World Cars, World Trade

GM is positioning Buick as a global brand drawing upon global product. As we've earlier blogged, this will work only if there is a convergence in tastes across major markets that allows the same vehicle to be made and sold with only minor modifications. Now the brand name may not be the same; what is a Buick in China may be an Opel Mokka in Europe and not sold in the US at all – though in this case the Buick Enclave is, as detailed in this Bloomberg article.

homologation and lower tariffs would benefit us

This isn't just to lessen risk (though in the case of China, that's been upside risk!), as argued in Spreading out for a little elbow room, a post by one of my students. Partly it's a story of platforms, as a manufacturer enjoys economies of scale when the same underlying vehicle can be tweaked. But ideally it's about selling the exact same vehicle on a global basis. That then works to the benefit of global suppliers (and to the detriment of medium-sized suppliers in Japan and elsewhere that have a narrow geographic footprint), as an OEM can ask them to supply the same part everywhere, down to the plastics and steel and so on that if allowed to vary can introduce defects, defects that are thus subtle and hard to diagnose, or add on to costs for local redesign and retesting.

At present, however, there are limits. The Insurance Institute for Highway Safety imposes crash tests that are unique to the US. Europe has its rules for pedestrian impact. Headlight standards vary, and require redesign and recertification. A standard approach in Europe – lights that track as you turn, and adjust vertically ascending and descending hills, are not always allowed in other markets. And providing those functions interacts with styling. So homologation of such rules across markets can bring big benefits.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership, as well as the on-going Trans Pacific Partnership talks with Japan, Australia and others. How autos are treated could be a boon to the US industry.

And by the US industry I don't mean just the Detroit Three (though if we're precise, only GM is headquartered in Detroit, reflecting a long-run trend to exit the city). Michigan is the leader of exports within NAFTA, both to Canada and to Mexico. BMW in Spartanburg, SC leads the auto industry in exports, and has just completed a $900 million expansion. (I've been through their paint shop, which includes a PACE Award-winning innovation from PPG that eliminates an entire oven.) But Audi is opting for Mexico because as an exporter they find it a better location for the range of available free trade agreements and resultant lower tariffs. (Audi's plant will be the only one to make certain products, as discussed in The Tariff Advantage of Mexico.)

So homologation and lower tariffs would benefit us, and benefit others. We'd presumably have to lower the temporary 1963 "Chicken War" tariff on light trucks that's still in place 50 years later. But while there is convergence across markets in what people drive and in styling – as our students heard in the spring from J Mays, Ford's Chief Creative Office, reflected in their notes here and here – that convergence is not complete. Japan's "minicar" market is deeply entrenched; so are big pickups in the US. So it's really not credible threat to the Detroit Three, who hold a lock-grip on pickups (Toyota has about a 6% share, Nissan closer to 1%). There's nowhere imports could come from. So as I see it, we'd benefit from these agreements. We might see some low-volume vehicles that for now are found only in Europe, because of the cost of adapting to US standards. Low-volume however is the crucial adjective.

The Tariff Advantage of Mexico

Adapted from a post by Griffin Cook on the Econ 244 blog, May 18, 2013

Audi's decision to place the plant that will build the new Q5 crossover in Mexico resulted from more than cheaper labor and government incentives. After all, assembly is likely 10% or less of manufacturing costs, and direct labor only one piece of that. Inventives are even less a factor – what big greenfield plant wouldn't likewise enjoy incentives if located in the US? (See an August 13th Bloomberg story on efforts to recruit car-related factories in the US.) So other considerations likely dominate.

According to CEO Rupert Stadler, Europe's growing interest in SUVs and and crossovers played a key role. The European Union slaps a 10 percent tariff on U.S.-built vehicles, which would have cost Audi more than $3,000 per vehicle – and only 25% of the plant's cars will likely be sold inside NAFTA. A majority will instead be headed for the European Union.

This is part of a growing trend in which cars are produced in a foreign country and then exported to the home country, in part due to cheaper labor costs and flexibility in trade laws, but also access to a supply base and to hedge foreign exchange risk. This presents a problem for the European Union, with production in its periphery, outside the Euro zone.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership. Lowered tariffs would help the US. And another component is homologation, which might lessen the divergence in safety and testing standards that mean that Audi and BMW (whose South Carolina plant exports 70% of its output) must produce slightly different products for different markets – variations in headlight standards, how emissions are measured, and on and on.

Sources:

• Automotive News Europe May 17, 2013: Tariff played a role...
• TTIP – Official EU Site
• TTIP – Official US Site

...tariffs are 0% on vehicles shipped from Mexico...

Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest. So while VW has operations in Mexico, here I focus on the Japan angle, because I'm teaching a course on the Japanese economy.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it's not a priori a natural choice.

The answer lies in free trade agreements: Mexico has been more aggressive on that front than the US (and Japan). As a result not only can vehicles be shipped tariff-free to the US–0% from Mexico versus 2.5% on cars and 25% on trucks shipped from Japan. Ditto Europe–tariffs are 0% from Mexico versus 10% on vehicles shipped from the US or Japan. (I have not researched whether Mexico has similar aggreements in Latin America.)

Now Japan could offset some of this were it to negotiate more free trade agreements. (It has one with Mexico.) But that's an awkward process, and has yet to join the biggest pending agreement (TPP, Trans Pacific Partnership). The reason: farmers, whose political clout is disproportionate to their share of the economy, and whose clout over time has led to subsidies and tariffs that allow rice farmers to remain in business despite costs that are multiples of those in other large producers. So removing protection for rice would drive most farmers out of business. In Japan, it's the "3rd rail" of electoral politics.

While we didn't hear anything about the economies of Canada and Mexico, our two biggest strategic partners, in the recent (and unlamented) US political cycle, this movement clearly benefits NAFTA and thus the US. Do higher wages in Mexico harm us? No! And while we might rather have the jobs in the US, we do pick up additional parts business. If we're going to import vehicles – and economies of scale mean that many will still be built in but a single plant globally – then better Mexico or Canada than Japan or Europe!

...mike smitka...