Protection that worked

Robert Kuttner

July 08, 1992|By Robert Kuttner

IT IS A staple of economic theory that any spell of protectionism is likely to become a permanent crutch, making the protected industry that much more inefficient, denying the consumer free choice, and harming everyone's economic well-being. People who believe that should have a look at their local auto showroom.

The American auto industry, in the 1970s, found itself abruptly overtaken by imports. To a large degree, this fate was the industry's own fault. For a generation, the industry had coasted on its big head start, engineering better tail fins rather than better engines, resisting the public's appetite for a reliable small car. Sheltered from competition, Detroit earned comfortable .

profits, which it shared with its workers.

When the import wave of the 1970s collided with two recessions, Detroit very nearly went under. Three U.S. presidents responded by reluctantly negotiating "voluntary" Japanese import quotas, to stem the tide of Hondas and Toyotas. Congress, with equal reluctance, floated a special low-interest loan to bail out Chrysler.

Both measures gave most economists hives. But elected politicians nonetheless concluded that the auto industry, and all its supplier industries, was simply too important to the economy to be allowed to die just because a generation of auto executives had gotten lazy.

Foolish politicians. Didn't they ever read an economics textbook?

Well, a funny thing happened. Contrary to the theory, restrictions on imports gave Detroit some breathing space, which the automakers used wisely. Detroit didn't get lazier; it started making better cars. And it started making them more efficiently.

Chrysler pioneered a whole new product, with its popular minivans. Ford demonstrated with its Taurus line that it could win back skeptical import-buyers. Even GM managed to design a brand new car from the ground up, produced in partnership with the UAW -- the widely acclaimed Saturn, which Car and Driver magazine recently rated the top value among cars priced under $10,000.

Today, the most productive North American auto plant is roughly at par with the most productive Japanese auto plant. And the Big Three have actually been gaining market share, at the expense of Japanese imports. In the first five months of 1992, domestic carmakers accounted for 72.4 percent of the U.S. car and light-truck market, up 1.6 percentage points over a year ago. The Japanese market share was down 1.4 points, to 24 percent.

In the meantime, Japanese automakers, long accustomed to very low borrowing costs, now face capital costs almost equal to those of their American competitors. Japan has been locating "transplant" factories in the United States. To manufacture made-in-U.S.A. Hondas and Nissans, not just to get around import quotas, but because U.S.-based production now actually enjoys a cost advantage.

According to a recent study by the Washington-based Economic Strategy Institute, the low-cost producer among American and Japanese automakers is now Ford. The study calculated total costs of labor, materials, and other expenses, and found that the average cost per car was $6,395 for cars made in America, and $6,644 for cars made in Japan. Ford's costs were just $5,415.

Mazda, Nissan, and Toyota can still make a car with fewer labor-hours than even Ford, but the gap is closing. And lower American wages and fringe benefits still make it slightly cheaper to produce cars domestically.

This is, of course, a remarkable turnabout. But as Clyde Prestowitz, president of the Economic Policy Institute, observes, all is not well. Japanese producers still resist buying components from American suppliers, and a Big Three car still has more than twice the domestically produced parts of even a Honda made in Ohio, because Japanese producers still bring in most of the parts from home. "If the Japanese were behaving rationally," says Mr. Prestowitz, "they would buy more parts in the U.S."

This is not to say that Detroit is free of flaws, either. In the 1980s, American carmakers took advantage of import quotas to retool -- but also to raise prices. Despite the cheaper dollar, domestic auto companies basically took advantage of the fact that a higher yen forced Japanese producers to raise prices -- and Detroit played follow the leader and raised prices, too.

Domestic carmakers could have increased their market share even sooner if they had resisted the temptation to gouge consumers. Moreover, GM is still the high-cost producer, by far. And its innovative Saturn line still only accounts for a small fraction of total GM sales.

And government hasn't consistently helped. The Bush administration still can't decide whether it matters if America retains a strong auto industry, or whether Japan plays fair. President Bush has lobbied Prime Minister Kiichi Miyazawa to press Japanese producers to buy more U.S. auto parts. But last week the Bush-appointed U.S. International Trade Commission overruled a Commerce Department finding that Japanese automakers had been dumping minivans in the United States at prices far below those posted in Japan.

It remains to be seen whether Detroit can build on its recent gains, and make a durable comeback. But its surprising success to date calls into question the usual claim that a bout of protection will only doom industry to sloth and decline.

For Detroit in the 1980s, a small dose of protection was exactly the right remedy.

Robert Kuttner writes a weekly column on economic matters.

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