prices and take a little less profit margin but, ultimately, if push came to shove, their foreign owners would be perfectly happy to close those plants and bring “home” (to Japan, Korea and Germany) their manufacturing jobs, placing them once again under the protective umbrella of currency manipulation.
Ultimately, it’s the trade deficit that is destroying the domestic auto industry, just as it’s destroyed every other manufacturing industry in the U.S., from textiles to outboard motors. And it’s impossible to “compete” our way out of a trade deficit with nations like Japan, Korea, China and Germany because the deficit has nothing to do with labor costs or currency valuation. It has everything to do with their badly bloated labor forces and low per capita consumption, the inevitable consequences of being grossly overpopulated. The only remedy in such trade situations is tariffs, designed to compensate the U.S. for their inability to provide us access to equivalent markets.
Americans often complain that our government should be run more like a business. OK, let’s run our trade policy like a business, exiting relationships that don’t yield positive results and putting our trade balance sheet back in the black. Let’s stop being the world’s global trade chumps.