Alan Tonelson on Saving What's Left of the American Auto Industry

Alan Tonelson, a research fellow at the U.S. Business & Industry Educational Foundation explains why it is important to link the Big Three automaker rescue plan with a long-term effort to save American manufacturing jobs.

Congress Must Ensure that the Big Three Bailout is Made-in-America
Alan Tonelson
American Economic Alert www.americaneconomicalert.org
Wednesday, December 10, 2008

Bully for the President, the President-elect, and Congress: They all supported the Executive Branch showering literally trillions of taxpayer dollars on the economy’s generally incompetent (or generally criminal?) Big Finance sector – with virtually no conditions or oversight provisions. But now Washington has drawn a clear line in the sand, and insisted that the beleaguered Detroit automakers show them detailed “plans” for viability before providing a relatively small (by Washington standards) bridge loan.

And bully for the automakers, their own worst enemies: They’ve followed their instructions after a disastrous initial round of Washington begging, and seem poised to receive temporary support – though clearly what tipped the balance was last Friday’s government report showing 533,000 American jobs lost in November.

Tragically, however, for all the noise about holding Detroit’s feet to the fire, both American leaders and the auto industry keep ignoring the most important conditions that any rescue package needs to contain: The more fuel-efficient vehicles that government aid helps Detroit produce must contain sky-high levels of U.S. content. Moreover, they need to be made in factories using domestically made machinery. And the research and development, design, and engineering they’ll require must be performed onshore as well – primarily by American citizens.

Unless the Big Three auto companies are required to curb their offshoring sharply, and the industry’s renewal is overwhelmingly Made-in-America, much of the benefit will leak overseas. Just as important, Washington will have squandered a golden opportunity to strengthen much of the rest of America’s struggling domestic manufacturing base, and thus help the nation produce its way out of the economic crisis. Setting this precedent – domestic production – is especially important because most of the taxpayer-funded economic recovery ideas in the air these days – including infrastructure building and the promotion of green manufacturing and green technologies – raise exactly the same issues.

In part, the neglect of content levels reflects the desperation of Detroit’s situation and the suddenness with which it has worsened. Immediate either-or questions like “bail them out or not?” understandably have dominated the recent debate.

But Washington has been in the auto revitalization business since at least September, when Congress approved $25 billion in subsidized loans for the domestic auto industry to (a) refurbish their factories to make “next generation” vehicles that will greatly reduce America’s oil use, and (b) develop the parts and components from which these vehicles will be assembled.

This recent decision to support a sector of the economy that actually creates new wealth contrasts strikingly with the rest of Washington’s responses to the economic crisis – which have focused obsessively on encouraging more of the consumption, lending, borrowing and other intrinsically unproductive activities responsible for this increasingly terrifying mess in the first place.

And the legislative language – contained in the Energy Security and Independence Act of 2007 – unmistakably emphasizes promoting better auto manufacturing at home. Yet the bill's wording is too loose to ensure meeting this goal satisfactorily. And since all unearmarked money is ultimately fungible, the likely diversion of part of these funds to extend emergency short-term financing to the Big Three further reduces the odds of taxpayer dollars being spent predominantly on domestic production and innovation. Moreover, the Detroit automakers have been offshoring production too enthusiastically for too long to trust them or market forces to do the job.

The Energy Act seeks to promote onshore automotive production through three main provisions. First, it instructs the Energy Department officials who dole out the funds to “give priority to those facilities that are oldest or have been in existence for at least 20 years” – including facilities currently sitting idle. Second, priority also must be given to “the refurbishment or retooling of manufacturing facilities that have recently ceased operation or will cease operation in the near future.” Third, funding is restricted to “engineering integration performed in the United States of qualifying vehicles and qualifying components.”

The phrasing is exactly what you’d expect from lawmakers seeking to assist a domestic industry and economy but afraid that explicitly favoring U.S.-owned companies would violate World Trade Organization rules against such nationally based discrimination. Thus the “20 years” restriction reflects the fact that few of the foreign-owned auto transplant facilities in the United States date back that far. And few of these factories have “recently ceased operation or will cease operation” soon.

Still, the bill leaves intact way too many opportunities for Washington policymakers to stimulate auto-related production and engineering work overseas, by both the Big Three and their foreign rivals. Notably, neither the 20-year rule nor the focus on recently closed or imminently doomed facilities is an ironclad requirement, but a preference. In addition, even if the measure were interpreted strictly, Toyota, Honda, Nissan, and Subaru all have factories in the United States that are old enough to qualify. What would stop these firms from transferring the knowledge they gain through U.S. taxpayer subsidies to their newer plants?

Many auto rescue opponents claim that the United States doesn’t need an American-owned vehicle industry because these Japanese and other foreign transplant operations now use lots of domestically made parts and components. Therefore, most of the U.S.-owned parts companies heavily dependent on Big Three customers could in theory offset business lost from Detroit by selling more to the foreign firms that would fill the vehicle vacuum.

Yet the official U.S. data on auto parts imports continue to belie these claims. Foreign-brand auto sales have declined nearly as sharply in recent months as Big Three vehicle sales. Yet through September, there’s been nothing close to the comparable fall-off in parts imports from Japan, Germany, or South Korea that you’d expect if their U.S. content levels were indeed high and increasing.

In fact, since the start of 2005, imports of tires, electrical equipment, seating and trim, and vehicles from Japan have risen. Imports of tires, lighting systems, stampings, and miscellaneous parts from Germany have grown. And imports of every parts category from Korea are up except for electrical systems and vehicles themselves. Just as surprising, many categories of parts imports from Germany and Korea have risen significantly since 2005, notably lighting, stampings, and air conditioning systems from the former, and brakes, transmission and power train-related items, and seating and trim products from the latter.

The message couldn’t be clearer: A permanently and dramatically downsized U.S.-owned automotive industry means a permanently and dramatically downsized parts-making complex – with all the crippling production, employment, and tax revenue loss that would create. Thus enabling the transplants to use U.S. tax dollars for factory retooling would be a big mistake. In fact, it would reward their discriminatory procurement practices.

At the very least, the transplants should only receive public subsidies if U.S. Customs and other officials can examine their books in detail and determine their actual levels of U.S. content – in order to give them higher targets to meet.

Restricting rescue money to factories that have recently closed or are about to would effectively shut out the transplants. Yet the Energy Act says nothing about using U.S.-made capital equipment for these efforts. A huge boost to many European and East Asian economies – many of the latter in particular renowned for predatory trade practices – would be provided by an auto revitalization package that enabled the Big Three to fill their new modernized plants with the latest foreign-produced machine tools, robots, conveyors, industrial controls and other electrical equipment, heating and cooling systems, and the like. The same goes for all the molding and casting and forging operations required in automotive production.

The energy bill’s provisions for parts producers suffer from the same problem. Although the bill refers to “encouraging domestic production” of the components of advanced, fuel-efficient vehicles, it sets no hard and fast requirement. Nor is the term “component” defined. Far from nitpicking, this point is central in an era where parts and components are often complex systems comprised of many other parts and components. So the Big Three and major parts-makers could well take their tax dollars and assemble in the United States vehicles and parts whose makeup and value-added is nearly entirely foreign.

Indeed, both Ford and GM have announced in recent years plans to ramp up parts procurement from very low-cost countries like China and India. (Evidently Mexico has been too pricey.) These days, such economizing moves understandably will loom larger than ever in their corporate plans. But if such offshoring is subsidized by U.S. taxpayers, not only would the opportunity to maintain hundreds of thousands of middle-class jobs be blown. Many spillover effects from the technology-intensive parts sector would be lost as well.

Speaking of technology, the bill wisely requires that the engineering connected with retooling factories and producing next-generation vehicles and parts be performed in the United States. But significant tightening of the language is essential. After all, engineering work at multinational manufacturers nowadays – along with research and development and design – has become just as globalized as production. In fact, it’s now common to organize transnational teams of scientists and engineers, with the geographic dispersal enabling projects to be worked on 24/7.

The auto industry is no exception. Given all the very inexpensive talent in these fields available around the world, the Big Three and the larger U.S. parts companies will find it even more tempting to use it – in conjunction with U.S.-based personnel. Lawmakers will have a difficult time figuring out where the domestic work stops and the foreign work begins in these cooperative endeavors. But if they don’t, public funds could wind up encouraging the export of thousands of these valuable white-collar professional jobs, as well as blue-collar production jobs.

The obstacles to implementing these content standards will be formidable. They would need to be effectively monitored and enforced – not exactly Washington’s strong suit when it comes to trade policy. In turn, effective monitoring and enforcement means that Detroit will have to open its books, too, and give officialdom and the public accurate information on its current U.S. content levels. Policymakers will also need to know when procuring from U.S. suppliers simply isn’t possible – because the industry in question is too hollowed out, or has vanished altogether. The purpose, however, would not be to identify permanent exceptions to the U.S. content policy, but to gain the knowledge needed to re-create these industries.

Moreover, high U.S. content requirements will tend to raise Detroit’s overall cost levels (along with the earnings of American workers) vis-a-vis their competitors’ overseas and transplant operations. Therefore, innovative trade policy measures will be needed to negate these advantages. And U.S. leaders will need the backbone to pursue these policies whether other World Trade Organization members like them or not.

Of course, this program will unleash a torrent of invective and cries of “Smoot-Hawleyism” from all the usual domestic suspects as well – Big Media commentators, academic economists, outsourcing business interests, etc. (Hopefully, some sense of shame would lead Wall Street to refrain, but don’t count on it.) Further, polls indicate that a bailout-weary public might object, too.

But these are the kinds of obstacles that transformational leaders, by definition, overcome. And there are simply no other choices – that is, if Americans truly are serious about restoring genuine prosperity, and reviving the domestic manufacturing on which it must be based.

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