Auto Industry and china

We have talked about how the Big 3 auto firms have been losing market share to foreign companies for several decades, and that these foreign firms are from mainly Europe, Japan, and Korea.  It appears as if China’s entrance into the market is fast approaching and now Romney and Obama have used this as a talking point for the upcoming election.  Both are worried that the Chinese government subsidizes car part exports in order for Chinese companies to gain a foothold in the American car market.  The Big 3, Romney, and Obama are all eager to prevent this from happening.


7 thoughts on “Auto Industry and china

  1. It seems a major issue confronting American trade policy is to what extent we should protect our manufacturers at home to keep those jobs here, or whether we should focus more on protecting consumers by allowing them to have full access to the cheapest goods available so they can spend more money elsewhere, whether they be imports or domestically produced cars. Standing up to China will certainly give a candidate political points, but it makes you wonder whether the consumer is fully benefitting from blocking trade relations. After all, there appears to be evidence that China’s cheaper goods have kept inflation down, which is especially important with U.S. wages having fallen over the last decade. But with the main focus on jobs and the middle-class, it appears policy priority is in favor of bringing back American industry, particularly in manufacturing.

  2. Clearly, there is a incentive to be protective of domestic industry. This is especially true given it is an election year. The question is, how protective will we be after an election year?

  3. Several issues here:

    1. Would links by Chinese parts makers, either through investment in facilities in the US or through exports, make any difference to the ability of Chinese-made cars to succeed in the US market? I’m skeptical.
    2. Is it really true that the Detroit 3 oppose such imports? Aren’t they the importers? [Not the case for things like brake pads, which are sold in the aftermarket.]
    3. What is “Chinese”? After all, China is the world’s biggest car (and truck) market, and every global supplier wants to be in the game. Some of them may export part of their production. In that case are they Chinese? German? US? [At the detailed level, the engineering may be done in the US, the capital equipment — robots — may come from Japan, the paint and coatings [BASF] from Germany, and the management from various countries (including perhaps Brazil or India). Don’t we want to look at “value added” — and in some cases the only “Chinese” component may be labor.]
  4. I am still confused by what Romney means with “getting tough on China”. Clearly, he indicates that China is not playing by the rules or is somehow playing unfair. The argument is then that certain jobs in the US would again be competitive if China played fair. However, even if the Yuan appreciated drastically, paying for simple manufacturing jobs would still be way cheaper in China than in the US. This assumption holds unless the US$ depreciated by 200% against the Yuan. Given the development of the exchange rate over the past few years, this kind of depreciation seems unrealistic. Therefore, if Apple wants to maximize its profits, it should better stick to Foxconn. Moreover, a drastic appreciation of the Yuan would probably ruin the Chinese export industry since it operates on very small margins. This again would damage the US economy.
    Well, which rules is Romney then referring to? As far as I am concerned, there are no rules and no international institutions which dictate a sovereign country what exchange rate to pursue.
    At the moment, China and the US use the strategy of tit-for-tat when it comes to protection of the domestic industry. However, I am not sure whether this strategy will rather harm both economies than actually benefit the domestic industry.

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    • This is something that comes up almost every election campaign — it used to be “get tough on Japan.” Most of the time the stance lacked detail (at the Presidential level) and so wasn’t taken very seriously by those involved with trade. This time is no different — complain, but not in detail and not with a detailed policy proposal. So on this issue I can’t fault Romney.


      1. protection raises prices in the US
      2. and

      3. cuts volume so hurts the exporter, too.
        A stronger yuan has the same effect.

      A detour into international finance would note that in the short term capital flows can swing by very large amounts and so swamp the impact of trade on forex rates while bilateral trade doesn’t imply anything about whether the yuan is overvalued even from a trade perspective. [The BIS — Bank for International Settlements, the “bank” for central banks — has both trade-weighted and inflation-adjusted trade-weighted exchange rates on a monthly basis for the US, China, the Euro and 20-odd others for their narrow measure, 61 countries for their broad (but reliant upon more assumptions) measure. There’s a fair-sized empirical literature with results all over the place, but typically on the it’t-not-far-off end of the spectrum.

      Even if there was a policy response, it might take a long while to have an effect. And remember that the value added by China is quite small, so the flip side of “wages would have to double” is “even if they did, not a big deal.” A company called iSupply for example tracks the content of the iPhone and finds very little actually originates in China, and that assembly is a small part of overall costs. Apple could produce here, and political risk considerations (of a blowup in China, not of a bilateral spat) may get them to diversify their sources. That however can’t be done quickly, Foxconn employs 1 million (though many outside China) and moving an operation the size of Apple’s iPhone one would take time…

        • I’ll have to look at the article, but my sense is that 3-D printing remains a very low volume technology, used only for prototypes. Now at some level semiconductor chips are make with a 3-D manufacturing process, but it takes weeks to etch and redeposit material on a wafter to make a chip, and new plants run $3 billion. Very few items have the value/size ratio of an integrated circuit so that the slow speed and high cost can be overcome.

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