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.

Some excerpts...

"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.


STF said...

Maybe the Big 3 would have had more success by simply asking for the same treatment the foreign automakers are getting?


mike norman said...


But they wouldn't have gotten it because they are American companies.

I believe there is a widely held view in America that we are a nation of sinners--profligate spenders, debt-junkies and commie leeches of the government or advocates of the social cause who suck off the tit of the true "wealth creator," which is the free market.

In the eyes of most people, unfortunately, these sins must be punished. In their mind this is a fundamental requirement for absolution.

I am convinced that this view is held with a zealousness that rivals the most extreme form of religious fanaticism (Muslim extremism, for example) and those that hold it are prepared to sacrifice themselves, and innocents, in the name of this cause. (Just as Muslim extremists show no compunction in strapping a bomb on themselves or even their children, then walk onto a bus filled with innocents and blow it up.)

In the movie "The Godfather II," there is a scene in which Michael Corleone is in Cuba and is about to make a signficant investment. However, right before going ahead with the decision he witnesses something that causes him to change his mind. On his way back to the hotel he watches as a group of rebels attack the government forces and in the skirmish some of the rebels blow themselves up, killing a few members of the government forces along with them.

Later on that evening, while everyone is celebrating their new "venture" in Cuba, Corleone expresses reservation. When asked why, he recounts the events he witnessed that day and pointed out that those who are prepared to kill themselves along with innocents cannot be easily vanquished. He understood that the overthrow of the Cuban regime could not be far off when he witnessed, first hand, the unwavering resolve of those who opposed it.

The free market economic extremists in America today are of the same ilk. They are the economic equivalent of Cuba's revolutionaries or the Muslim extremists of today. The are driven by what can only be described as a religious fanaticism and their doctrine is the only true one. All others are corrupt, immoral and the preachings of the devil and the infidel.

That is why I think we cannot win this. I have become increasingly disheartened by what I see. It is useless to fight with logic, fact and reason, just as it is useless to tell fanatical Muslim extremists to sit down and "let's all just respect each other and get along."

Nothing good can come of this.

Unknown said...

Excellent article Mike.

I too am distressed by the number of people who seem to want to punish the auto makers. I don't think they understand the effect that of one of the big 3 going out of business might have on the remaining manufacturers.

I imagine many of the parts suppliers aren't vertical to one manufacturer. What happens if a major supplier to Ford gets their credit lines pulled because GM goes under? Where does Ford get its parts from? And what about the supplier to the parts manufacturer and so on. Playing with fire if you ask me.

Amazing that the auto mfgs have to show up hat in hand when the crooks on wall street who got us into this mess get whatever they need.

cuOnTheOtherSide said...

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.

And when these people are 55 and 60 will BMW and Nissan fire them?

Are there no advantages to having an more experienced workforce?

And when BMW and Nissan is beating them with 50 and 60 year olds what will be the excuse then?

cuOnTheOtherSide said...

States are shoving tax breaks at most companies moving into the state. If GM open a plant in one of those they will get tax brakes also.

mike norman said...

That's right, but they won't because it is all about union busting. The benefits to workers in the South from these foreign plants have been little. Per capita earnings of these states are among the lowest in the nation. Achieving a competitive advantage is all about supressing the living standard of your residents, either by wage destruction or currency manipulation. On a broader scale it is being applied to all the U.S. right now with policy designed to weaken the dollar in order to achieve export "competitiveness."