Mark Fields, president and CEO of Ford Motor Company, celebrated President Trump’s Jan. 23, 2017, executive order withdrawing the United States from the Trans-Pacific Partnership (TPP). In a statement the following day, Fields said, “And I would just call out yesterday, the president’s decision to withdraw from the TPP. We’ve been very vocal, both as an industry and as a company, and we’ve repeatedly said that the mother of all trade barriers is currency manipulation, and TPP failed in meaningfully dealing with that, and we appreciate the president’s courage to walk away from a bad trade deal.”
Field’s comments are consistent with Ford’s longstanding position, so were not surprising. What is harder to understand is that the company appears to be ignoring the economic interests of farmers and ranchers, a significant portion of its customer base for F-150 and heavier trucks.
The F-150 is the best-selling vehicle in the United States and has enjoyed that status for many years. Some 820,000 were sold last year in this country, with another 145,000 sold in Canada.
The 2012 Census of Agriculture reported slightly more than 2.1 million farms in the United States. Many of them are quite small, part-time operations. However, there are more than 500,000 commercially significant farms with sales in excess of $50,000 per year. A high percentage of farmers drive pickup trucks.
Due to relatively low commodity prices, recent years haven’t been great for farmers. Net farm income has fallen almost by half since 2013, dropping from $123.7 billion to a forecast level of $66.9 billion in 2016. Many farmers are putting off buying new machinery and equipment, as well as new pickups. The farm economy really could benefit from a boost in demand for agricultural products.
Farmers expressed dismay at the president’s decision to withdraw from TPP. An American Farm Bureau Federation study had predicted that improved access to 250 million customers in Japan, Vietnam, Malaysia, New Zealand, and Brunei would raise U.S. net farm income by $4.4 billion per year, as well as adding more than 40,000 jobs to the American economy. (No estimate was made as to how many of those jobs would have been related to building more pickup trucks.)
It’s true that not all F-150s are bought by farmers. Construction workers and others who need to haul stuff around find them to be genuinely useful vehicles. It’s not obvious that many non-farm pickup buyers would have seen their economic prospects hurt by the implementation of TPP. The detailed TPP study prepared by the U.S. International Trade Commission estimated real Gross Domestic Product (GDP) would increase by more than $40 billion per year by 2032, and employment would rise by over 120,000. Even though the gains from TPP would be modest in the context of the large U.S. economy, any additional growth leads to demand for more F-150s.
But what about currency manipulation? TPP included a side agreement “that addresses unfair currency practices by promoting transparency and accountability.” Member nations committed to avoid currency devaluations intended to enhance the competitiveness of their exporters. The agreement called for regular consultations and public reporting regarding foreign-exchange interventions. Achieving consensus on this provision was made easier because no TPP member currently is pushing its currency to an abnormally low level.
Even though this was the first time the issue of currency manipulation had been dealt with in the context of a U.S. free-trade agreement, the provision was insufficient to quell the concerns of critics, including Ford. The company has not explained how its pursuit of justice with respect to currency scofflaws will be enhanced by killing this meaningful effort to address it.
As a major manufacturer with large investments in numerous countries, changes in relative currency values can be problematic for Ford. Global investment decisions made on the basis of one set of currency relationships can become uneconomic if the dollar’s value changes markedly compared to the yen, for instance. Firms with world-wide supply chains tend to prefer currency stability.
For the broader economy, though, the effects of currency manipulation can be counterintuitive. A shift in exchange rates changes a country’s “terms of trade,” which is an expression used by economists to describe the ratio of a country’s export prices to its import prices. From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, America’s terms of trade will improve. The United States will be able to obtain a greater quantity of imports for the same quantity of exports. Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee and flat-screen TVs.
The country that chooses to undervalue its currency will be placing an unrealistically low value on the output created by workers and capital in its domestic economy. It will, in effect, be selling its exports for less than their true economic worth. A nation that is consciously devaluing is making a decision to transfer wealth to the United States. Our country should think twice before rejecting such a gift.
An increase in affordable imports generally doesn’t strike consumers as a bad thing. People tend to enjoy the higher standards of living that result from trade. Lower prices on imported goods mean that consumers have more money left with which to buy pickup trucks. And Ford needn’t have worried about TPP unleashing a flood of foreign pickups onto the U.S. market. U.S. negotiators were successful in getting other countries to agree to a 30-year continuation of the 25-percent U.S. tariff on light trucks. (Not exactly a “free trade” provision, is it?) This tariff helps explain why Honda and Nissan manufacture pickup trucks in the United States.
It’s difficult to conclude anything other than that Ford’s misguided perspective on currency manipulation has caused it to embrace a curious approach to trade policy that will be detrimental to a substantial portion of its customer base. What the death of TPP ultimately will mean to the U.S. and world economies, to vehicle manufacturers, and to farmers and ranchers remains to be seen.
In the meantime, pickup buyers have a number of alternatives. Chevy Silverado, anyone?