Sunday, April 04, 2010

Economic Lessons on Free Trade from the Auto Industry: How Cheap Imports Create U.S. Jobs

From Popular Mechanics: "6 New Cars Under $20K From the New York Auto Show:"

"If you’re looking for a car with no secret history, a warranty and decent gas mileage—but you don’t want to spend a lot—there are plenty of options. From the floor of the 2010 New York Auto Show, we bring you the top 6 cars you can buy for under $20,000."

1. Low labor costs in Cuautitlán, Mexico make the feisty Ford Fiesta affordable to the masses (see photo above). With a base price of around $13,320, the subcompact is available as a hatchback or sedan. Made in Mexico.

2. Nissan Juke, base price of $18,000. Made in Japan.

3. Mazda2, base price of $14,000. Made in Japan.

4. Scion IQ, base price to be announced. Made in Japan.

5. Chevy Cruze, base price of $15,000. Made in USA.

6. Kia Sportage, base price of $18,000. Made in South Korea.

A couple important points here:

1. Of the six cars featured, only one is made in America - Chevy Cruze, all the others are imports.

2. Even though most of these affordable cars are imports, they still create thousands of jobs in America since they are sold and serviced at dealerships around the country staffed by thousands of Americans, they are insured by U.S. insurance companies that employ thousands of Americans, financed by U.S. banks and credit unions, registered and taxed by state governments across the country, etc. Some manufacturing jobs might be displaced, but many other are created.


3. In the same way that Wal-Mart provides cost-saving benefits even to consumers who shop at Target, Costco, Walgreens, Safeway, Home Depot, and Best Buy because of the competitive discipline Wal-Mart imposes on its competitors, the super-efficient, low-cost foreign auto companies impose cost savings for Americans who buy U.S.-built vehicles because of the competitive discipline Mazda, Kia and Nissan impose on Ford and GM.

For example, consider the graph below that compares the monthly CPI for all items (data here) to the CPI for New Cars (data here) back to 1995. The CPI for new cars has been flat for the last 15 years, while the CPI for all items has increased by about 45% since 1995. If new vehicles had increased at the same average rate as all consumer items, new cars would be 45% more expensive than they are today (adjusted for quality). Stated differently, the price of new cars, adjusted for quality and inflation, have been falling every year by -2.50% on average.


Q: If the Big Three had continued with their 90% market share and been completely protected from foreign competitors like Toyota and Honda, would the real, quality adjusted price of cars have collapsed over the last 15 years? Not a chance.

Bottom Line: The market for new vehicles has never been more competitive than it is today, and foreign competition has played a major role in both improving the overall quality of both domestic and foreign vehicles, and contributing to falling vehicle prices in real terms. When it comes to selection, price, dependability, service and quality, American car consumers have never had it as good as they do today - there has never been a better time to buy a new car. And because of the incredible affordability of today's new cars, American consumers have saved millions of dollars that can be spent on other goods and services, which indirectly creates millions of U.S. jobs.

U.S. politicians like Rep. Tim Ryan (D-OH) claim that China's currency policy puts "a lot of Americans out of work." That's absolutely true. But it's only half the story. China's policy also creates millions of U.S. jobs, by saving U.S. consumers and companies millions of dollars every year, which helps U.S. firms buying Chinese inputs operate more efficiently and potentially hire more workers, and which also puts millions of extra dollars in the pockets of American consumers from the cost savings that can then be spent on other goods and services, which are frequently provided by U.S. producers, restaurants, retailers, etc. There are indirect benefits as well from the competitive discipline imposed on American companies by low-cost Chinese products.

The main lesson here about international trade, whether it involves foreign vehicles or Chinese imports, is that we only hear half the story when politicians, unions and domestic producers focus on the jobs lost from trade. What we don't hear is the story that involves the significant benefits and millions of dollars of cost-savings for American consumers and businesses, and the millions of jobs created from international trade - directly by the American firms using foreign inputs that operate more efficiently and competitively with low-cost inputs and thereby expand output and hire more workers, directly by the American suppliers, retailers and dealers who distribute and sell imported goods like Japanese vehicles, and indirectly by the American firms that benefit from increased output, sales and employment because of the significant cost-savings from cheaper imports that translate into increased demand for other goods and services.


10 Comments:

At 4/04/2010 11:13 PM, Anonymous gettingrational said...

Free Trade?

"A variety of nontariff barriers have traditionally impeded access to Japan’s automobile and automotive
parts market, and overall sales of North American made vehicles and parts in Japan remain low. The
Japan Automobile Importers Association (JAIA) reports that sales of U.S. produced motor vehicles in
Japan were 15,341 units in 2007."


Yes, the United States Trade Representative calls the variety of non-tariff barriers Japan imposes on U.S. made vehicles "traditional". Non-tariff barriers include individual car inspections for a variety of ever changing standards.

What about Free Trade of autos and Korea?

"Increased access to Korea’s automotive market for U.S. suppliers remains a key priority for the U.S.
Government. Korea maintains an 8 percent tariff and a range of nontariff barriers, such as discriminatory
taxes based on engine size, standards, inadequate regulatory transparency, and inadequate ability of
stakeholders to provide input at an early stage into the development of regulations and standards."


These are quotes from The National Trade Estimate Report on Foreign Trade Barriers. This report deserves a bookmark.

 
At 4/04/2010 11:33 PM, Anonymous Mazda USA said...

Compelling topic!

Just to clarify for your readers, the base price for the Mazda2 is under $14,000. It's even listed that way on Popular Mechanics.

 
At 4/04/2010 11:42 PM, Anonymous Lyle said...

Alternatively this shows how insular the top execs of the US car companies were, and fell victim to the innovators dilemma in spades.
Detroit was convinced there was no money to be made in small cars so they did not even try. That is exactly what happened to the integrated steel mills and the mini mills. There is an interesting comment in the Tycoons that says Carnegie was always pushing the envelope in steel producing tech, but once JP Morgan took over it was better to be fat and happy and let tech slide. This happened to a lot of US industries after the 1950s.

 
At 4/05/2010 1:47 AM, Blogger sethstorm said...


2. Even though most of these affordable cars are imports, they still create thousands of jobs in America since they are sold and serviced at dealerships around the country staffed by thousands of Americans, they are insured by U.S. insurance companies that employ thousands of Americans, financed by U.S. banks and credit unions, registered and taxed by state governments across the country, etc. Some manufacturing jobs might be displaced, but many other are created.

Nothing of what you said is exclusive to imported cars. They would do the same thing whether it was a domestic car being sold or the import being serviced.

The only remarkable thing is that one can stuff a 4-cylinder engine along with some low-quality distractions into a golf cart. European-inspired Cruze included.

The Fiesta? Bad last time around, bad this time around for the narcostate special.

 
At 4/05/2010 6:32 AM, Blogger juandos said...

"The Fiesta? Bad last time around, bad this time around for the narcostate special"...

Well the solution is simple sethstorm, don't buy one...

 
At 4/05/2010 7:55 AM, Anonymous w cristo, jr., md said...

All true, BUT:

1) anyone might have bit the bullet and bought an American car

2) said car woould still need sales and service people as well as finance people

3)They would borrow more, as US cars cost more; maybe more finance jobs
HOW do we accoumt for there faciors???????????????

 
At 4/05/2010 8:10 AM, Anonymous David said...

This comment has been removed by a blog administrator.

 
At 4/05/2010 8:42 AM, Blogger Jet Beagle said...

w cristo, In response to your three assertions:

1. If competition from foreign firms had not driven down auto prices, Americans who "bit the bullet" would be spending more on automobiles. They would have much, much less to spend on all other goods. Fewer people would be employed in those other consumer goods industries as a result.

2. If competition from foreign firms had not driven down auto prices, fewer autos would have been sold in the U.S. If you know have a very basic economics education, you know that quantity demanded increases as prices decline. So, absent the foreign competition, fewer sales, service, finance, and insurance employees would be required.

3. Auto finance jobs are much more determined by the number of transactions - the number of cars sold - than by the amount of each loan. Again, absent foreign competition, car prices would be higher and fewer cars would be sold. Fewer loan transactions would mean fewer auto finance jobs.

 
At 4/07/2010 3:53 AM, Blogger grant said...

One benefit not mentioned is that smaller cars use less fuel so their use in large numbers should result in less imports of raw oil and less depletion of domestic reserves.

 
At 4/13/2010 2:44 PM, Blogger Lawrence J. Kramer said...

"Foreign" cars is not the issue. Japanese and German cars have been bought because Americans preferred them, not because they were substantially cheaper than comparable American cars. We should not protect American car makers from better cars made elsewhere.

But what about Chinese and Indian cars? Will they be better? Or just cheaper? Do we really have to compete against the world on the basis of whose workers live most poorly?

Americans are losing their manufacturing jobs and not finding good jobs to replace them. How could they? Free traders brag about how competition from cheap labor has made our manufacturing workers the most productive in the world. Yeah, all seventeen of them are exceedingly proficient at pushing the buttons on the robots that actually make stuff. Meanwhile, the rest of us are taking in eacn others' laundry.

Competition from cheap labor creates wealth, but it concentrates it, too. Why that should be seen as a politically desirable trade-off is not clear to me

 

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