Why The Auto Industry Is Failing – Part 4.

In this installment, we look at unfair trade practices.

Now mind you, I’m a free-trade kinda guy.  I’m a huge believer that free-trade practices provide competitive pressures that force companies to provide better products.  And we’ve seen this happen with the Japanese invasion in the 1970s.  The US automakers got complacent in making crap.  Along come the Japanese, with their focus on constant quality improvement, and gave the sedentary US auto sector a good run for its money.

As it stands right now, US automakers make cars that are as good, if not better, than what the Japanese make.  You’ll never hear this being said, because the major media outlets are more focused on the tag-line that domestic cars suck.  The fact is cars from Ford, GM, and Chrysler have come a very long way from even the quality improvements of the 1990s.

This is a prime example of how open markets, and competition works.

Unfortunately, the competitive advantages are skewed against domestic automakers.  Much of this is the fault of government.

I was keyed into this by a radio interview I heard with Duncan Hunter, while he was running to be the Republican presidential nominee in 2008.  His biggest beef is how foreign governments punish the Big Three overseas, while taking advantage of seemingly draconian tax policies in this country.  Human Events had an interview where he detailed how these unfair tax strategies ate implemented:

I believe in supply-side economics. I supported the Reagan tax cuts, the Bush tax cuts, and would support extensions of those—because all of these tax cuts, a number of them, have sunsets and extensions are required. That’s where I’m on common ground with the most other Republicans. But one place where we differ is trade.

We’ve practiced what I call “losing trade”—deliberately losing trade—over the last 50 years. We need to reverse that. Today, other countries around the world employ what they call a value-added tax, in which foreign governments refund to their corporations that are exporting goods to the United States the full amount of their value-added taxes that that particular company pays in making a product. They subsidize them. Japan’s VAT, I think, is 5% or 6%. I believe China’s is 17%.

When American products hit their shores, they charge a value-added tax going in that is the same amount. So they enact a double hit against American exporters. One is that they subsidize their own imports going out, and the second is that they tax us coming in. The United States doesn’t do this.

There is little doubt that even the Founding Fathers would agree that one of the first responsibilities of the federal government is to make sure that US companies are being given a fair shake when it comes to importing and exporting goods.  In fact, the federal government has done precious little to provide equity in this arena.

Another tactic used by foreign governments is currency manipulation.  Both China and Japan “fix” their currency rates so as to maintain currency levels that are below that of the US dollar.  How does this work?  Well, a paper by the Automotive Trade Policy Council details the purpose of currency rate manipulation:

Currency manipulation is a policy used by the governments and central banks of some of America’s largest trading partners to artificially set the value of their currency to gain an unfair competitive advantage for their exports.

The IMF defines currency manipulation as “protracted large-scale intervention in one direction in the exchange market.” Since 1998, Japan has spent $505 billion intervening in currency markets more than 160 times. Japanese government officials also continue to send strong messages to the markets to keep the yen artificially weak. This astonishing record, by any standard, is the classic case of disruptive, trade-distorting currency manipulation.

Countries manipulate their currencies to protect jobs and promote exports. This comes at the expense of taking jobs and siphoning economic growth from their trading partners. Japan has used immense resources to maintain the yen at artificially weak levels and avoid making much-needed domestic economic reforms. This weak yen policy has given its exporters a huge subsidy and competitive advantage in the U.S. market, and in its wake, created waves of disruption and harm to U.S. manufacturers.

Now you may be saying that because a majority of Japanese cars are manufactured in the US, this currency fixing isn’t a big deal.  Think again:

Japan’s artificially weak currency policy provides an average subsidy of thousands of dollars for each and every car it exports to the United States. For example at 116 yen to the dollar, a luxury sedan imported into the U.S. can receive an $8,000 subsidy from the government of Japan. Japanese cars produced at plants here in the U.S. are also partially subsidized because of their high imported parts content.

[…]

Many people believe that Japanese cars and trucks sold in the United States are almost exclusively built in the United States. However, Japan is still exporting nearly 2 million cars and trucks annually into the U.S. – the same level as twenty years ago. In contrast, last year just 15,565 cars were imported into Japan from the U.S.

China uses the same policy.  China does not allow the importation cars made in the US, and US manufacturers MUST produce cars to be “sold” in China (let us not forget that China is still a communist country, so the word “sell” has a funky sort of connotation) within the host country.  That literally takes money from the US, and places it solely in China.

The Japanese and Chinese are flagrant about the manipulation of their currencies.  In a fairly recent Bloomberg report:

Japan’s finance ministry may come under pressure from the nation’s companies to resume sales of the yen to protect their income. Hiroshi Okuda, head of Japan’s largest business lobby group, yesterday said that “measures may have to be taken” to stem the yens’ gains. A strong yen makes the country’s dollar- denominated exports less competitive and reduces repatriated earnings. Japan hasn’t sold its currency since March 2004.

“Excessive and disorderly moves in foreign exchange rates are undesirable because they may hurt economic growth,” Tanigaki said at a regular press conference in Tokyo today. He declined to comment on whether Japan may sell the yen.

“Disorderly moves” in foreign exchange rates, like the kind the US dollar has, is considered “bad business” by the Japanese who want to make sure their products hit US shores cheap, and thus they are guaranteed economic growth.  Nice.

Even with free trade agreements between foreign countries, an artificial imbalance exists.  For example, consider the current problems with the Korean Free Trade Agreement:

Advocates of FTAs argue that these model agreements level the playing field so that U.S. companies, and U.S. workers, can compete in markets free of distortions. The U.S.-Korea FTA is a perfect example of why such agreements fail to live up to their expectations. First, Korea, as does China, uses an undervalued exchange rate to maintain its competitive position in the U.S. market and in third country markets. Six months prior to the initiation of negotiations on an FTA, during the pre-negotiations stage, Korea began to appreciate the Korean won by almost 15% until it reached its peak just prior to the conclusion of the negotiations. Three months later, the currency depreciated until it was once again at the initial exchange rate. Even to the unpracticed eye, Korea’s exchange rate movements have been convenient in the extreme and indicate how Korea is likely to manage its exchange rate to achieve maximum commercial advantage. Whether intended as a means to gain an unfair competitive advantage or not, Korea’s undervalued exchange rate subsidizes its exports, subsidizes foreign direct investment, and taxes foreign imports into Korea.

Second, after years of observing and negotiating with Korea over a wide range of products and services, I have learned that Korea uses non-tariff barriers, particularly standards, as a means of providing an advantage to its domestic producers. Because the Korean market is relatively small, foreign suppliers are at a disadvantage. As a share of their sales, the Korean market is not large enough to justify meeting those extraordinary standards requirements and, when standards are met, the cost per unit is high. When taxes are added to the product, those taxes are applied to the full cost of the product, thus increasing the absolute price disparity between products. U.S. companies, and thus their workers, must absorb much of those increases through lower profit margins and stagnant wages.

Third, in the case of automobiles, Korean tax authorities have been known to harass purchasers in Korea of foreign automobiles, a practice which has been substantiated by European and North American producers. This harassment has discouraged Koreans from purchasing foreign-made automobiles in addition to other products. The impact on automotive trade is more extreme because of the visibility of those products.

As I’ve already pointed out, countries like Japan, Germany, and Korea directly subsidize their auto sectors.  In many instances, they provide subsidies for the purchase of home-grown autos.  When was the last time the federal government offered you a nice, fat check to buy a Ford or a Chevy?

I’m not even going to touch the fact that these same countries – Japan, Germany, China, and Korea – all have nationalized healthcare systems, whereas the US is privatized.  Thus, citizens of these countries bear the burden of paying for the system (which usually provides poor services in general when compared to US standards of healthcare), and the companies reap the benefit of being able to sell low-cost products to this country.

Now, the liberal response is to play the same game.  Their first move would be to nationalize healthcare, subsidize industries, and place us all on a level playing field.  This would be disastrous.  The key to this prediction is based in the fact that barriers to US good exist in the first place.

If US goods were so terrible, and so expensive, no trade barriers would be required in places like Japan and South Korea – virtually no one would buy our goods.  That’s essentially what happened when the Japanese first started selling to the US; their stuff was considered junk.  Since then, they’ve learned a thing or two about how to produce quality products.  This is because they’ve had to deal with the American notion of competition.  If these nations had nothing to fear, they would feel no need to protect their economies.  They know, however, the US workers and companies, despite not having all of the subsidies provided to their citizens and businesses, can outproduce them.  We can flood their markets with less expensive goods at comparable levels of quality.

The key is for the federal government to selectively start putting up conditional trade barriers to goods sold in this nation.  Is this protectionism?  Yep.  Free markets and free trade doesn’t work when the “in” door swings freely, and the “out” door is nailed shut.  Start cutting off access to the markets, pinch off the revenue streams, and we’ll see how quick these countries decide to play fair.

When the wolves polish off the sheep faster than the sheep can reproduce, the end result is the decimation of both parties.  This is what’s presently going on in the US.

In the end, trade that is both fair and free benefits everyone.

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4 Responses to Why The Auto Industry Is Failing – Part 4.

  1. Mike Harmon says:

    Nice writing style. I look forward to reading more in the future.

  2. unknownconservative says:

    Thank you.

  3. SMG says:

    I ran a Dutch owned auto parts supplier for 9 years in Michigan, from 1989 – 1997. When I arrived the firm was in the doldrums, almost broke. I put together a excellent USA management and sales team. The Dutch maintained control of our accounting via the use of an independent firm. My pay was pegged to our profitability.

    Over the next years the product we sold skyrocketed. The parent company expanded operations all over the world and none of them made money. The parent made money by manufacturing the primary product we sold then exporting it to us. We made the Michigan Private 100 three times during my tenure and the Dutch government (Queen Beatrice) honored the parent company with a national export award.

    But in the United States, we barely made a profit. The reason being the parent company would extend 90 days to pay invoicing, as our internal profits rose, they would issue new invoicing at higher cost, thus eliminating our profitability (taxable income)in Michigan and the United States while engorging themselves over seas.

    By the mid-90’s they bought a money losing company in England and began billing us from there to increase the British firms books while further deflating our corporate earnings. In 1996, because they owned companies in many countries, they began issuing their internal quarterly sales reports in English. All of those reports indicated the USA firm’s exported profits were propping up the whole multi-national organization.

    I had enough and left the company, moving to Florida in 1997. Subsequently the owner sold the USA company to another European held auto supplier in the USA for tens of millions even though the reported profits could in no way support the amount he received.

    I chronicled the whole affair in three large bound volumes including the internal reports, emails, etc. I then hired an attorney and we contacted the IRS, they first sent us to their field office in Louisiana. From there we were sent to the Michigan Division. We flew up and spent the day with three examiners. We went over all the information explaining that both the state of Michigan and Federal Government were being ripped off via questionable currency transactions that deflated taxable earnings in the USA while inflating profits in Europe.

    That this mid-sized Dutch company was only one of hundreds doing the exact same thing. One of hundreds being helped by USA based accounting firms to dodge taxable income by “adjusting invoicing”, and profiting nicely from the practice.

    The IRS agents whose watch all of this takes place under on a daily basis were very antagonistic, even hostile in our day long meeting. They took the binders and indicated they would “get back to us”. I sent the same basic information (less binders) to Mike Wallace at 60 Minutes and the hot dog Michigan attorney Jeffrey Fieger. Feigers office implied it didn’t handle such cases but it turned out he was preparing a run for office, he didn’t want the heat. 60 minutes never responded.

    My attorney tried getting information from the Michigan IRS office regarding the “investigation” for next three years. Never got anything. The Dutch owner took his money and became one of the 30 wealthiest persons in The Netherlands.

    To this day the same practice is occuring all over the country. The nation is bleeding taxable profits to multi-national firms based overseas. They are stealing our wealth under the eyes of the IRS via the “adjusting” of payable invoices to currencies being unfairly set for this very purpose. They are stealing hundreds of millions of dollars in states like Michigan and no government agency cares to unravel the spool.

  4. unknownconservative says:

    I work for a European company. My situation is somewhat similar in that the US division is profitable, and the European divisions are losing money hand-over-fist. Recently, I’ve had to give up some benefits (which, in the grand scheme of things, were minor) so that all divisions of the company had a “shared sacrifice” with the parent division.

    “Shared sacrifice” my a**!

    Your story does not surprise me in the least. Duncan Hunter, during the last Republican primary, highlighted some of the obscene tax advantages that European companies and countries benefit from when it comes to dealing with the US. They do this because a) the country in question continues to get a corporate cash cow they can milk for their failed socialist policies, and b) because they cannot make a profit in Europe, this is the only way those corporations can actually remain fluid.

    It also doesn’t surprise me that the IRS agents were fairly hostile to your plight. It is much less effort to bully your average small company or American taxpayer into submission, than it is to actually go after the big-time tax cheats. This is called the “path of least resistance.” Plus, it is probably twice as difficult to go after multi-national companies NOT based in the US, because foreign governments do not have to cooperate with the IRS (at least to my knowledge). So, all you’re doing is creating a headache for some ensconced bureaucrat who would rather cruise the Internet all day than actually do his job.

    I’ve had dealings with the government in the past. I’ve actually seen this in action.

    And given that you’re going after a bunch of European socialists, it is no big surprise to me that 60 Minutes has no taste for looking into this. Socialists don’t go after other socialists.

    Jeffrey Feiger is a criminal attorney, and is more likely to defend the people you’re looking to nail, than actually go around trying to nail them himself.

    I wouldn’t bother going to either Carl Levin or Debbie Stabenow either. Given the influx of European companies into Michigan – obviously European socialists have found a familiar climate to that of Europe in which to do business – they’re unlikely to bite the hand that feeds them.

    My suggestion is that you contact Pete Hoekstra, or Candice Miller about this:

    http://www.house.gov/hoekstra/
    http://candicemiller.house.gov/

    Another possibility is Duncan D. Hunter (Duncan Lee Hunter’s son) who took over his father’s house seat:

    http://hunter.house.gov/

    Another thought is Sean Hannity or Glen Beck. They and their staff LIVE for this kinda stuff.

    My personal opinion, aside for the vagaries of your story, is that there is a fair amount of truth to your tale.

    There is one thing that I’ve learned about in my life, and it is: wars are won in the will. There is no such thing as a lost cause, only pawns sacrificed for the cause. If you really love your country, you won’t give up pursuing this. If a big-breasted bimbo like Erin Brockovich can win a settlement out of junk science – and the details of her “landmark” actions should outrage most Americans – you can get places with actual evidence.

    I’ve had lots of people in my life tell me “no,” or that “you can’t do that.” My response was to flip them the Bird, and do it anyways. I’ve been the most successful when I never stopped in the pursuit of what I’ve wanted. Which is why most liberals win all of these types of fights – they usually have nothing better to do with their time. They obviously aren’t productive.

    So, in short: don’t give up. Certainally, don’t give in. Keep on this.

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