Archives: 11/2010

Why Don’t Koreans Buy More Ford F-150 Trucks?

Ford Motor Company ran a full-age ad this morning in The Washington Post urging Congress and President Obama to reject the pending free-trade agreement with South Korea unless its provisions on automobiles are changed to promote the sale of more U.S.-made vehicles in Korea.

To drive home the point, the ad shows 52 cars with Korean flags in the windshield dominating one car sporting an American flag. The ad claims that, “For every 52 cars Korea ships here, the U.S. can only export one there.”

As my colleague Dan Ikenson blogged earlier, Ford blames the disparity on Korean trade barriers that discourage auto imports. Ford demands that the Obama administration “fix” the agreement before it can be approved by Congress.

In a study we released last month analyzing the agreement, Cato senior fellow Doug Bandow offered a different explanation of why we import so many more cars from Korea than the Koreans import from the United States, and why the agreement would go a long way to addressing legitimate concerns about barriers to U.S. auto exports:

In terms of tariff reduction, the agreement would deliver the “level playing field” many members of Congress demand. Tariffs on imported passenger cars and parts and accessories are currently 8 percent in Korea and 2.5 percent in the United States. Most of those tariffs would be eliminated upon enactment of the agreement, and all by its full implementation.

Although the FTA reduces South Korean tariffs, American automakers complain that the accord does not address non-tariff restrictions. … In fact, social and cultural barriers may be more important than government policies. One problem is auto size, since American cars are larger than those typically preferred by apartment-dwelling South Koreans. Even if all tariff and non-tariff-barriers were removed, the average Korean would still be much less inclined to buy a Ford F-150 pickup truck, a Chevy Suburban, or a Jeep Grand Cherokee than the average American would be inclined to buy a smaller, more fuel-efficient Korean-made vehicle such as a Hyundai Sonata. No free trade agreement can change fundamental consumer preferences.

Instead of complaining about all those Korean cars Americans want to buy, we should be glad for an agreement that opens both markets to greater competition.

Republican Agenda: Privatization

In coming months, new Republican members of Congress will be looking for ways to cut the budget deficit and also to increase economic growth. One way to do both is to privatize government assets, such as the U.S. Postal Service, Amtrak, and the air traffic control system.

Privatization can reduce deficits from the one-time gain of an asset sale and from the elimination of annual taxpayer subsidies. Privatization can spur economic growth by moving resources from moribund government agencies to the higher-productivity and more innovative private sector.

A new report by a trade magazine specializing in privatization confirms that the United States lags many nations on innovative infrastructure financing. Public Works Financing has been tallying data on “public-private partnerships” around the world since 1985. PPP is sort of half way toward the full privatization of government assets such as highways. I prefer full privatization (such as this highway), but PPP has swept the world in recent years and it is a step in the direction of market reform.

Public Works Financing is subscription only, but I can summarize a few findings from their October annual survey.

  • Since 1985, the magazine has tallied 1,867 PPP infrastructure projects worldwide valued at $712 billion. U.S. projects represented just 8 percent of the total value.
  • With a population about 10 percent as large as the United States, Canada had 53 percent of the U.S. PPP deal value. With a population of a similar size as the United States, Europe has had five times the value of PPP deals.
  • Of the 35 top global transportation firms doing PPP deals, the United States had only one firm, Flour, which was ranked number 33. Countries with firms heavily involved in PPP include Spain, Australia, China, and France. American entrepreneurs are apparently losing out because U.S. policymakers are asleep at the switch regarding private sector infrastructure financing.

Examples of PPP in the United States include the project to widen the Capital Beltway in Virginia, which involves the firms Transurban and Flour, and the leasing of the Indiana Toll Road, which involves Cintra and Macquarie. These deals aren’t full privatization, but they will hopefully bring some market efficiencies into an area of the economy dominated by the government over the last half century.

Congress is expected to write a major transportation authorization bill next year. The likely GOP chairman of the House Transportation and Infrastructure Committee, John Mica, has a more favorable view of private infrastructure than the prior Democratic chairmen. However, it is not clear that some of the incoming Republicans really understand the anti-spending message that voters delivered on Tuesday. Regarding President Obama’s $8 billion in wasteful high-speed rail subsidies, Mica did not call for killing them, but just for making them “better directed.”

The election ended the debate over whether to cut federal spending, but the debate about cutting particular programs has just begun.

Ford Motor’s Curious Policy Priorities

Though it has been relatively successful in the marketplace lately, the Ford Motor Company continues to confound in its public policy commitments.

First, the company remained silent for the better part of two years as its chief domestic rivals General Motors and Chrysler were nursed back to viability by a doting government dispensing $65 billion of taxpayer-funded nourishment. Not once (to my knowledge) did Ford publicly complain that the government bailout of its struggling competitors was an affront to its own prospects or that it would deny the company its rightful increase in sales and market share (the so-called spoils of competition).

But now Ford is trumpeting its opposition to the U.S.-Korea Free Trade Agreement. In a full page ad in today’s Washington Post, Ford implores Americans to reject the agreement as it currently stands, arguing that it would “allow Korea to remain one of the most closed automotive markets in the world.” So all of a sudden Ford is concerned about sales and market share?

Had GM and Chrysler been allowed to contract to a degree commensurate with their reckless decisions over the years, Ford might have hit the mother lode of sales and market share. But Ford didn’t even attempt to make that case. If Ford is so concerned about sales and market share, where is the outrage over the $45.4 billion in unconventional tax deferrals being granted GM as part of the ongoing bailout bonanza? Aren’t those deferrals just subsidies to help GM regain market share … at Ford’s expense?

Instead, Ford has chosen to target a trade agreement that promises enormous benefits to American businesses and consumers, a slew of new domestic employment opportunities, and annual increases in GDP of anywhere from $17 to $43 billion (bailout-type sums!) on the grounds that the agreement contains no guarantees of increased U.S. auto sales in Korea.

There are no guarantees in trade. But that’s what Ford and others in the U.S. auto industry and in Congress want: guaranteed sales figures, bilateral trade balance within the auto sector, managed outcomes. Is that what Ford means in the ad where it claims to support free trade?

Granted, the Korean auto market has been notoriously difficult to penetrate. Behind-the-border taxes levied on engine size and other non-tariff barriers have discouraged purchases of U.S. automobiles in Korea. But without the agreement, none of that will change. With the agreement, Korea reduces its tariff on passenger vehicles from 8% to 0 immediately, while the United States reduces its tariff on passenger vehicles from 2.5% to 0 immediately. So both are good reforms, but there is no question that U.S. auto exporters get a relatively bigger boost from the agreement. And though there are no guarantees of hard sales quotas, one can be pretty well assured that only the most inept producer/exporter would fail to capitalize on an 8 percent cost reduction granted with the stroke of a pen.

Ford should stop politicking and stay focused on the goal of making better automobiles.

A Grimm Proceeding

On Tuesday — you may have missed this because of some political developments that day — the Supreme Court heard oral arguments in Schwarzenegger v. Entertainment Merchants Association.  This case is a First Amendment challenge to a California law that prohibits selling violent video games to minors. 

Cato had filed a brief pointing out that, to paraphrase the Four Tops, it’s just the same ol’ song, but with a different meaning whenever a new form of entertainment comes along.  In other words, it is difficult to find any form of entertainment that did not once suffer the ire of parents’ groups, smoldering church bonfires, and would-be government protectors of children. From the Brothers Grimm, to “penny dreadful” novels, to comic books, to movies, to video games, each new entertainment medium was said to achieve innovative levels of mind control that corrupted children with flashing pictures, bright colors, or suggestive mental imagery.  

And it seems like the justices were listening.

Throughout a lively oral argument that primarily dealt with the vagueness of trying to define a “violent video game,” justices and counsel consistently discussed the rogues gallery of past entertainment industries that were said to corrupt our children. At one point Justice Scalia asked California’s attorney what “deviant violence” is, to which the attorney responded, “deviant would be departing from established norms.” Scalia asked incredulously, “There are established norms of violence?” The attorney began to say “Well, if we look back…” before Scalia cut him off with, “Some of the Grimm’s fairy tales are quite grim, to tell you the truth.” When California’s attorney said he would not advocate banning Grimm’s fairy tales, Justice Ginsburg came back, asking, “What’s the difference?…[I]f you are supposing a category of violent materials dangerous to children, then how do you cut it off at video games? What about films? What about comic books? Grimm’s fairy tales?”

Later in the argument, Paul Smith, attorney for the Entertainment Merchants Association, referenced Cato’s argument: “We do have a new medium here, Your Honor, but we have a history in this country of new mediums coming along and people vastly overreacting to them, thinking the sky is falling, our children are all going to be turned into criminals.”

Granted, these arguments could have been raised even without Cato’s brief, but exchanges like these demonstrate the value of amicus briefs. Along with novel legal arguments, they can supply the Court with historical, statistical, sociological, and other information that is relevant to deciding the case.

You can read the argument transcript here and the audio will be available tomorrow at this site.  Thanks to Cato legal associate Trevor Burrus for his continuing work on this case (including with this blogpost).

A Budget Plan: Don’t Buy Stuff You Cannot Afford

Some 75 new Republican members of Congress got there by promising to stop the federal government’s massive overspending. And as Chris Edwards noted, there have been a number of lists of budget cuts proposed recently.

Saturday Night Live did a sketch back in 2007 that might be useful to Tea Partiers and new members of Congress. It’s about a self-help plan called “Don’t Buy Stuff You Cannot Afford.” Since the federal government is running deficits well over a trillion dollars a year, I’d say this plan would be good advice:

Hat tip to Jonathan Witt at the Acton Institute’s PowerBlog, who points out that if this were a perfect analogy, the book author would be more agitated because “the couple has been spending the author’s money using a credit card he had idiotically loaned them a few years before.”

How President Obama Can Make His India Trip Meaningful

To make his coming visit to India meaningful, President Obama needs to combat the impression that India fares better with Republican presidents than Democratic ones, because the latter are instinctively more protectionist. In his quest for economic recovery, he has bashed US corporations that outsource jobs to places like India, forbidden companies getting government rescue funds from outsourcing work, and has now enacted higher visa fees for visiting IT professionals which seem designed to hit Indian companies quite specifically. This may be designed to win votes in the Congressional elections, but will not win hearts and minds in India. President Obama needs to state categorically that he will not follow the Great Depression formula of trying to combat unemployment with protectionism.

A better way to create US jobs will be to relax labyrinthine export licensing rules for exports of dual-technology equipment and technology (which can be used for both civilian and defense purposes). India also needs to do its bit by shedding its reputation as world champion in anti-dumping actions (206 in the five years to 2009).

What Happens When Politicians Get a New Source of Revenue?

We’ve been spending too much time on elections, so let’s get back to pointing out inane, foolish, and destructive government policies. Our latest example comes from the United Kingdom, where politicians are pushing airline ticket taxes to punitive levels and harming the tourism industry. But the real lesson from this story is that it is very dangerous to give politicians a new revenue source.

The airline ticket tax was first imposed by a (supposedly) Conservative Party government in 1994 at a maximum rate of 10 pounds. During the Blair/Brown Labor Party reign, the tax was boosted to a maximum rate of 50 pounds. Now, the new government, led by ostensible Conservative David Cameron, is pushing the maximum tax up to 75 pounds (more than $120) per ticket.

Here’s an excerpt from the story in the Telegraph.

Families are avoiding holidays in Egypt and the Caribbean because of the high cost of air taxes — even before the hike in passenger duty that comes into place on Monday.

…The duty, which is paid by all travellers on leaving Britain and added automatically to the price when a ticket is booked, is to increase by 50 per cent to some destinations. It is the second significant rise in two years, and figures show that previous hikes have already influenced people’s choice of holiday destinations.

…Bob Atkinson, travel expert at Travelsupermarket.com, said: “Families looking to book for this winter and summer next year will be faced with tax rises of up to 54 per cent on their family holidays. This tax rise is completely out of line with inflation and bears no relation to the original purpose of the tax.”

…The tax was introduced in 1994 at the rate of £10 on long-haul flights, but increased by the previous Government, which said it was a necessary “green measure”.

…The increases mean a family of four flying to the Caribbean will pay £300 in duty compared with the old rate of £200 or £160 last year. Willie Walsh, the chief executive of British Airways, has branded the higher taxes a “disaster”. Earlier this month, he called the duty a “disgrace”.

No wonder families are choosing not to travel. But, more important, imagine what American politicians will do if they ever succeed in imposing a value-added tax. The rate initially will be low (just as the original income tax had a top rate of just 7 percent), but nobody should delude themselves into thinking the rate won’t quickly climb as greedy politicians get hooked on a new form of revenue to feed their spending addictions.