Make Cars Not Trade Wars

Andrew van der Stock
by Andrew van der Stock

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.

Andrew van der Stock
Andrew van der Stock

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  • Sutski Sutski on Sep 23, 2009

    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.

  • Andy D Andy D on Sep 24, 2009

    Just wondering, is Walmart a big presence in the mid-east oil patch? Just what Chinese stuff would they be intersted in?

  • Hermaphroditolog Good hybrid cars use ICE implosion mode.Mercedes-EQXX uses implosion turbines (turboexpanders) for regeneration from heat losses.
  • Kosmo I, for one, and maybe only one, would buy a 5.0 L, stickshift variant of the sedan/hatchback that is Ford's "Not A Mustang EV" tomorrow.I'd buy the sportwagon version yesterday.
  • Akear I am counting the days when Barra retires. She has been one long nightmare for GM. People don't realize the Malibu outsells all GM EVs combined.
  • Redapple2 you say; most car reviewers would place it behind the segment stalwarts from Honda and Toyota,........................... ME: Always so. Every single day since the Accord / Camry introduction.
  • Akear GM sells only 3000 Hummer EVs annually. It is probably the worst selling vehicle in GM history.