LURKING beneath President Bush's haggling with Japan about auto sales is a nagging basic question that he never squarely addressed: Does it matter whether America retains an auto industry? And if so, why?
If Bush does think we should revive Detroit, he needs to think harder. Specifically, what can government competently do to help the auto industry without violating America's general commitment to open global trade.
These are the nettles that George Bush has refused to grasp. Instead, he has settled for some ad hoc arm-twisting, while insisting that he's really a free trader.
Most economists, even some liberals such as Harvard's Robert Reich, insist it doesn't really matter who makes cars. If American-owned auto companies can't hack it because their products don't attract consumers, that's just too bad. Reich does believe it's worthwhile for car production to remain in America, but if that production happens to be Japanese-owned and managed, that's fine too.
As public policy, Reich doesn't want government to coerce Japanese factories to relocate here. Rather, he wants public policy to aim at improving the U.S. work force, which will then presumably lure foreign-owned firms spontaneously to our shores. I call this the "Field of Dreams" theory of industrial strategy: If you build it, they will come.
Others, like Clyde Prestowitz, formerly the Reagan administration's chief trade negotiator with Japan, insist that it matters a lot -- not just that auto production remain in the United States, but that U.S. automakers survive. Prestowitz's Economic Strategy Institute has just published a timely report, "The Case for Saving the Big-3." It calls for a program of tax credits, increased capital investment, labor-management collaboration and negotiation with Japan on sales and production -- all aimed at reviving U.S. car output.
America does need to retain a domestic auto industry, it seems to me, for the following reasons:
* Autos are a huge, basic industry. When you add up autos and all of the input industries that go into autos -- steel, rubber, glass, plastics, auto parts, machine tools -- you are talking about several million jobs and hundreds of billions of dollars of output.
* The manufacture of automobiles is a capital-intensive and highly productive enterprise. That means each auto worker can command a relatively high wage. High-productivity employment is what creates high incomes and a high standard of living for Americans.
* Auto sales now account for more than two-thirds of our trade deficit with Japan. If we can either raise the level of domestic sales, or increase auto sales abroad, that will solve much of our trade imbalance.
Up to this point in the argument, Reich and Prestowitz largely agree, for the issue is the location of production, but not its ownership. But while Japanese-owned "transplant" auto factories are better than nothing, they are not nearly as good for the U.S. economy as domestic ones. As Prestowitz reports, only about 35 percent of Japanese "made-in-U.S.A." cars are actually made in the U.S. Most of the parts come from Japan. The senior management, engineering expertise and proprietary technology tend to stay in Japan, and of course the profits flow home to Japan.
By continuing to make autos, American car-makers keep current in manufacturing technology. If they simply exit the business, the costs of re-entering are prohibitive, and our broader technological competence will suffer.
A mass-production auto industry evolved first in the United States for a variety of reasons. We were the first society rich enough to support a mass market for a product as expensive as a car. We were also a big, sprawling country, and people welcomed this new mode of transportation.
Being the first country to mass-produce cars gave America what economists call a "first-mover advantage." We learned more about making cars than our competitors, and until well into the 1970s, America dominated world auto production. This, in turn, helped create the high-wage jobs that produced a high American standard of living -- which kept expanding the market for cars. For a long while, Detroit coasted on that head start, but gradually squandered it.
However, when a key industry like autos rests on its laurels and more aggressive foreign producers surpass it, should we just curse the auto executives and conclude that the free market has rendered an irrevocable verdict? Reich says yes; Prestowitz says no.
Historically, other nations did not passively bow to America's post-World War II dominance of key industries. The Japanese could have bought Fords and Chevys, but instead they resolved to rebuild their own industry, and they kept American firms out while they did it. The French and Germans could have ceded aircraft production to Boeing, but instead they developed the Airbus, which is a very competitive plane.
Turnabout is fair play. It is insane, in the name of some abstract doctrine, to conclude that the United States should just give up making cars. It is entirely legitimate to attempt to reclaim world leadership in auto production.
As Ford showed with its acclaimed Taurus line, and Chrysler with its ingenious vans, there is still some life left in Detroit. We should encourage that revival, without shame or apology -- and then let consumers have the final say on whose cars they wish to buy.
Robert Kuttner writes regularly on economic matters.