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.