Commentary

It’s Not the Yen, It’s the Mileage

By Daniel Griswold
This article appeared in the Los Angeles Times on January 30, 2007.

Ford Motor Co.’s announcement last week that it lost a record $12.75 billion in 2006 will tempt the new Democratic Congress to come to the rescue of Detroit’s Big Three automakers. General Motors and DaimlerChrysler are also expected to announce SUV-sized losses for 2006, further revving the engine for congressional action.

Momentum is already building to make Japanese and other foreign-owned automakers the scapegoats for what ails Detroit. Just after the November elections, Big Three executives met with President Bush to complain about “unfair” competition from Japan.

Armed with a paper they had jointly released in September, the Big Three claim that the yen is undervalued by 15% to 25% because of massive intervention by the Bank of Japan. The paper concluded that “currency manipulation by Japan is a serious unfair trade practice impacting U.S. auto manufacturers today [that] provides an average subsidy of thousands of dollars for each and every car it exports to the United States.”

The Big Three demand that the United States and other governments lean on Japan to stop all direct and indirect currency interventions. They call on the U.S. Treasury Department to declare Japan a “currency manipulator” and on Congress to “vigorously monitor implementation of the currency provisions of the 1988 Omnibus Trade Act” — provisions that can ultimately result in trade retaliation.

With Michigan Democrats John Dingell and Sander Levin now chairing the House Commerce Committee and the Ways and Means subcommittee on trade, respectively, the Big Three will find a sympathetic ear in the new Congress.

Despite its pleas, Detroit’s woes are homegrown, not created abroad. A report from the Treasury Department last month concluded that no major trading partner of the United States, including Japan, met the technical definition of manipulating its currency for unfair trade advantage. Although the real value of the yen is at its lowest point in 20 years, the Treasury Department noted that the Bank of Japan has not intervened in foreign exchange markets since March 2004.

Even if Japanese authorities have tried to “talk down” the value of their currency, as the automakers claim, it has not done Japanese exporters any discernible good in the U.S. market. Japan’s share of the total U.S. import market has dropped by half in the last decade, to only 8% in 2006. Our bilateral trade deficit with Japan also has been shrinking as a share of our total merchandise trade deficit, from more than one-third in 1995 to less than 11% in 2006.

Nor has the supposedly manipulated yen given Japanese automobile exporters an unfair advantage in the U.S. market. In fact, automotive imports from Japan, including both passenger vehicles and auto parts, have been steadily losing market share among total automotive imports. In 2005, total automotive imports from Japan made up 22% of the total U.S. auto import market, a decline from 23.7% in 2001, according to Commerce Department figures.

The Big Three’s own paper acknowledges that the number of finished cars being imported from Japan — about 2 million annually — is the same as it was 20 years ago. And most of those imports are luxury models, for which a price break of a few thousand dollars would win little new market share.

Detroit’s steady loss of domestic market share has not been driven by “subsidized” imports from Japan but by the success of foreign-owned automobile plants operating in the United States.

Since the 1980s, Japanese automakers such as Toyota, Honda, Nissan and Mazda have dramatically increased their production capacity in the United States, including facilities in Fremont, Long Beach and Ontario that employ more than 6,000 Californians. Today, two out of every three Japanese nameplate cars sold in the United States are made domestically rather than imported. Every one of the top 10 selling models of cars and light trucks in the U.S. are made in this country. Detroit’s real competition is not factories in Japan but in California, Ohio, Kentucky, Tennessee, Texas, Mississippi and South Carolina.

The Big Three have hurt themselves with overly generous union contracts, including lavish health and retirement benefits and restrictive work rules; an overemphasis on light trucks and sport utility vehicles that have lost their appeal amid higher gasoline prices; and a lack of exciting new models. No appreciation of the yen will save the Big Three from competition against nonunion plants turning out stylish, dependable and fuel-efficient cars in the American heartland.

Burdened by problems largely of their own making, the Big Three are desperately searching for somebody else to blame. In their campaign against the yen, they now hope to accomplish through political pressure what they have been unable to achieve in the showroom.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of the recent study, “Blowing Exhaust: Detroit’s Woes Belie a Healthy U.S. Auto Market.