Your car is made up of thousands of components, manufactured all over the world and assembled in many places by humans and robots. There is simply no such thing as a 100% “domestic” car anywhere in the world. When (not if) artificial barriers are placed on the manufacture, sale and movement of parts and the eventual manufacture, sale and movement of the resulting vehicle, there are two common outcomes. The best-case scenario is you’re going to pay more—effectively stealing from you and everyone in the global economy. Unfortunately, the typical result is that you cannot buy most of the cars made on this planet in your local market.
Protectionism makes the overall pie smaller. As there are fewer things being sold, protectionism limits job creation, which is a primary aim of protectionism. Without a job, you can’t afford a car, you can’t afford house or feed your family, and, worst of all, you can’t buy the big ass LCD TV. And we all want the big ass LCD TV.
Protectionism is the establishment of rules to make a particular set of goods or services cheaper than others, usually in a transparent bid to protect “local” jobs or industries. Needless to say, this distorts the market for those goods or services, often in quite unintended ways.
There are two major types of protectionism: First, physical trade barriers: unique safety requirements, unique emissions requirements, “bio” barriers such as lengthy quarantine requirements, quotas, fuel requirements, and everyone’s favorite local content requirements. Second, financial trade barriers: targeted incentives/”bonuses”/”grants”, foreign company structures, capitalization requirements, proscriptions on profit repatriation, debt instruments, and favorable tax treatments available to some but not all of the market.
Companies rush to the trough when it’s offered. They’d be stupid not to, especially considering their lobbyists organized for the trough to be painted with a special paint containing a particular hay from a particular field so as to exclude their competitors.
I apologize in advance for poorly researched, most likely inaccurately interpreted, Twitter nutshell versions of terrible periods in history, but I offer them anyway:
An interesting closed market was 19th century feudal China. Britain essentially forced China to the trading floor, breaking up the Qing dynasty’s lucrative trade monopolies. This led to the First Opium war. That’s right—Britain won the right to trade opium (heroin) with the Chinese, many of whom became seriously addicted. Opium dens were a consequence of this liberalized trade, but it started China along the path to where we are today.
Of course, no protectionism article can ignore the 1930s, when the Smoot Hawley Tariff Act compounded the stock market crash, economic depression and drought with deep protectionism—60% import tariffs. Wikipedia tells me that world trade fell by 66% in the following few years. Without war spending (essentially economic stimulus), there’s no doubt the depression would have lingered into the 1950s.
In the 1970s onwards, the EU protected its farmers, creating literal lakes of milk and mountains of butter. After a quite understandable backlash from the public, the politicians decided the best way to tackle this was not to scale back subsidies, but to pay farmers to leave fields fallow whilst folks starve in other countries. EU taxpayers pay for this non-production twice—higher taxes and higher food prices compared to the rest of the world. Of course, “fair trade” folks ignore the fact it’s very hard for developing countries to export food to the EU.
Flash forward . . .
“Bailout. Everyone’s doing it.” The USA bailed out GM and Chrysler, which let France bail out Renault and so on and so on. I think this has been documented here at TTAC fairly well. The end result is most likely Death Watch II—the slow lingering death of GM prior to a final chapter 7 breakup and implosion of Fiat / Chrysler as reality intrudes. I could be wrong, and I hope I am, but we’ve kissed a lot of money goodbye in the process.
“Cash for clunkers” worked spectacularly for a value of “worked” that’s different to the dictionary definition. Created to encourage folks to buy NAFTA-zone fuel-efficient cars, but ended up destroying a lot of domestic metal and selling a lot of small non-NAFTA-built cars. There’s now a very deep sales drought. This is an excellent result of how not to stimulate a market.
“No Tires For Us, Were American” is yet to play out in full, but this particular spat will prove beyond reasonable doubt how much protectionism hurts local and global economies.
There are, of course, plenty of excuses for protectionism. “We must have fair trade. We shouldn’t have to compete with goods made by child slaves, who eat lead paint and chunky polluted air for lunch, work 28 hour days, and are beaten by harsh supervisors who chain them to their desks.” All fair issues, which I’m passionate about myself, but these are usually green washing excuses for protectionism, especially when it comes to cars. Fair trade protesters trying to foist a “domestic” on everyone should have no problems buying a car from any country that doesn’t have these issues, such as Australia, Brazil, Argentina, Canada, Japan, or the EU.
“To get out of a recession, you need to protect (our) jobs”. In the agrarian revolution, millions of farm hands were displaced by tractors as agribusiness gobbled up the family farms. Today, a tiny fraction of the population are farmers, but they produce far more food than ever before. Although not everyone can work in a wealthy service industry like banking, getting folks off the land created a middle class, extended life spans, dramatically improved the health and well being for everyone, and created vast wealth in the process.
“Economists can’t predict the future, only the past.” I am totally with you on that one, even though it is an ad hominem attack, and thus irrelevant. The quants got us into this problem, and excessive risk taking (and hiding) is part of the reason we are here. Like a broken clock, economics is sometimes right.
Bottom line: protectionism is bad.
If you’re sad about not getting that Ford Falcon (yes, it’s still made here, it’s still RWD—albeit with IRS—and still has a V8, although you’d want the G6 E Turbo. I think you’d like it), imagine the sadness of the USA luvvin’ redneck living in another country. Due to technical restrictions, USA made cars are rarely seen outside their own market, and it’s not because they are unsafe or huge polluters.
For example, unique safety requirements in many countries means the D2.8 can’t easily export US market cars elsewhere or easily import already sunk investments (i.e., EU / AU / JP / EMEA / CN models) without extensive compliance costs—costs they’ve already paid for in those other countries. There should be a single best of breed global safety standard. It’s simply not that hard. Of course, politicians didn’t come up with dastardly car safety rules in the seeping cesspool of backroom politics. No, that required carmaker lobbyists “protecting” their “local” jobs.
If you listened to the histrionic ranting of anti-globalization protestors and protectionist zealots that the world would be full of unicorns and daisies if we simply stopped all trade. Think of the children! I for one would love to have a unicorn to mow my lawn. And a flying car. I was promised a flying car when I was a kid. Of course, stopping trade doesn’t produce unicorns; it’ll just make us poorer. Much poorer.
In some ways, it’d be like living in North Korea. They don’t have a lot of oil, so they have to import it. They can’t afford to import it. The roads are essentially empty, there’s little to no power at night, and folks are starving because they can’t grow enough food and get it to market.
This is what would happen to the USA, which net imports 55% of its oil product requirements from other countries. Fixing that wouldn’t just mean getting every other car off the road; it would be a dramatic loss of quality of life, as oil is used in everything from plastics, roads themselves, to producing our food chain.
Nearly every country has subsidies that encourage home ownership. The USA has mortgage interest tax deductions. Inevitably, the price of housing goes up as folks think they can afford a $500K house when realistically, they can afford a $300K house. Too bad all the crappy houses where I used to live in Maryland are now $500K.
Australia has the long-running first homebuilder’s grant, which kicks in nearly $30K to folks building a new home. This had two side effects, both undesirable: the price of starter houses has jumped essentially 100% ($150-200K in most markets) since its introduction back in 2002, more than eating up the $30K “bonus.” Secondly, $30K was just enough to get a 0% down, 100% low doc loan from even respectable banks. You can guess who is in trouble paying their mortgages even with the lowest rates in recorded history. The first homebuilder’s grant stimulated the building industry, but has locked out the next first home buyers for probably a generation—modulo any forthcoming correction in the market once the grant starts to be phased out.
We could talk all day about bio fuel subsidies, despite it being a great deal cheaper (and simpler) to simply burn plant stalk waste in power plants and charge electric cars in off peak times. Doesn’t solve the CO2 issue, but does in one fell swoop remove bio fuel refiners and their subsidies out of the equation, and additionally help move the fleet to electric propulsion, where we need to be in 50-100 years anyway, so oil can be used for things only oil can do.
World trade is as ancient as boats, asses and camels. To think otherwise is just naïve. There are famous trade routes, such as the Silk Road, which is easily over a thousand years old. We are a part of the densely interlinked global economy and in this reality protectionism is akin to someone in Queens banning imports from downtown NYC. Pointless and futile.
There shouldn’t be restrictions on what you can spend your money on. In this nirvana, we’d all be able to buy the cooking models of any car made on the planet. Imagine that—a sportscar-led recovery! More seriously, let’s hope the pending trade war and protectionism goes the way of the dodo—clubbed over the head. Or Unicorns.
Well Said. But watch for the reaction of the fried chicken protectionists. (fried in peanut butter too, while they worship Lou Dobbs, who has a HARVARD ECONS BA and the total Hypocrite KNOWS better!)
Fair trade protesters trying to foist a “domestic” on everyone should have no problems buying a car from any country that doesn’t have these issues, such as Australia, Brazil, Argentina, Canada, Japan, or the EU.
And I, for one, do not. I am for eliminating all trade barriers between North America, the EU, Japan, South Korea, Taiwan, and Australia/New Zealand.
But hell no to completely free trade with countries that don’t have any pollution or labor regulations, that’s just stupid. The only people it benefits are the shareholders since they can exploit lax labor and environmental standards, not to mention the authoritarian government that keeps the proles in line (yes, I’m talking about China).
Oh, and I’m even open to more relaxed standards with “second world” democracies like Mexico and Brazil.
Can one of the b%b please answer this question? We, Canada and the USA are car producing nations.
We also import vehicles from, among others Japan,Germany and South Korea.
Do Japan,Germany and South Korea have any trade barrier’s? Do they give us unlimited access to thier market?
Just asking.
Thank you for a great read Mr. van der Stock.
God, I wish I could have one of those Falcons. With the V8 please.
Do Japan,Germany and South Korea have any trade barrier’s
Japan sure as hell does. They fiercely protect their home markets in just about every sector.
The Europeans are much more fair. Count the number of Fords (or Xboxes, for that matter) you see in Germany vs. the number you see in Japan.
Free trade is a myth even within a single city.
Basically there are local regs, local taxes, local distributors that must be placated, subsidies that favor one business activity over another and the list goes on.
It’s a complicated world we live in. While I’m not an economist, I find it to be a pain the butt that I can’t buy a car in Texas and drive it in Mexico without special permits, plus local insurance. Likewise I can’t buy a Mexican car and drive it as I please in Texas.
What we call free trade is still pretty much regulated. Make sure that you dot you i’s and cross your t’s – maybe even hire a local lobbyist, as well.
Fair trade protesters trying to foist a “domestic” on everyone should have no problems buying a car from any country that doesn’t have these issues, such as Australia, Brazil, Argentina, Canada, Japan, or the EU.
Brazil charges huge tariffs on imported cars (this is reverse protectionism, was done to get companies to produce cars in Brazil not to help brazilan manufactures).
Japan makes it so that car dealers cannot sell multiple brands (really new brands) at existing dealerships. This is why they are so small in Europe, they wanted to do in Europe what they did in US and Europe said you open your dealers to us and we’ll open ours to you, Japan didn’t go for it (Try buying land to open a dealership there and you would understand why they do it, “veiled protectionism”.)
The reverse is Europe and the EU, before EU each country had thier own little captive market, which allowed them to make crappy cars that they couldn’t sell anywhere else really (See european carmakers history in the US). After the EU these restrictions were taken away and competition made the cars much better.
This is what opening the US market was supposed to do, make US manufactures world class and in most ways it did, but mostly by them moving the workforce elsewhere.
France is highly protectionist. Recently, Enel (Italy) approached Suez (French company) in order to buy them. Curiously, after this news broke, Gaz de France (state owned) moved in to buy Suez. The Enel cried foul, but the merger was pushed through.
Vodafone (UK) moved to push their minority shareholding in SFR into a majority shareholding, but was rebuffed.
As I mentioned on TTAC before the French government offered bailouts to French car makers provided they didn’t close French factories*.
All the while, French companies are allowed free access to other EU countries.
As a result, I’ve boycotted all French goods and services. I personally, don’t subscribe to full free trade (that’s another issue), but I don’t like the idea that the French can protect their own market but be allowed into other countries.
I am surprised that the French have been allowed to do this for so long, but as Umterp85 said “vote with your money.
* = https://www.thetruthaboutcars.com/renault-beware-of-french-governments-bearing-gifts/
In some cases protectionism works – take Japan, Europe, S. Korea. I don’t remember them losing automobile, electronics, or aerospace industries. Also, many well-known companies would not exist now without massive government actions of the past. For instance, Airbus is essentially an artificial EU creation. The great West Indian company monopolized the trade with Asia, and as A result Netherlands ruled the seas for two centuries, and made a lot of Dutch people very rich in the stock market. The agricultural protectionism of the EU Andrew mentions, created on the healthiest and the most developed food marktets in the world – that of Europe.
One other thing never mentioned – the young US republic had about 50% trade tariffs on everything.
Am I missing something or are you using the term “fair trade” incorrectly? “Free trade” is trade without unfair, protectionist fees. “Fair trade” has to do with the conditions the laborers have to work in.
Perhaps I’m naive, but it seems to me those concerned about the “child slaves, … who work 28 hour days” are concerned with the child’s well-being, not the profitability of another manufacturer.
I agree that protectionism is bad for competition, but I’m not sure I follow all of your logic on the interchangeability of “fair” and “free” trade.
This article meshes perfectly with the auto regs article from February: link
Talk about non-tariff trade barriers!
Get over the XBoxes… it’s not a japan thing… the rest of the world doesn’t like the XBox as much as America does. You’re selling Madden to a world that speaks Soccer.
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Japan is about as bad as the US in some ways, worse in others… their farm subsidy supports a small agricultural sector growing nothing but expensive crops, and their tight control on currency makes/made their automobile and electronics exports aggressively over-competitive outside.
I have had a thought and would value your response. What if ‘our’ country offered free trade terms to any country which observed free trade themselves but applied tarrifs or restrictions when exporting to countries which had tarrifs and restrictions of their own.
Would this encourage those countries with strong restrictions to relax them in order to promote their own exports? Or does it fall down because of trade imbalances?
sort of related:
http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-ghost-fleet-recession-anchored-just-east-Singapore.html#ixzz0RCMY59Uy
If you kill world trade, you end up with world war. That was to be my dissertation, but of course the liberals in academia didn’t much like it. It’s too reality-based.
In the meantime, I will console myself with the article title. Make prosperity, not war. Also, bring back Japanese sport compacts, thanks.
Maybe not 100%, but Japan comes darn close to making complete cars from soup to nuts. IIRC, the content on my Mazda3 was something like 99% Japanese. It’s not at all impossible – American cars were once upon a time 100% American too. We allowed the Japanese and the Koreans to engage in a one way trade war with us and guess who won? We didn’t even know we were playing.
The Aussies may have that first homebuilders grant that locks out the next generation. The US has a similar housing market distorting rule…. fully tax deductible mortgage interest. At least in California, where I am from, this benefit to home owners was priced into houses a long time ago. it helped push the prices ever higher, making it that much harder for the next generation to save up to buy a home. It is kind if hard to save a down payment with you have to pay taxes on housing income, but the guy who owns does not.
The end result is the same. The market sucks up that benefit and screws over the next generation of buyers.
Total free trade scares the hell out the of Aussies. They don’t want to compete with the US. In my experience, the thought of Wal-Mart coming to Oz, or Costco, scares the living hell out of them. Aussies are very quick to throw up barriers.
The Aussie film industry is always pissing and moaning about having to compete with Hollywood. They demand, and sometimes actually get, tax dollars to subsidize film production down under. So tax payers get to foot the bill for some producer’s and director’s wet dreams all in the name of “Telling stories by Aussies for Aussies”. Nice. I don’t have a problem with Aussies making films for Aussies. I have a problem with the government to take money out of my pocket to do so.
Next… look at South Korea. They have made a cult out of bashing US imports. For christ’s sake they are rioting in the streets because, God forbid, someone wants to let them buy US beef. Based on the way they are acting, you would think that we went over there, killed all their farmers, crushed their kittens, raped their cattle, then pointed guns and their heads and forced them buy US beef at the grocery store.
I can go on. The point is that the US is actually open compared to the rest of the AP.
Thanks everyone for your comments – please keep them up! :)
@ ghodges – I used “fair trade” correctly. Many folks are rightly concerned about child slavery, poor or exploitative working conditions, poor or unfair wages (for that country), and lack of pollution controls.
But if you scratch many fair trade excuses when it comes to cars, it’s a greenwash. I put that bit in after an argument with a friend of mine as it turned out they are basically anti-import rather than pro-fair trade.
We need to tackle all nations who have poor working conditions, poor environmental protections and so on, but in a way that is realistic. My parents grew up in England in the 1940’s and 1950’s – they had pea soupers every day from unbridled pollution. The air quality is now fairly good in most UK cities. Things can change, but don’t expect it by 2012.
@ Rada – protectionism has hurt Japan deeply. They have a economic bubble based around highly inflated real estate that burst a while ago (coming up 20 years ago), and now their state debt is 200% of GNP. They are essentially bankrupt. South Korea has serious corruption issues with its chaebols, and so I doubt it is a long term “good thing” for them.
@john.fritz – The G6 turbo goes faster than the V8 and has less weight over the nose. Coupled with the essentially flat torque curve, it’s a far more satisfying drive (or so I read in the buff mags). It’s also a bit cheaper. If I was forced to have a Falcon company car, it’s the one I’d go for.
Good points, but when you open your markets and trade partners don’t reciprocate you’re wearing a big “Kick Me” sign. South Korea built their auto industry through protectionism, it’s the world’s 6th largest auto market but only ONE PERCENT of their market is imports.
http://tinyurl.com/m83o8e
Sure Kia and Hyundai are good…but they’re not that good.
“If you kill world trade, you end up with world war. That was to be my dissertation, but of course the liberals in academia didn’t much like it. It’s too reality-based.”
You could not find three reader who would buy the central point of the argument because they were all too liberal? At a Doctoral granting university? In what field?
I agree.
Look at who is the only superpower in the world? The US of A. Who is the largest net importer? The US of A, again.
No, it’s not coincidence.
My logic is like this:
1) If you are competitive, you shouldn’t fear anyone. A job needs to be earned, not protected. If it has to be protect, it doesn’t need to be there.
2) If another country tries to dump cheap stuff to you below cost, fine, just print more greenbacks and get their stuff for almost free. When they have depleted their natural resource in the process of dumping, sell your resource to them. Don’t forget to gouge them while you are at it.
Only problem I have with globalization, is the further erosion of the middle class. Solve that, and I will drink your kool-aid. A nation of part-time clerks cant afford a new bicycle , let alone a new car.
This is the essential dividing line between “Libertarians” and the rest of us.
The free trade theory is all well and good. But if you look at practice in history, it’s quite different.
South Korea was a backwater 60 years ago. They built up a modern industrial economy using tariffs. Japan did something similar to build themselves up in the late 19th Century.
And one more country did the same thing – they even used tariffs in place of an income tax (SMART! heh?)
That nation was the United States of America in the 19th Century.
The theory of free trade assumes mutual benefit of exchange – that’s by no means been proven.
South Korea was a backwater 60 years ago. They built up a modern industrial economy using tariffs. Japan did something similar to build themselves up in the late 19th Century.
We did the same thing in the late 1700s and early 1800s. In fact the Coast Guard exists largely because of this – they were the Revenue Cutter Service and their job was to catch smugglers who wanted to avoid import duties.
Let’s quit pretending that what we learned in Econ 101 is gospel. If the pie is made in China, how will Americans afford pie, even if it’s cheaper than American made pie?
If we can’t come up with new 21st century industries – and the unemployment rate suggests that we can’t, or at least have not done- then we’ll just have to hang on to our 19th century industries until something better comes along.
“mtypex :
September 17th, 2009 at 5:57 pm
If you kill world trade, you end up with world war. That was to be my dissertation, but of course the liberals in academia didn’t much like it. It’s too reality-based.”
You got it exactly right, and as a veteran academic, professor for more than 25 years at the nation’s top research university (as measured by the millions of sponsored research every year), I am emphasizing the above in my graduate classes every single year for the last two and a half decades.
Even UNFAIR trade, warts and all, is far better, for both the USA and the world as a whole, than less trade.
“.. Make prosperity, not war. …”
Yes. ANd when we did the opposite, when the econ illiterate politicians of the world imposed tariffs, some of them foolishly thinking they were protecting their workers, (as if the other nations would not retaliate.. LOL), we ended up woth BOTH the Great Depression of the 30s AND W W II!
Autosavant, as an academic for your entire career, global trade has worked for you. As a ship wright,low voltage technician, blue collar guy trying to put his offspring through college, all I can say is not so much. I have had to re-train myself 3 times so far to stay in the labor pool. Everytime with less prospect and remuneration than the previous. In academia, age implies wisdom and gets you tenured. In the workforce, you are just old.
Andy D :
September 20th, 2009 at 3:36 am
Autosavant, as an academic for your entire career, global trade has worked for you. As a ship wright,low voltage technician, blue collar guy trying to put his offspring through college, all I can say is not so much. I have had to re-train myself 3 times so far to stay in the labor pool. Everytime with less prospect and remuneration than the previous. In academia, age implies wisdom and gets you tenured. In the workforce, you are just old.
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Global trade is meant to work for the society as a whole. And yeah, it doesn’t work for everyone. For instance, the pay gap between an American and a Chinese will be narrower and narrower, if they can provide identical work. From the American point of view, it’s not good. From a buyer’s point of view, it’s fair.
Every coin has two sides. For whatever job loss Americans have to face, they gain in cheaper merchandise. If there hasn’t been a globalization, maybe 5% more Americans can have a job, and everything in Walmart at least triple in price. Do you like that?
Wsn, Actually, if I was one of the 5% with a job, I would be fine with it. Percents of unemployment are just numbers you read about. It is real easy to get blase. Until you get laid off and unemployment reaches 100%
Best succinct round up of current global state of play I have read for a while. Big government and WAR are so passé. Automate and prosper I say!
I sincerely hope they invite you to the G20 to read the above out.
They just need to fully level the global playing field once and for all with regard to import/export costs. The cost of delivery should be the only charge after production. Painful for a while, as wages and country prosperity levels even out and fluctuate while this unfolds, but the consumer price would also fall drastically for many things once un-tariffed/taxed!
Like eBay then?!
Except you would need a global currency. Eh pardon? did China just buy 50bill of IMF SDR’s I hear you say? Yup. Well that global currency will be happening soon then I would wager.
No need to use the $ when China wants to buy the Gulf’s oil and they want to pay for Chinese goods then either…Ouchville, USA.
Just wondering, is Walmart a big presence in the mid-east oil patch? Just what Chinese stuff would they be intersted in?