Thursday, December 11, 2008
Excellent article on how foreign automakers used policy to achieve "comparative advantage"
Blaming U.S. automakers is naive. There are a whole set of complicated reasons that foreigners have "comparative advantage," but it pretty much all boils down to policy.
Read full article here.
"Under the new phenomenon called "globalization", the so-called "comparative advantage" which underpinned the early centuries is no longer God-given or determined by the weather, as was the case, two centuries ago, with David Ricardo's English woolens and Portuguese wine. Now commercial success is largely created, or not, by government policies, and the United States government refuses to compete for such success, even though, as The Economist magazine reported recently, "Business these days is all about competing with everyone from everywhere for everything."
Right after World War II, Japan started its trade war by competing in international trade for market share rather than profit. Japan closed its domestic market and sold its exports at cost, making up the profit in its closed market. It subsidized production and targeted certain items in trade - first textiles, then electronics, machine tools, robots and, finally, automobiles. As a consequence, Toyota is today #1 as General Motors, Chrysler and Ford struggle just to survive."
The United States Congress looks at the BMW plant in South Carolina, my home State, and the Nissan plant in Mississippi as examples of relative success and wonders what's the matter with Detroit?
• Yet BMW received a tax deferral benefit of $100 million to locate in South Carolina and Nissan received over $300 million to locate in Mississippi. And all Detroit got - Ford, GM and Chrysler alike - was tax incentives to leave the United States and offshore its jobs and production.
• The supervisory personnel from Germany and Japan who run BMW's and Nissan's plants have health care and retirement benefits paid for by Germany and Japan. Detroit has to pay for the health care and retirement benefits of its supervisory personnel.
• BMW and Nissan have deductible health care for its employees. Detroit has to pay full health costs on its employees.
• BMW and Nissan hire forty-five year olds and under in order to minimize health costs. Detroit has a lot of senior people and legacy costs.
• The major parts that BMW and Nissan use to assemble cars in the United States are produced 16% cheaper in Germany and 5% cheaper in Japan because BMW's and Nissan's VAT taxes are rebated when parts are shipped for assembly in the United States. Detroit pays all local, state and federal taxes on its parts.
• Nissan, with a largely closed domestic market, does not have to make a profit, and thus located in the United States for market share. Detroit needs to make profits.
• BMW and Nissan high-ball the costs of their imported parts so as to minimize profits and taxes to the United States. Detroit has to pay taxes on its profits.