Industry Today: The World of Manufacturing

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 Date:6/5/2009

 

Wake Up Call
From Big Three to Little Two
Foreign protectionists’ biggest triumph yet is the whittling down of GM and Chrysler, argues Alan Tonelson.

Ever since it became clear that both GM and Chrysler were going bust, two thoughts have kept rumbling around my head: First, “Foreign protectionists have won an epochal victory.” And second, “Which domestic industry will be taken out next?”

I know that President Obama and his auto expertise-light auto task force insist that bankruptcy offers the only chance for survival for the Detroit automakers – or at least for GM and Chrysler. But after months of demanding that these two American industrial icons develop credible plans for viability, it’s more painfully obvious than ever that Team Obama hasn’t a clue about this goal, either. That is, unless everything everyone has said about the auto industry for decades is wrong, and enormous scale really isn’t vital for success.

For make no mistake about it: The barely coherent thought apparently underlying Obama’s auto strategy is that GM in particular can survive indefinitely and even prosper, as a shrunken and largely domestic version of its former self. If so, it will mark the first time that a mass consumer product is profitably provided by what has become a niche company.

Especially senseless is the expectation that a mini-GM can compete effectively against rivals still enjoying much greater efficiencies thanks largely to their unfettered abilities to do business both in their home countries and the enormous American market. Indeed, there’s a good chance that not even Team Obama believes it. Perhaps that’s why it foresees GM remaining a ward of the state for up to five years.

And of course, the second the company becomes profitable again, Washington says it wants out. This may please the president’s Republican party critics and other free market purists – though it’s unimaginable that the administration will win many plaudits from these ranks. But no government genuinely committed to keeping the United States a significant automotive producer and reaping the resulting economic and technological benefits would ever imagine that the challenge could be met in so brief a time, especially since Detroit’s rivals and their home governments will hardly be standing still. However vague, this latest Obama deadline signals more interest in establishing plausible deniability of blame if the U.S.-owned sector finally does collapse than in promoting its long-term health.

At the same time, the defeatism suffusing the Obama auto policies hardy stops with production issues. It’s shaped the president’s decisions on the labor front as well. Thanks to the past year’s headlines, Detroit auto workers and their union have clearly been vulnerable to powerful rhetorical and substantive attacks. During a punishing recession, the fight to preserve pay and benefits far above average national blue collar levels has understandably bred resentment. And the role being played by tax dollars naturally keeps fueling this fire.

Yet even a smidgeon of perspective reveals how thoroughly our national economic ambitions and confidence have been beaten down, and how stunted and warped our expectations have become. It’s not necessary to endorse every or even most of the decisions made by the United Auto Workers’ union in recent decades to recognize that the auto industry’s historic transformation of literally millions of working class jobs into employment that could sustain middle class lifestyles has been an achievement, not a mistake. Enabling so many blue-collar factory employees to buy homes, send their children to college, and enjoy secure retirements was central to keeping the American dream’s promise after the World War II effect ended for the U.S. economy. Indeed, even then-Walmart CEO Lee Scott stated in 2005 that GM and its labor practices were crucially responsible for establishing “the post-world war middle class that the country is so proud of” – and that even retailers as huge as Walmart could not possibly play this role because of their inherently slim margins and low rents.

And as Henry Ford saw way back in 1914, well-paid factory workers in a large country like the United States could create enough consumer demand to propel his company – and the entire economy – to once-undreamt of heights. It will surely become one of economic history’s great ironies that the great insight of this tycoon, widely condemned as a reactionary and union-buster, has been emphatically rejected by the ostensibly progressive Barack Obama – and the elitist academics and Wall St. financiers dominating his auto task force. Again and again they have insisted that national auto industry compensation levels should be set by the downright stingy practices of the foreign transplants. It’s hard to imagine a more effective way to speed up the downward spiral of American living standards. For what’s to stop the transplants themselves from lowering wages and benefits still further? When has such a buyers’ market existed for auto-related labor?

The Obama labor record, moreover, reveals perhaps the most critical facet of the president’s auto policy: the maintenance of a domestic automotive market wide open to all import competition as his unmistakable bottom line. As frequently noted, this objective has led to some breathtakingly screwball twists in the ongoing scramble to save Detroit. This White House’s aim from Day One was to facilitate Chrysler’s acquisition by the Italian automaker Fiat. From the shortest-term and narrowest perspective this is reasonable enough. Yet the Fiat solution nonetheless raises the question of why any U.S.-owned automotive presence is needed at all. Similarly bizarre was the decision to spare GM’s life on the condition that the company boosts its vehicle imports from Mexico, Korea, and China. What happened to the emphasis on American jobs?

More fundamentally, however, the administration has never even considered a series of steps that could preserve maximum U.S. ownership, American jobs, and first world wages – imposing high local content standards on all vehicles sold in the United States, whether Detroit or transplant or foreign-produced. In particular, such a “sell it here, make it here” approach would free U.S. autoworkers and their employers of the need to compete with penny-wage and/or heavily subsidized foreign competition. It would in fact recreate something like the domestic automotive status quo that prevailed until the first major import waves broke – a period of unquestioned prosperity and real health for the American economy.

Even better, the likeliest objection to this domestic-oriented model is easily overcome. Worried that not enough competition would be generated to ensure continually improved value and quality, plus technological progress? Then break up the GM, Ford, and Chrysler conglomerates, enforce anti-trust laws vigorously, and hold foreign producers eyeing the U.S. market to the same strict standards. In other words, realize that capitalism is based not necessarily on foreign or global competition. It’s based on competition, period. And nowhere is this truer or likelier to succeed than in a big, diverse, socially and economically free-wheeling country like the United States.

Skeptical? How do you think every other major foreign automotive industry has survived and even flourished – especially during the first two-thirds of the 20th century, when Detroit was supreme by every important measure – including price. In Europe and Japan, interwar governments built up high tariff walls to keep American imports out, and bring in American capital and knowhow – along with the jobs they would create. After the war, the Europeans let the Opels and Vauxhalls and Ford Europes rev up again, but remained highly resistant to U.S. imports. Japan, which had kicked out U.S. competitors during the 1930s, kept them out after V-J Day – which dovetailed perfectly with Washington’s desire to turn Japan into a reindustrialized anti-communist bulwark, with its free market leanings, and with its blithe assumption of perpetual and even God-given American economic predominance. Therefore, despite American automotive superiority, U.S. auto import growth during this period far outstripped export growth.

In other words, obviously none of the other reemerging automotive powers, save Britain, were willing to let the competitiveness chips fall where they may. And although most had fully rebuilt impressive auto complexes by the 1960s, none of their governments was willing to loosen the reins at that point. Having created sanctuary markets in their home countries and regions, most redoubled their focus on the only major sales opportunity left – the United States. The result: Ever since, Detroit has been largely restricted to defending its home turf, while its rivals faced no worries about imports, could in fact rack up outsize profits at home, and could turn the lion’s share of their attention to exporting.

The scale advantages they reaped, along with government provided health care and pensions that eliminated legacy costs even in high-wage, heavily unionized countries, have now proven to be a literally unbeatable combination.

So for as far into the future as can be seen, global automobile sales and production will be dominated by players operating from tightly protected markets. The industry in the world’s most open major auto market by far will be reduced to a Chapter 11 case owned largely by taxpayers, a subsidiary of Fiat, and a lone U.S.-owned private sector survivor that has totally mortgaged its entire future. And while the new Wall Street-Washington axis struggles to reconcile its new stake in automotive success with its revived infatuation with global popularity contests, the victorious European and Asian protectionists will be free to turn to their next American industrial target.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C. A contributor to the Council’s AmericanEconomicAlert.org website, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). The views expressed here are his own.