What This Commentary Is
- A revealing look at how Toyota (and other Japanese vehicle manufacturers) exploits post-World War II U.S. foreign policy to unfairly compete from a sanctuary with U.S. companies,
- An examination of U.S. government incompetence in its stewardship of economic and international trade policy,
- A compilation of news article links publicizing Toyota’s recalls and quality issues (at bottom of page),
- An argument for sustainable, mutually beneficial free trade between the U.S. and Japan (and other countries),
- A challenge and direct response to Toyota’s unofficial “cheerleaders” who make empty apologies and excuses for Toyota at the expense of the U.S. economy and safety of consumers.
What This Commentary Is Not
- It is not about bashing Toyota, the people of Japan, or any other country that imports into U.S. markets,
- It is not an argument for U.S. protectionism.
Reuters (Apr 7, 2010) – Toyota exec warned on defect: “We need to come clean”
Introduction
Want to know the secret (literally since the media rarely talks about it) of Japanese automakers’ success? They certainly haven’t earned their success fairly. Unlike U.S. manufacturers, Japanese manufacturers compete from a sanctuary, coddled and protected from external competition. Because Japanese automakers do not face external competition in their home markets, they operate from a sanctuary which gives them a profit cushion to export in the U.S. market and gain market share in a predatory manner.
“So what,” you say? You are paying higher taxes because the U.S. government finances foreign trade by borrowing up to $2 billion every day ($6.5 trillion in cumulative annual trade deficits)to cover the annual trade deficit. Approximately two-thirds of the trade deficit is in merchandise (the remainder is due to oil imports) and a significant portion of this is due to importation of automobiles from Japan (and to a lesser extent, South Korea). Clearly, our overconsumption of imported automobiles and other merchandise is unsustainable, leads to higher taxes to service the increasing debt, lower standards of living for up to eighty percent of the population, and will ultimately bankrupt the country.
Think it’s okay to buy a U.S.-assembled vehicle from a Japanese manufacturer? If you do, then you’re promoting a system of unfair trade policy that says it’s okay for Japanese automobile manufacturers to have access to the U.S. market even though U.S. manufacturers don’t have access to the Japanese market. I believe it’s important that not only U.S. workers share in a nation’s prosperity but U.S. entrepreneurs have the opportunity to create businesses and hire U.S. workers without being put out of business by foreign cartels operating from economic sanctuaries (see the two youtube clips below from a documentary on this very issue).
Want to know why the U.S. government allows a system of trade that places U.S. workers and companies in competition with foreign cartels operating from economic sanctuaries? If so, then I invite you to continue reading below.
Foreign Economic Sanctuaries vs “If Detroit Were As Good As The Japanese Automakers …”
All too often, U.S. politicians and the corporate media blame the “Big 3” automakers for their problems. Unfortunately for the U.S. economy, it’s become fashionable to bash U.S. manufacturers and labor and ignore the core reasons why they (and the U.S. economy) are in such a bad state of affairs. One of the core reasons for Japan’s success in eliminating U.S. manufacturing companies (cars/trucks, electronics, motorcycles, etc) and workers is that its companies belong to powerful cartels that compete from a sanctuary in their home market.
“One of these days, Japan will wake up to the fact that subsidizing exports to the United States is no way to ensure long-term economic growth,” said Peter Morici, a business professor at the University of Maryland and a former chief economist at the U.S. International Trade Commission (Washington Times, Feb 17, 2009).
Japanese vehicle manufacturers have full access to the U.S. market without experiencing competitive pressures from reciprocal trade competition in their home market. This means Japan competes from a sanctuary which gives them a profit cushion that allows it to compete aggressively and unfairly in foreign markets, particularly the U.S. market.
Since at least forty years ago, trade barriers have existed in Japan that prevent significant levels of foreign competition in its home markets. Efforts by the U.S. government to negotiate with the Japanese for wider market access during this time have had little success. One primary reason is that U.S. trade policy has also been a key foreign policy tool following World War II. Clyde Prestowitz, former counselor to the Secretary of Commerce in the Reagan Administration and founder and President of the Economic Strategy Institute writes in Global Asia:
“[U.S. Leaders, following World War II] along with most western economists, believed that unilateral free trade was an advisable policy. In other words, they thought that the United States should reduce its tariffs and trade barriers even if other countries kept theirs in place.
“As a result, in the trade negotiating rounds of the 1950s and 1960s, the US made more and deeper cuts in its trade barriers than most other trading nations. It also allowed the dollar to be overvalued for long periods of time, partly as a kind of foreign aid to countries trying to export to the US market and partly because it was advantageous to US consumers and financiers. Although it was disadvantageous to US manufacturers, they were initially considered so competitive that currency values wouldn’t matter. On the domestic side, the US, fearing a return of the unemployment and depression of the 1930s when World War II ended, adopted numerous measures to stimulate domestic demand and encourage consumer spending as the main engine of economic growth.”
As the New York Times documents in a 1995 story:
“Five previous Presidents, starting with Richard M. Nixon, have promised to break through the system of corporate relationships that keep outsiders from prospering in Japan. Five have failed.
“Certainly, there has been no shortage of trade agreements in that time, in everything from citrus fruit to window glass, and in some cases American suppliers have prospered. But in this fight, Mr. Clinton has promised to change not the trade numbers but the system. His objective, he and Mr. Kantor have said many times, is to end the days when Japan can make its home market a sanctuary for Japanese producers, where they can charge high prices free of the kind of competition they face around the world.”
Dr. Ulrike Schaede, Professor of Japanese Business at the University of California, San Diego, School of International Relations and Pacific Studies explains on page 11 of her paper, “Self-Regulation and the Sanctuary Strategy: Competitive Advantage through Domestic Cooperation by Japanese Firms” (PDF), one aspect of how the “sanctuary strategy” works in Japan:
“By [Japanese firms] using self-regulation to structure the [Japanese] domestic market and limiting competition in order to attain stable and above competitive profits at home, exporting firms can sell products at a discount in foreign markets. Lower profits in export markets are counterbalanced by stable, high profits in the domestic market. To implement this strategy, self-regulation may include entry barriers through restrictions in the distribution system, boycotts of foreign competitors and discount stores, or retail price maintenance and other means to ‘maintain stable prices’ in the home market.
“The obvious problem with self-regulation is the danger that it results in collusive practices which harm the efficiency of the industry and its firms. To be sure, if companies block market entry and rig prices, over time they are likely to become cost inefficient. Indeed, many of Japan’s domestically oriented industries, especially in basic materials, have succumbed to this type of slack. Yet, some of Japan’s export-oriented industries, such as automobiles and electronics, have been able to avoid the pitfalls of collusion.
“There seem to be three ways in which industries can benefit from self-regulation while escaping potential pitfalls: (1) by focusing on their international competitors, in addition to their domestic ones, as the measure for competitiveness and bench marking, companies can avoid being blindsided; (2) by sharing cost and other strategic information for the domestic market, companies can make more informed business decisions and reduce waste of resources; and (3) by limiting self-regulation to those activities that do not harm efficiency, companies can leave room for competition; for instance, even under price agreements they can agree to compete on quality, or they can limit self-regulation to entry barriers and rules on distribution which increases their margins but does not affect domestic competition. Therefore, while domestically oriented industries may suffer a loss in efficiency from increased self-regulation, competitive industries can use self-regulation to increase their competitive advantage by successfully setting up a sanctuary without being dulled into inefficiency in the process.”
Economist Dr. Peter Morici writes in his paper Antitrust in the Global Trading System: Reconciling U.S. Japanese and EU Approaches (if prompted for a password, click cancel to view):
“The notions that too much competition is harmful and that competition should be managed to ensure stability remain deeply ingrained in Japanese business culture. Cartel activities remain prevalent in steel, petrochemicals, cement, fertilizer, paper, glass, automobiles and parts, and many other sectors.”
An example of Japan’s fear of external competition in its domestic markets is documented in these excerpts from Morici’s paper:
“Five integrated companies produce most of the steel consumed and exported from Japan. Prices charged domestic consumers are consistently higher than prices charged foreign customers and on the U.S. west coast (appropriately adjusted for transportation and other costs).
“For example, the big-buyer price in Japan for hot-rolled coil was 67 to 105 percent above the comparable U.S. price from February 1993 to September 1998. To maintain such price differentials, Japanese steelmakers must establish mechanisms for setting prices or limiting production, and must also keep imports from undercutting domestic prices.
“As for setting prices, a Japanese steel executive who once worked for several years in the United States said, ‘In the United States you have free competition. Here it’s like we’re violating the Antimonopoly Law everyday. The steel companies get together and talk about what the price ought to be.’”
“Meanwhile, the consuming industries, such as automobiles and shipbuilding, support the cartel by not purchasing from minimills and foreign companies. Because their principal competitors face the same high costs, they are willing not to look elsewhere.”
“In anticipation of competition from imports, therefore, the Japanese government undertook an express effort to replace government-imposed protection with a labyrinth of private barriers to imports. Specifically, the Japanese Cabinet concluded in 1967 that it would be necessary to restrain foreign enterprises coming into Japan after liberalization from disturbing order in domestic industries….
“The establishment of these countermeasures for strengthening the capacity of our industry for international competition and for preventing foreign enterprises from disturbing order in our industries and market would be a basic necessity if the liberalization is to be promoted and if our people are to enjoy its economic benefits.”
Much of the trade deficit with Japan is in automobiles and related parts. One of the myths I hear is American cars wouldn’t sell in Japan because they are too big, they consume too much fuel, and are left-hand drive. That is probably true. But that line of thinking avoids the reality of what Ford (and other American companies) has done in Europe, Brazil, Australia, and other foreign locations where they are allowed access.
Ford designs and builds its European cars in Europe …they do that because it’s the best way to design cars that will appeal most to local buyers. And, it works – Ford is currently the number two manufacturer in Europe. In 2005, for example, Ford celebrated its 30th anniversary as Britain’s most popular car brand. The Ford Focus (the European Focus is different from the American model) was the country’s top selling car. Ford is also doing well in Germany (most trusted brand in Germany), Brazil, Australia and other countries. Until 2006, Japan was the world’s 2nd largest automobile market. If there was a way Ford, GM, and Chrysler could design, build, and sell their cars in Japan, as they successfully do in other countries, they’d be in Japan because the volume is there. I know Americans love Japanese products. Japanese products have historically been of high quality (but that appears to no longer be the case). But their products have been and still are essentially designed and produced in a political system that shields Japanese companies from external competition in their home markets and the external competitive cost pressures faced by nearly all American corporations. And, as the trade deficit data illustrates (chart), consumption of those products by American consumers has had, and still has, an insidious high price.
The clearest proof that Japan’s auto market is not open can be found by looking at the new registrations-sales statistics that the Japan Automobile Manufacturers Association (JAMA) maintains on its web site. As I mentioned previously, Japan was the second-largest car market in the world until 2006 (it is now third, behind China). According to JAMA, 4,641,732 new cars were registered-sold in Japan. Of those cars, only 248,208 (five percent) were made by non-Japanese manufacturers. Considering all the excellent right-hand drive small cars Mercedes, BMW, Volkswagen, Ford of UK and Germany and others (Hyundai, Kia, etc) produce, five percent combined is they best penetration all of them can do in the Japanese car market? In the U.S., foreign-owned manufacturers have 52 percent of the U.S. market (and growing) and the majority of their cars are imported!
It’s interesting to note that South Korea is also emulating Japan’s export-oriented, sanctuary/closed-market strategy. Ward’s Auto reports that the new Hyundai Genesis is priced 40 percent less in the U.S. market than in Hyundai’s home market of South Korea (Re-Importers Conspire to Buy U.S. Hyundai Genesis to Resell in Korea, Report Contends).
I believe it’s important that not only U.S. workers share in a nation’s prosperity but U.S. entrepreneurs have the opportunity to create businesses and hire U.S. workers without being put out of business by foreign cartels in economic sanctuaries and other foreign interests shielded by U.S. foreign policy. Again, the only way to create and expand business opportunity is to enforce reciprocal trade and for the U.S. government to not look the other way when foreign countries (e.g. Japan and China) manipulate their currencies to artificially favor their exports at the expense of U.S. manufacturers.
Detroit doesn’t build the vehicles consumers want?
Ford, GM, and Chrysler frequently get hit over the head on this issue. There is a reason the “Big 3” have increasingly focused on SUV’s and full-size pickup trucks for the past twenty years: They’ve faced unfair competition from Japan’s sanctuary strategy (described above) and have tried many times over the past two decades to get the U.S. government to resolve unfair trade with Japan but have been unsuccessful. Thanks to a twenty-five percent tariff on trucks imported into the U.S. and the fact that Japan does not build large SUV’s and pickup trucks in its home market, the “Big 3” have been able to stay in business while Japan competes from its sanctuary. The problem with this strategy, of course, is that the “Big 3” had to put most of their “eggs in one basket” and be significantly at-risk from high oil prices and eventual competition in the big SUV and pickup truck market by the Japanese. Both high-priced oil and Japanese competition in the big SUV and pickup truck market have materialized in the past few years and this has significantly eroded the “Big 3’s” remaining market share and profits.
Japanese automakers are required to build small cars in their home markets due to the small roads, limited parking space, taxes, and high fuel costs. There isn’t any other choice for them. Folks who commend Japanese automakers for building good and fuel-efficient small cars are giving them undeserved credit. If anything deserves credit, it is the Japanese government and crowded cities in Japan. Most of the cars Japanese auto makers have exported to the U.S. market during the past thirty+ years have been updated versions of cars they were already making for their home market. Since Japanese automakers compete from a sanctuary, they are able to spend more money building better and nicer small cars compared to what the “Big 3” can do profitably. It’s not rocket science that Japan’s small cars are nicer. Given the unfair trading advantage Japanese auto makers enjoy from their sanctuary, why should anyone expect anything different?
Also, a significant number of U.S. consumers historically have wanted big SUV’s and pickup trucks. Nobody forced them to buy. The “Big 3” have been successful at producing a very high quality and successful product in this regard. Thus, the “Big 3” have produced a significant number of vehicles that consumers obviously have wanted and they were able to make a profit on these vehicles in contrast to their small cars that compete directly with the Japanese auto industry sanctuary. As to whether big SUV’s and pickup trucks should even be available to U.S. consumers is another issue, particularly since the U.S. government is primarily to blame for: 1) Not having an effective energy policy and, 2) Not setting higher fuel economy standards as is done in Japan. Interestingly, Toyota, Nissan, and Honda all now sell big, gas-guzzling SUV’s and pickup trucks in the U.S. market (see photo gallery) and would love to sell as many as they can to U.S. consumers. Furthermore, Toyota joined the “Big 3” in 2007 to fight higher U.S. fuel economy standards.
Toyota’s Prius Hybrid sales are off 48 percent. Thus, even if the “Big 3” had a small hybrid car (Ford has had an SUV hybrid for a few years, and now has a class-leading hybrid mid-size car), their sales would still be down significantly due to the credit crisis, economic downturn, and fluctuating fuel prices.
It’s not that the “Big 3” has wanted to ignore the small car market for the past twenty years. If there was a profit to be made in that market segment, they’d be there. Because the U.S. government has shown no willingness to enforce reciprocal market access in Japan, the “Big 3” has had no choice but to focus most of their resources on where they could make a profit and that has historically been SUV’s and pickup trucks.
If there has been any incompetence in U.S. automobile manufacturing, surely the U.S. government is equally (if not more so) to blame. Further, it is disingenuous for politicians to blame the “Big 3” in public debates when they are aware (or ought to be) that U.S. foreign policy interests (described above) have trumped those of U.S. manufacturers and U.S. workers for decades. Every foreign country that has significant trade relations with the U.S. has an industrial policy that results in close ties between government and industry to target their exports in foreign markets, particularly the U.S. market. The U.S. does not have any such policy and, consequently leaves U.S. manufacturers on their own to find a way to compete against unfair foreign industrial cartels and policies. Obviously, U.S. economic and foreign trade policies are long past due for a change.
Dr. Peter Morici wrote on January 13, 2009 (U.S. Records Huge Trade Deficit):
“Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by 3.4 percent of GDP [over 5 percent in 2008 …Michael], the trade deficit creates an enormous drag on demand for U.S.-made goods and services.”
“To finance the trade deficit, Americans are borrowing and selling assets at a pace of about $400 billion a year. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to nearly $2,000 a year for every working American.”
“To the extent stimulus packages expected to be enacted in the United States, Europe and China lift the global economy, the reduction in the trade deficit will reverse. Oil prices will rise again, and with China increasing subsidies on exports, U.S. imports of consumer goods will soar. The trade deficit will emerge as a major drag on the demand for U.S. made goods and services, and pull the U.S. economy back into recession as the effects of stimulus spending wear off.”
Clearly, as Dr. Morici warns in the above excerpts from his commentary, the trade deficit must be addressed before the ailing U.S. economy can be cured. I don’t own any stock or have any financial interest in any auto company. I don’t know anyone who works for an auto company. My only interest is to point out that the U.S. government is significantly responsible for the condition of the U.S. auto industry today (and most other manufacturing sectors that no longer exist) and provide the supporting facts. For nearly twenty years, I have closely followed the U.S. manufacturing sector’s struggle against unfair foreign competition and incompetent U.S. economic and foreign policy. I add my voice and experience to the U.S. auto industry and manufacturing debate. It is my sincere hope that someday, sooner rather than later, the U.S. government and its citizens will support an economic and trade policy that allows U.S. manufacturing to thrive again and the middle class to grow again. Some say manufacturing jobs aren’t going to come back. I say those jobs have to come back because, otherwise, the trade deficit will continue to bankrupt the U.S. economy and, subsequently, the global economy. We must produce enough here at home to support our consumption of imports and blaming only the U.S. auto industry for the problems it finds itself in today will not fix the structural problems that have pushed GM and Chrysler into bankruptcy and threaten millions of U.S. jobs and communities.
Conclusion
Let me be clear: I’m not proposing that the U.S. resort to “buy American” protectionism. What I am proposing is that the U.S. must discontinue a foreign policy that protects foreign economies at the expense of its own and immediately condition trade with foreign countries on having reciprocal access to their markets (e.g., two-way trade). And, in the case of Japan and China, the U.S. must also insist they discontinue subsidizing their exports and manipulating their currencies (Geithner Says China Is Manipulating Its Currency) to unfairly compete with U.S. workers. Otherwise, the only choices for the U.S. government are: 1) Allow continued massive trade deficits to bankrupt the U.S. economy or, 2) Force more production to occur in the U.S. (via tariffs, import quotas, or European-style VAT taxes, etc). Neither of these two options are desirable but in lieu of reciprocal and fair trade being enforced, there are no other choices. The trade deficit must be quickly and drastically reduced.
Those who disagree and favor the status quo need to explain why U.S. economic and foreign trade policies consistently result in massive and ever-larger trade deficits and why taxpayers should be on the hook for financing it (U.S. government finances foreign trade by borrowing $2 billion every day). They also need to explain why U.S. entrepreneurs should be expected to compete with foreign cartels even though domestic cartels are illegal.
There is a reason why no new domestic car company has been successful in modern times: Foreign cartels in Japan and elsewhere, who have free access to the U.S. market but restrict access to their own, indirectly prevent domestic entrepreneurs from attracting investment and competing at a profit. It is unfair and not in the interest of the consumer and the U.S. It must stop.
The author is an IT engineer whose interests include cars, playing his saxophone, and photography. He is very concerned about the decline of U.S. manufacturing, it’s impact on the health of the U.S. economy, and has studied the issue and written commentaries on the subject for nearly twenty years.
