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

June 19, 2008

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.