Auto Industry: “We’re winning with NAFTA.” Seriously?

October 25, 2017

The above-linked article reports on an effort to generate opposition to the Trump administration’s tough stance on the renegotiation of NAFTA.

Auto trade associations representing General Motors Co Toyota Motor Corp, Volkswagen AG, Hyundai Motor Co, Ford Motor Co and nearly every other major automaker, are part of the coalition dubbed “Driving American Jobs” and backing an advertising campaign to convince the White House and voters that the agreement has been crucial in boosting U.S. automotive sector production and jobs.

“We need you to tell your elected officials that you don’t change the game in the middle of a comeback. We’re winning with NAFTA,” the group said on its website.

OK, wait a minute, domestic auto manufacturers, especially GM and Chrysler.  First of all, you’re not “winning.”  You’re barely hanging on, thanks to a taxpayer-funded government bail-out a few years ago, made necessary by the fact that rotten trade deals drove you into bankruptcy.  What American jobs have come back since then were largely driven by the fact that the United Auto Workers, being one of the stakeholders in the bankruptcy process, demanded that it have some say in the location of new plants.  That’s GM.  And Chrysler?  Part of their pathetic “comeback” required them to be sold to Fiat, globally recognized as one of the shoddiest car-makers on earth.

Ford survived without a bailout, a point of pride for that company, but now finds itself struggling with a shortage of capital to modernize its product offerings.  Not a problem for GM and Chrysler who factored that need into the bailout.

No doubt, NAFTA has played a role in propping up the profitability of these companies.  But to suggest that that somehow is a “win” for American workers is ludicrous.

The campaign comes amid rising concern that the Trump administration could opt early next year to withdraw after giving six months notice, a move that could expose automakers to high tariffs who are building trucks in Mexico and impose new tariffs on parts and cars made throughout North America.

This coalition would like you to believe that automakers would have no “plan B” to counteract tariffs.  That they’d have no choice but to continue building in Mexico, forcing consumers to pay the tariffs.  Don’t be ridiculous.  Production would be moved back to the U.S. to avoid the tariffs and the impact on production costs would be largely offset by reductions in shipping an other supply chain costs.  The impact on consumers would be virtually zilch, and the impact on the American labor force would be an upward pressure on wages.

I don’t understand why the Trump administration is even wasting its time with trying to renegotiate this agreement, whose sole purpose was to boost Mexico’s economy, in line with the United Nations’ push to raise living standards in underdeveloped countries.  I suppose to be able to at least say, “we tried.”  But there’s nothing to negotiate.  Just impose the tariffs and watch them work their magic.


Ford Moving to Mexico; Trump Says He’ll Stop It

September 15, 2016

The above link will take you to an interview conducted by CNN’s Poppy Harlow with Mark Fields, Ford CEO.  If you have the patience to watch it all the way through, it will be immediately followed by further discussion of Trump’s plans to raise tariffs and bring manufacturing jobs back to the U.S.

Trump has long predicted that Ford would be announcing its move to Mexico.  Fields responds that they are only moving its small car production – the Focus and the C-Max (both made at Ford’s Dearborn, MI plant) -to Mexico.  Other models will continue to be made in the U.S.

Ford actually sells six car models:  Fiesta, Focus, C-max, Fusion, Mustang and Taurus.  The Fiesta and the Fusion are already built in Mexico.  Ford’s announcement about the Focus and C-max leaves only two of its six car models that are still made in the U.S. – Mustang and Taurus.  The former is built at its Flat Rock, MI plant and the Taurus is built in Chicago.  Most of its SUVs and trucks are built in the U.S.  There’s a good reason for this.  The U.S. continues to maintain a 25% tariff on all imported light trucks.

The Transit Connect is an interesting exception.  Until 2013, Ford imported the Transit Connect, a vehicle it markets as a commercial van/truck, from Turkey, trimmed out as a passenger van.  It then strips out the passenger interior, removes the windows, and replaces them with metal panels, converting it into a commercial vehicle.  It did all of this to escape paying the 25% import tariff.  In 2013, the U.S. ordered Ford to stop this practice.  Ford still does it, but now it pays the tariff.  It “eats” the cost of the tariff.  It doesn’t pass it on to the consumer.

If elected, Trump has vowed to essentially tear up most trade deals – particularly NAFTA, and will raise tariffs to force companies to re-establish their manufacturing operations in the U.S.  In the case of Mexico, he has suggested a 35% tariff.  During the linked interview, Ms. Harlow asked Mark Shields directly whether he would still move manufacturing to Mexico if that were to happen.  Shields side-stepped the question.  But the answer is obvious.  Of course Ford would not move more production to Mexico if that were to happen.  Quite the opposite.  Production of the Fiesta and Fusion would also return.

Late in the interview, Shields cited the huge savings in labor costs for the move to Mexico, saying that it needed to be done to remain competitive in that segment of the market.  Ms. Harlow failed to follow up with the obvious question:  “So you’ll be reducing the price of the Focus once production has moved to Mexico?”  I would have loved to see him squirm and see the smirk run away from his face when he replied that the price wouldn’t change a bit.

Has any company ever cut the price of any product once its production was moved overseas?  Of course not.  They pocket the extra profit.  Which brings us to one of the arguments employed by economists (and cited in the 2nd CNN segment which starts immediately after the Mark Shields interview) that prices will rise and consumers will be forced to pay the tariffs, hurting the economy and cutting deeply into consumer spending.

That’s absolute nonsense.  Consumers don’t pay the tariffs.  The importing companies pay the tariffs.  Whether or not they elect to pass that extra cost along to the consumer is entirely up to them.  As we saw above with the Transit Connect, Ford doesn’t pass it along.  Sure, that would cut deeply into profits.  By far, the smarter alternative is to move manufacturing back to the U.S.

During the course of the interview, Ms. Harlow repeats a myth about tariffs and their role in the Great Depression.  “… the last time a big tariff was instituted in the United States back during the Great Depression, all the economists agree that it made the Great Depression worse.”  I’ve said it many times but it bears repeating here:  that’s factually false and is absolute nonsense.  First of all, no new, big tariff was implemented during the Great Depression.  The Smoot-Hawley Tariff Act of 1930 was a very slight tweaking of the  Fordney-McCumber Tariff Act of 1922, raising tariffs overall from 38.5% to 41.4%.  Following enactment of Fordney-McCumber, the economy boomed during the “roaring ’20s.”

By the time Smoot-Hawley was enacted, the Great Depression had already been underway for a year.  During the Great Depression, America’s balance of trade declined by less than $1 billion while GDP fell by $33 billion.  To blame tariffs for the Great Depression is ludicrous.  But that didn’t stop economists from doing it, eager to make a case for their new, untested theory about “free” trade.

In the CNN piece following the Mark Shields interview, CNN reports on dire warnings by economists that Mr. Trump’s tariffs would have disastrous consequences for the economy, cutting GDP by up to $1 trillion and would result in the loss of 4 million jobs.  Such claims are really puzzling, given the fact that economists know very well that a trade deficit is actually a subtraction in the calculation of GDP.  It’s impossible that bringing back manufacturing would do anything other than boost GDP dramatically.  Merely balancing trade in manufactured goods would be an $800 billion boost to the economy.  That would be a 4% jump in GDP which, not coincidentally, is what Trump has targeted for economic growth.  Any further surplus in trade in manufactured goods would boost the economy even more.  And instead of cutting 4 million jobs, it would actually create approximately 10 million jobs.

Free trade advocates claim that manufacturing jobs don’t matter any more, that most manufacturing is automated and there are few jobs there to be had.  If that’s true, then why do so many badly overpopulated nations with huge, bloated work forces cling so desperately to the manufacturing that they do for the American consumer?  Certainly, automation has improved productivity in manufacturing, but not nearly to the extent that free traders would have you believe.  Consider the production of the supposedly high-tech cell phones like the i-phone.  Their manufacture is about as low tech as you can get – thousands of people assemble the circuit boards by hand in China.

During one of the CNN segments, the reporter comments that “cars aren’t really built from scratch any more.  They’re assembled.  Those plants in Mexico will be assembling them from American-made parts.”  As if the process of assembly requires no effort, and as if cars haven’t been built that way since Henry Ford invented the assembly line.  I can tell you from personal experience, having toured the Dearborn plant where Ford builds the Focus, that it takes a lot of workers to make an assembly plant “tick.”  Watching a stack of sheet metal being turned into a finished automobile in less than 24 hours is truly awe-inspiring.  Having toured both auto assembly plants and electronics manufacturing, I can tell you that an auto assembly plant is far more “high-tech” than electronics production.

Trump’s plans to use tariffs to return manufacturing back to the U.S. is exactly what the American economy needs – and is exactly the thing that globalists fear the most.

“Cash for Clunkers” an Abysmal Failure

August 27, 2009

When the “cash-for-clunkers” program ran out of funding after only a few days, Congress quickly injected another $2 billion into the program (which was first authorized with funding of $1 billion).  Auto dealers across the nation were hailing it as a huge success.

The intent of the program was two-fold:  to improve the overall mileage of America’s auto fleet by taking old, inefficient gas-guzzlers off the road but, more importantly, to stimulate auto sales and rev up domestic auto manufacturing.  And it did both.  GM added shifts to its Malibu and Cobalt manufacturing plants to replenish depleted stocks, putting 1300 auto workers back to work. 

So the program was a success, right?  700,000 cars and trucks (as reported in the above-linked article) were replaced by more efficient models.  Sales of domestically-produced vehicles were boosted from their recession level lows. 

So why was the program so unceremoniously terminated Monday by an administration that has played fast and loose with cash to boost the economy?  And why am I calling it an abysmal failure?  Because it was eroding our GDP (gross domestic product) at a frightening clip, undoing the effects of other stimulus spending.  More than anything, the Obama administration would like for 3rd quarter GDP to actually show some growth, however modest.  (After all, GDP is the gauge by which the end of the recession will be judged.)  But, if it misses that mark, the blame may very well lie at the feet of the “cash-for-clunkers” program. 

To understand, let’s do some math.  As reported in the linked article, 700,000 vehicles were sold in this program, at a cost to the government of $2.87 billion.  But 80% of these vehicles, or approximately 560,000, were imports.  (This figure doesn’t match the percentages reported in the linked article because some of the sales by GM, Ford and Chrysler were also imports from Mexico or Korea, like the Chevy Aveo imported from Korea.)  If we assume the average value of those imported vehicles to be $17,000, then almost $10 billion worth of vehicles were imported, and every dollar of imports is subtracted from GDP.  (Dollars spent on imports are lost and no longer available to spend in the domestic economy.)  So, for $2.87 billion in taxpayer expenditures, the government managed to reduce GDP by almost $10 billion.  A little of this was offset by boosts in domestic manufacturing, but not much. 

And this $10 billion erosion in GDP took place in the course of only about three weeks.  At that pace, if kept going, the program would have eroded GDP at a quarterly rate of $43 billion.  Actually, the effect upon GDP is doubled when you consider that those imported vehicles could have been produced domestically.  In addition to the subtraction for the imports, an equal amount of domestic business was lost. 

Making matters worse, the share of the “cash-for-clunkers” that went to domestic auto makers fell below the pre-program market share of those manufacturers.  In other words, the program was actually eroding the market share of the big-3, exactly the opposite of what the government – now by far the biggest shareholder in both GM and Chrysler – wanted to have happen. 

Now you can see why the program was terminated without any further calls to keep it going.  As the administration began to evaluate the data and saw that 80% of the money was being used to boost the economies of Japan and Korea (primarily), their response was surely, “Oh, sh#t!”  “This isn’t very smart!”

To its credit, the Obama administration has drawn a line in the sand when it comes to the demise of the manufacturing sector of the American economy – a line that, as owner – it will not allow the domestic auto industry to cross.  But, as owner, they are now also faced with the quandary of how to boost domestic auto sales (and thus the entire economy) within the framework of free trade policy it has inherited.  Now it can see that stimulating auto sales in a way that doesn’t violate trade agreements doesn’t work.  Will it now rely on boosting the quality and competitiveness of American cars?  If it does, it will be ignoring decades of experience that proves that that approach doesn’t work either, as imports will simply match them move-for-move.  Or will it continue to rely on jaw-boning other nations to start importing more American products?  That approach too has been proven a resounding failure.  Sooner or later, either the Obama administration or some subsequent administration must come to the realization that failed trade policy lies at the heart of our economic woes.

Fresh Start for GM, or Another Landmark in Economic Decline?

June 2, 2009

General Motors filed for bankruptcy yesterday, closing the book on the greatest American manufacturing company in history, as we knew it.  A new GM will emerge, but it will be only a shadow of the company that once was. 

The day was filled with a lot of cheerleading for GM, led by our president, now heavily invested in its success along with his taxpayers, to the tune of $50 billion.  And there were brave faces on display among GM executives in front of the camera, vowing reform and begging consumers not to abandon them.  All spoke of a fresh start and a vision of a new power-house U.S. auto manufacturer, one that will out-compete the foreign competition and win back market share. 

Lost in all the hubbub was the real significance of this event:  that it’s just one more landmark – and a huge one – in the steady deindustrialization of America and the downward spiral of its economy.  GM is just the latest victim of a policy that grants free access to the American market while asking and getting nothing in return – no access to equivalent markets.

Nothing has changed.  The new G.M. will re-emerge into the same environment.  Mounting job losses (to which G.M. has been a big contributor) will continue to be a heavy drag on auto sales.  The market will still be saturated with dozens of foreign brands, free to “dump” cars at below cost with impunity while American brands face a stacked deck in foreign markets that have been emaciated by overpopulation. 

The new G.M. re-emerges with a lower labor cost structure and has been freed of its crushing debt burden.  But it won’t make a bit of difference, except to force the foreign brands to cut their costs as well in order to maintain market share.  The U.S. auto market will simply become even more of a dog-eat-dog world, especially as Chinese brands make their entry. 

Reminiscent of the movie Groundhog Day, in a scene that has played out over and over and over for decades, if not in China then in Japan or Germany, Treasury Secretary Tim Geithner is in Beijing on a jawboning mission, trying to talk his way out of a trade deficit and into a healthy economy.  The effort is laughable and the results predictable.  Geithner will be patted on the head and sent on his way, leaving the Chinese negotiators rolling their eyes and shaking their heads in disbelief at the naivete they had just witnessed. 

Without meaningful action instead of talk by the U.S. to force a balance of trade, GM will be re-emerge as a little fish into a pond full of very hungry predators.  It’s been said that the U.S. doesn’t need and can’t support three separate auto manufacturers any more.  Yet, no one says the same thing about France, a nation one fifth the size of the U.S., with its Renault and Peugeot brands.  No one complains that Germany, a nation one fourth the size of the U.S., has four manufacturers – VW (the company founded by Hitler), Porsche, Mercedes and BMW.  No one complains that Japan, a nation less than half the size of the U.S., has six manufacturers – Toyota, Honda, Nissan, Mitsubishi, Subaru and Mazda.  How many of these companies would thrive without access to the American market, or if Americans’ per capita consumption of vehicles was cut in half, as it is in the emaciated markets of these overpopulated nations? 

No one can say that President Obama hasn’t been aggressive and decisive in tackling our economic implosion but, in the area that matters most – restoring a balance of trade, he’s talked a good game.  He’s chided the rest of the world to rely less on exports and to do more to boost their own economies.  But, though talk and diplomacy may be effective in dealing with other foreign relations issues, it can’t alter basic economic realities like the role of population density in driving global trade imbalances.  Without meaningful action by the  U.S. to address the root cause of our economic melt-down, GM’s bankruptcy is just one more waypoint in our downward spiral, soon to be followed by more – the bankruptcy of Ford, a collapse of domestic auto manufacturing, defaults by states like California, hyperinflation and eventual insolvency of the U.S. as a whole. 

We need action, not talk, and only time will tell if Obama has the courage to act when all of the talk has failed.

Farewell, Pontiac.

April 28, 2009

Taking yet another step toward oblivion, General Motors announced today that it will kill the Pontiac brand in 2010.  Thus ends another proud American name-plate, sacrificed on the altar of “free” trade. 

President Obama had the power to breathe new life into the domestic auto industry when he took office by restoring a balance of trade in the auto industry, demanding that Japan, Korea, Germany and Mexico begin buying as many American-made autos as we buy from them, or face tariffs and import quotas.  This would have almost instantly doubled domestic auto sales, breathing new life and profitability into GM, Ford and Chrysler, even as we headed further into recession.    Additional shifts would have been added and idled plants restarted.  This would have been a stimulus plan that put the one he opted for instead to shame.  Instant results. No expense to the taxpayer.

But no.  That would have made him a turd in the punch bowl at the G7 and G20 parties.  Much better to drive the domestic automakers into bankruptcy, slash pay and benefits, kill off thousands of dealerships, stiff bondholders and shareholders and stick taxpayers with the bill.

What a shame.  Pontiac made some of the most iconic models of all time including the G.T.O. and Firebird.  I’ve only owned one Pontiac in my life, a used ’84 Fiero which, aside from my first car, a ’73 Corvette, was the most fun car I’ve ever owned.  A mid-engined, 4-speed sports car with a composite body, independent suspension, four-wheel disc brakes and incredible handling for only $4,000.  High insurance rates finally killed off demand among its target demographic.  Too bad.  It was a terrific sports car at a great price. 

In my opinion, Pontiac still has the most attractive styling of all of the GM products available today (except Corvette, of course).  The Pontiac G6 is as stylish as anything in its class and the styling of the G8 is in a class by itself.  Then there’s the Solstice – the equivalent of a BMW Z4 at almost half the price.  I’d be driving one now if I was in the market for a new car. 

Obama has said that America needs a vibrant auto industry.  But the plan seems to be to down-size it out of existence.  In 2004, Oldsmobile bit the dust.  Today it’s Pontiac, Saturn and Hummer.  Along with those cuts come the closing of more plants, the elimination of almost half of its dealership network and the elimination of 21,000 more jobs. 

If this was all part of a process of slowly reducing our population to a sustainable level, I wouldn’t have a problem with it.  But killing off the last vestiges of the manufacturing sector of our economy even as the population is expected to grow by at least 100 million people in the next forty years is a recipe for an economic catastrophe.  Oh, wait, we already have one!

Cutting UAW Wages to Zero Wouldn’t Save Big Three

December 3, 2008
When asked about the possibility of further concessions to help the Big Three automakers during a press conference today, Ron Gettelfinger, president of the UAW (United Auto Workers) responded that they’re willing to help, but pointed out that “our research shows that even if we cut our wages to zero, it wouldn’t save the Big Three.”

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:

  1. 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.
  2. 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.
  3. 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.


$350 Billion for Citigroup – Not a Penny for the Auto Industry!

November 24, 2008

The double standard and hypocrisy in Washington simply defies belief!  When the domestic auto industry, upon which one out of every ten jobs in America is directly or indirectly dependent, needs a helping hand – a mere $25 billion – to survive the financial crisis, they are forced to appear before Congress for three days of hearings and are berated, belittled, mocked and sent home without a penny – with nothing more than a demand for a “turn-around plan.” 

Then along comes Citigroup.  Without a single congressional hearing or a request for any kind of plan, the government lavishes them with $350 billion!  ($25 billion already given to them, followed by $306 billion to back up their bad debts and another $20 billion injected in the form of capital.)  Not a peep of protest about Citigroup’s corporate jets or excessive executive compensation.  No turn-around plan.  Nothing.  

Add this to the AIG bailout and you have a total of $500 billion for just two companies, twenty times what the entire domestic auto industry has requested.  Yet the government won’t provide a penny to help them.  Obviously, the Big Three would have been much better off going to Citigroup and asking for the money.  Why should Citigroup deny them?  They can pass out money like candy and the government will be there to bail them out, no questions asked! 

The anti-manufacturing bias of the U.S. government is clear.  They force trade policies down our throats designed to destroy our manufacturing base, mock us as “protectionists” when we complain, and subject us to public humiliation when we ask for a little help.  On the other hand, they bow down before the financial industry as though they were gods, regardless of how badly the industry is mismanaged, completely ignoring the fact that they are 100% responsible for the global economic melt-down.

What is the “plan” that Congress wants to see from the auto industry?  The following three-step plan would surely do the trick:

  1. Donate as much money to congressional election campaigns as financial companies have.
  2. Double donations in the following elections.
  3. Double them again.

I’m sure that’d do the trick.

Government Accuses Auto Industry of “Mismanagement?!?!”

November 19, 2008

As I watched the leaders of the domestic auto industry take their beating from the Senate Banking Committee on Tuesday, I couldn’t help being struck by the absurdity of these senators accusing the Big Three of mismanagement. These senators who chided the Detroit execs for making bad decisions are the same people who voted for the Iraq war. These very same senators who accuse the CEOs of mismanaging shareholder funds are the very ones whose policies have ruined America’s economy. These same senators who charge the Big Three with caving in too easily to the demands of the UAW are the same ones who rolled over like submissive puppies when the financial industry came looking for $700 billion and AIG needed $150 billion. They who complain that Detroit doesn’t build cars that people want are the same people who showed callous disregard for the people of New Orleans as they wallowed in muck for months on end following Katrina. These same senators who deride executive compensation packages are themselves lavished with lobbyist gifts and favors while they shrug off single-digit approval ratings. Never has such a level of hypocrisy been on such public display. I wonder how fast these same Senators would be on their knees before China, begging for money were it not for their ability to crank out new money on their own printing press to cover up their screw-ups.

Certainly, the Big Three are not without their faults. But considering that the American car market is sliced and diced into ever-tinier pieces and passed out to every foreign car-maker who comes along, for nothing in return, it’s really quite remarkable that they haven’t lost even more market share and that they’ve survived for as long as they have. If Congress insists on continuing to pursue such destructive, idiotic trade policy, then the least they can do is give the domestic car makers a helping hand.

Frankly, when you look at the performance of the Detroit automakers vs. the performance of Congress, we all may be much better off if we placed the operation of the federal government under the management of the Big Three.

The Domestic Auto Industry’s Problem? Dumb Trade Policy!

November 13, 2008

In my previous post, I laid out the reasons why the Big 3 are in trouble, and how to help them.  Briefly, their problems boil down to one thing:  dumb trade policy that gives away our domestic auto market for almost nothing in return. 

Perhaps some fresh, cold, hard data will help.  Trade data was released this morning (November 13th) for the month of September, 2008.  The following is the data for our major trade “partners” for motor vehicles and auto parts:

Country    Exports ($MM)    Imports ($MM)    Pop. Density (people/sq. mile)

Mexico             1,620                   3,903                            141

Germany              949                   1,565                            600

Japan                   155                   4,158                            878

Korea                    85                      692                            1,257

Canada            4,584                   4,673                                30

We import 2-1/2 times as many cars from Mexico as they import from us.  With Germany, it’s almost the same.  We import eight times as many cars from Korea as they import from us.  And we import almost 27 times as many vehicles from Japan as they buy from us!  For contrast, look at Canada and you’ll see almost perfect balance.  I’m showing you this data to make two points:

  1. Notice how well the data correlates with population density.  (The population density of the U.S. is 85 people per square mile.)  Korea is a relative newcomer to the auto market (compared to Germany and Japan), so we can expect the imbalance with them to worsen dramatically as time goes on.  Clearly, free trade with grossly overpopulated nations is a sure-fire loser.  (The data for Canada is provided for contrast.  Notice that our trade in motor vehicles with Canada is almost perfectly balanced.)
  2. Is it any wonder our domestic auto makers are having trouble?  We gave away over half of our market and got virtually nothing in return from the likes of Japan and Korea.  That would be acceptable if they made up for this imbalance by importing more of some other category of product, but they don’t.  Our overall trade imbalance with Japan is enormous, second only to China for manufactured products and, while our trade deficit with Korea is relatively smaller, it’s growing fast. 

Folks, this is just idiotic trade policy.  The word “trade” is defined by Webster’s as a mutually beneficial exchange.  That means that each party gets something in return for what they are trading.  What are we getting from these countries?  In some cases, like Mexico and Germany, we are not getting enough.  In the case of Japan and Korea, we’re getting virtually nothing.  This isn’t trade; it’s global welfare.  It’s a huge lie being perpetrated on the American work force, telling us to compete harder and be more productive, all the while knowing that we don’t have a chance.  They’re not going to buy our products.  They’re not stupid.  They have far too many idle workers in their bloated labor forces to be kept occupied to keep their societies from collapsing.  They’re playing Americans for fools.

Will we ever wake up to what’s being done to us – to our country?  There was a time when Americans stood up for themselves and fought when they were being used and taken advantage of.  Is that time past? Have we evolved into a nation of sheep?  Like dumb mules, we take our beating and just keep trudging along with our heads down.  Frankly, the whole situation makes me sick.

Saving the Domestic Auto Industry: Why and How

November 13, 2008

Why the Domestic Auto Industry Cannot be Allowed to Fail:

The plight of the “Big 3” (GM, Ford and Chrysler) has dominated the news for the last couple of days.  All three are on the verge of bankruptcy.  All three are burning through cash at an incredible rate, the result of sales volume falling far below that necessary to support their infrastructure and legacy costs.  GM stock is now worth less than a 1-1/2 week inventory of the cars it builds. 

There seems to be a consensus that the domestic auto industry cannot be allowed to fail.  Yet, there are those who say “Let them fail.”  “It’s their own fault.  Their labor costs are far too high.  They build gas-guzzling inefficient vehicles.  Who needs them?  The Japanese, Korean and German carmakers can easily meet Americans’ need for vehicles.  Everything else we buy is imported and we get along just fine.  Why should cars be any different?”

Well, first of all, while everything else we buy does seem to be imported, we’re not really getting along fine, are we?  Take a look around.  Check your 401(k) statements.  Read the financial pages.  Our economy is in complete collapse, and the trade deficit is the root cause.  The trade deficit has drained away $9.1 trillion from our economy in the last three decades, and it’s all been financed by selling off American assets, even our homes, through selling mortgage-backed securities to our foreign creditors.  When we ran out of assets to sell them, the whole thing collapsed.

Imagine what would happen if the domestic auto industry collapsed, as it surely would if even one of the Big 3 goes under, taking the supplier base out from under the remaining two.  In a normal year, domestic car sales total about 16 million vehicles.  About half of these (a hair less) is built by the Big 3, about 8 million vehicles.  At an average cost of $25,000 per vehicle, that’s $200 billion per year added to our GDP of about $14 trillion per year.  Take that away, and our GDP falls to $13.8 billion.  Now, import those cars to make up the difference, and our GDP falls to $13.6 billion, because imports are subtracted from GDP.  (Even the government acknowledges that imports are a drag on the economy.)  At the same time, our trade deficit rises to $900 billion per year.  And, of that $200 billion cost of domestic cars, about $140 billion is labor cost.  Eliminate those jobs and, on average, every worker in America will take a pay cut of almost $1,000 per year.  Declining incomes is the real reason that home values are falling.  Take $1,000 per year out of everyone’s incomes and home values will drop another 10% automatically.  Looking for a sure-fire way to finally finish off the American economy?  This is it! 

Regarding the claim that their labor costs are too high, their legacy costs (pensions and health care for their retirees) are extremely high.  But remember, these benefits were promised at a time when domestic auto makers thought they could always count on having the domestic market to themselves, or later thought that free trade would provide them with export markets equivalent to any loss of domestic market.  They were suckered by economists who didn’t understand the real consequences of free trade, which was nothing more than an untested 18th century theory.  But they soon discovered the bind they were in and, since then, they’ve done a great job of working with the unions to slash labor costs and improve productivity. 

And regarding the claim that they only build gas-guzzlers:  they were crowded out of the small car market by imports and forced to specialize on the seqment of the market where they could still make a profit – light trucks and SUVs.  The only reason they build these vehicles is because that’s what Americans wanted.  Every big, gas-guzzling SUV on the road is there because that’s what the owner demanded. 

Now everyone wants fuel efficiency, but the small car market is glutted with overcapacity from all over the world.  The Big 3 simply cannot be cast into that glut and be expected to survive. 

The following article is a good summary of why the domestic auto industry can’t be allowed to fail.,8599,1858702,00.html?xid=feed-rss-netzero

“If GM were to go into a free-fall bankruptcy and didn’t pay its trade debts, then the entire domestic auto industry shuts down,” says Rodriguez. The system — the domestic auto plants and their interconnected group of suppliers — is far bigger than GM. It includes 54 North American manufacturing plants and at least 4,000 so-called Tier 1 suppliers — firms that feed parts and subassemblies directly to those plants. That includes mom-and-pop outfits but also a dozen or so large companies such as Lear, Johnson Controls and GM’s former captive Delphi. Beyond those are thousands of the suppliers’ suppliers.

Although the Detroit Three directly employed about 240,000 people last year, according to the industry-allied Center for Automotive Research (CAR) in Ann Arbor, Mich., the multiplier effect is large, which is typical in manufacturing. Throw in the partsmakers and other suppliers, and you have an additional 974,000 jobs. Together, says CAR, these 1.2 million workers spend enough to keep 1.7 million more people employed. That gets you to 2.9 million jobs tied to the Detroit Three, and even if you discount the figures because of CAR’s allegiance, it’s a big number. Shut down Detroit, and the national unemployment rate heads toward 10% in a hurry.

Even if just one of the Detroit Three — and GM is the most likely, as Ford is in better shape and Chrysler is much smaller — spiraled into a free-fall bankruptcy, the systemic effects, at least initially, would be huge. The whole industry would not be able to build cars in the U.S., because of the lack of parts. “Unlike the airlines or steel, when you look at the automobile industry and the fact that the whole supplier base is connected — to Ford, Chrysler, Toyota — it will have a ripple effect on the entire industry,” says Nicole Y. Lamb-Hale, a bankruptcy expert at the Detroit office of Foley & Lardner, a law firm that represents some GM suppliers.

And consider this:  the tool and die industry, critical to all of manufacturing, not just the auto industry, is utterly dependent on the auto industry for survival.  If the auto industry vanishes, so too will the tool and die makers.  If they go, the entire manufacturing sector of our economy is toast. 

How to Save the Big 3:

There’s no way that any of the Big 3 can survive even six more months without some kind of federal assistance.  And, just as the government is doing with the banks, it makes no sense to use taxpayer money to bail them out without taking a stake in the company.  So the first step is to provide whatever cash is needed to keep them going and take a 90% ownership stake in each.  It’s not such a crazy idea.  As the following article attests, that’s exactly what’s being considered.

Frank’s legislation would carve out a portion of the $700 billion financial rescue program for the Big Three automakers, letting the government take an equity stake in them in exchange for the loans, said Frank’s spokesman, Steven Adamske.

The Treasury could take warrants to share in a portion of future profits and would have to be paid back before any other shareholder. The car companies would face tougher restrictions on awarding pay packages to executives and dividends to their shareholders than the financial companies that get a piece of the original bailout.

Secondly, as I mentioned above, the Big 3 can’t survive in the glutted small car market.  At best, they would become the “Little 3,” not as bad as failing altogether, but not much better.  So the time has come to carve out a sufficient share of the domestic market to assure their survival.  This means that tariffs should immediately be imposed on every Japanese, Korean, German and Mexican car imported into the U.S.  Any tariff structure would help, but the one I proposed in Five Short Blasts, based on population density, would be ideal.  Such a tariff structure would impose a 5% tariff on cars from Mexico (even if they carry a “Big 3” brand), a 25% tariff on cars from Germany, a 40% tariff on Japanese cars and a 55% tariff on Korean cars.  The same tariffs should be applied to imported parts as well.  The result would be an explosion in demand for domestic cars and, within a few short years, the government could begin selling its stake in these companies at at least a 1,000% profit.  And don’t forget the tariff revenue that could be used to offset income taxes, providing a tax break to consumers. 

It’s time to abandon the blind faith that we’ve put in economic theories that pre-date electricity and steam engines, a time when the world’s population was one seventh of today’s and vast regions of the world remained unexplored.  It’s time to evaluate the results of free trade and globalization and make some adjustments to our theories.  The United States will be of little benefit to the global economy if it’s own domestic economy is in shambles, and there’s no hope of correcting the damage done to our economy without restoring a balance of trade.  Of course tariffs will impose severe hardships on nations dependent on exports to support their bloated labor forces, but how else will they be forced to come to grips with the effects of overpopulation?  Why should the U.S. function as a relief valve for their problems?  We’ve tried and it doesn’t work.  A global economy will work when each nation tends to its own problems first instead of looking for someplace to dump them.