The chickens have come home to roost

by Robert Lawrence, guest blogger

Although we call the big three automobile companies they have basically specialized in building trucks. This left them utterly unable to respond when high gas prices shifted the market towards hybrids and more fuel efficient cars.

One reason is that Americans like to drive SUVs, minivans and small trucks when gasoline costs $1.50 to $2.00 a gallon. But another is that the profit margins have been much higher on trucks and vans because the US protects its domestic market with a twenty-five percent tariff. By contrast, the import tariff on regular automobiles is just 2.5 percent and US duties from tariffs on all imported goods are just one percent of the overall value of merchandise imports. Since many of the inputs used to assemble trucks are not subject to tariffs anywhere near 25 percent -- US tariffs on all goods average only 3.5 percent -- the effective protection and subsidy equivalent of this policy has been huge.

It is no wonder much of the initial foray by Japanese transplants to the US involved setting up trucks assembly plants, no wonder that Automakers only put three doors on SUVs so they can qualify as vans and no wonder that Detroit is so opposed to the US-Korea Free Trade Agreement that would eventually allow trucks built in Korea Duty-Free access to the US market.

What accounts for this distinctive treatment of trucks? An accident of history that shows how hard it is for the government to withdraw favors even when they have no sound policy justification.

It all comes down to the long forgotten chicken wars of the 60s.  In 1962, when implementing the European Common Market, the Community denied access to US chicken producers. In response after being unable to resolve the issue diplomatically, the US responded with retaliatory tariffs that included a twenty five percent tariffs on trucks that was aimed at the German Volkswagen Combi-Bus that was enjoying brisk sales in the US. 

Since the trade (GATT) rules required that retaliation be applied on a non-discriminatory basis, the tariffs were levied on all truck-type vehicles imported from all countries and have never been removed. Over time, the Germans stopped building these vehicles and today the tariffs are mainly paid on trucks coming from Asia. The tariffs have bred bad habits, steering Detroit away from building high-quality automobiles towards trucks and truck like cars that have suddenly fallen into disfavor.

If congress wants an explanation for why the big three have been so uncompetitive it should look first at the disguised largess it has been providing them with for years. It has taken a long time -- nearly 47 years --  but it seems that eventually the chickens have finally come home to roost.

Comments

[boom trucks]

It is great that people are thinking about the environment and working to make the world a safer place. Not only the materials that you are using on your home are safe for the environment but dump trucks have come a long way since the earlier models. We are learning and expanding and coming up with a wide range of safer more effective vehicles for the work force. I think it is great that many auto manufacturers are turning to hybrid vehicles to protect the environment and now they are even using hybrid dump trucks.

[runescap power leveling]

I like your articles, you have a great writing style!
Thanks for sharing

[Zach]

Fascinating.

Although for a moment there I thought you were going to mention the width of railroad tracks, and the Appian Way...

[Bill Darusmont]

You forgot to mention one of the biggest reasons for buying SUV's...the 2004 change in the tax law that allowed 100% write off the first year for LARGE SUV's which caused many businesses to by them rather than cars, especially since anthing over $35,000 was classified as a luxury car and had to be amortized over a five years. As usual, Congress had their greedy hands in the till.

[moneymouth77]

It's always the way with American cars, isn't it? Bigger, harder, faster... Except for the new Chevrolet Camarro SS, which looks like a cross between a muscle car and a saloon.

[raivo pommer-www.google.fi]

Better news on manufacturing in Europe, China and India, and positive signs on U.S. home sales and construction raised hopes on
Monday that the deepest economic slump in decades may have bottomed out.

Manufacturing in Europe declined at its slowest pace in six months, and grew in China and India in April, while pending sales of existing U.S. homes rose unexpectedly in March and U.S. construction spending rose a slim 0.3 percent the same month, its first increase since September.

A top U.S. Federal Reserve official said the recession is fading and growth will resume later this year.

"While overall activity is still contracting, it now appears as if the pace of contraction is diminishing, and at some point later this year, activity will bottom out and begin expanding again," Richmond Federal Reserve President Jeffrey Lacker said in a speech to business leaders.

European and U.S. shares rose -- Wall Street's leading indexes jumped 2.5 percent or more as investors bet the government's "stress tests" won't be bad for banks and hoped the housing data meant the recession is ending. The S&P 500 topped the psychologically important 900 level for the first time since early January.

[Les Pauls]

Wow who would of thought great article

[Chandan]

Awesome! Never thought of this side of the story!!

[Anon]

Whatever... Korea developed fuel efficient cars despite a high tariff and a consuming public with near fundamentalist dedication to domestic brands.

You don't think maybe the UAW had a hand in Detroit's demise? They turned the Big 3 into giant pension schemes / welfare programs with auto-manufacturing as a side show. Of course state/fed gov'ts share blame here.

[Richard Hoogesteger]

You have a point but this is just a specific case of a problem that plagues American style capitalism. Namely that most major businesses in this country are in one way or another state sponsored. This has been true since the tariff in the early nineteenth century. For the auto industry state help has included everything from the government building factories for them in WWII for arms manufacture which were then turned over to the big three for civilian use for no charge after the war to antitrust laws being used to shut down privately owned mass transit in major U.S. cities in the 1950's. It's not just cars though, this pattern runs through our entire economy. Everything from computers to pharmaceuticals has had heavy government involvement. One problem is that these state sponsored enterprises find it very difficult to compete with foreigners on a level playing field.

[Jeff]

While I am not so skeptical, I'm sure this case could be bolstered with some references, though - any chance you could show us some?

Also, some of these comments seem to be spam - of little use and taking advantage of the "free link" from a valuable site, this one, to their own commercial site.

[runescape power leveling]

Just wanted to say HI. I found your blog a few days ago and have been reading it over the past few days.

[C.Raghavan]

Both under the GATT 1947 provisions for retaliation, and under the WTO-GATT-94 provisions (DSU Art.22.2), there is no requirement that 'retaliation' (the term used is 'suspension of concessions') has to be on a 'non-discriminatory' basis. it is specifically against the Member who has violated the obligations. this has been both the law and practice. but in 1962, only europe exported trucks to the US. auto exports by japan and then other east asians came much later.

raghavan

[raivo pommer-eesti.]

German sportswear maker Adidas said yesterday its first quarter net profit fell 97 per cent as the economic crisis crimped the company's sales, especially in North America.

The Herzogenaurach-based company said net profit for the January-March period fell to just €5 million ($11.5 million) from €169 million in the first quarter of 2008.

Sales for the period fell 2 per cent to €2.58 billion from €2.62 billion in the first quarter of 2008.

The company, whose brands include Reebok and TaylorMade Adidas Golf products, said it expects sales to decrease at a low to mid-single digit rate this year.

The results pushed Adidas' stock more than 11 per cent lower to €26.21 in Frankfurt trading.

"We've faced a number of economic and market challenges in the first quarter of 2009," said Herbert Hainer, Adidas' chief executive.

"Our results have been materially affected by higher input prices, currency devaluation effects and restructuring costs," Hainer said.

[Zach]

Check out this example of regulatory capture in the NYT story about stress tests:

“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” said Gary B. Townsend, a former banking regulator who now runs his own investment firm.

This kind of obessessive devotion to free-market ideology (in the face of all reason) is not surprising, but to see it expressed with such clarity is certainly a gem.

[raivo pommer-www.google.fi]

Source says Bank of America needs $34 bln in capital

Stocks slid and the yen rose on Wednesday after news Bank of America needs $34 billion in fresh capital, sending shivers through investors ahead of official results of stress tests on U.S. banks due for release on Thursday.
U.S. S&P 500 futures were down 1 percent, indicating a lower market open later in the day on Wall Street, after a source familiar with the government test results on 19 banks told Reuters that Bank of America has been deemed to have additional capital needs worth nearly half its current market cap of $69.4 billion.
The yen strengthened across the board as dealers scrambled to relative safety, knocking the Australian dollar down 1.7 percent despite much stronger-than-expected Australian retail sales numbers.
"This could put a dent in the rally we've seen," said Jan Lambregts, head of Asia research at Rabobank in Hong Kong. "Definitely we'll have a breather until we get these (stress test) results. Perhaps there are a few surprises in there," Lambregts said.
The MSCI index of Asia Pacific stocks outside Japan fell 1.2 percent, after hitting a seven-month high on Tuesday. Cyclical sectors like energy and materials in addition to financials led the index lower.
Japan's markets were closed for a holiday.
Hong Kong's Hang Seng index was down 0.8 percent, weighed by 2.7 percent drop in shares of China Construction Bank after the Financial Times said Bank of America was considering the sale of an $8 billion stake in the firm.
Investor willingness to take risks has been steadily increasing over the last new months and has been strengthened by signs around the world that the global economic downturn is easing.
That has prompted a rally in equities, commodities, emerging market debt and high-yielding currencies, which may only slacken momentarily because of uncertainty over the stress tests.
"In the short term, fundamentally, a correction is overdue and U.S. bank stress test results could well become a trigger as they will reveal capital needs without any real immediate remedy," said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong.
"However, market positioning is likely to trump fundamentals, and it seems real money is coming out of the trenches and shooting with not just sniper fire but machine guns," he said in a note.
The U.S. dollar was down about 0.7 percent against the yen to 98.22 yen.
High-grade credit spreads in Asia widened slightly on the Bank of America news, though they remained near the tightest levels since October, the Asia iTraxx investment-grade index showed.
U.S. crude for June delivery was nearly unchanged on the day at $53.80 a barrel after rising to a high for the year overnight of $54.83.

[raivo pommer-eesti.]

Microsoft

has always been the direct result of the talent, hard work, and commitment of our people, eliminating positions is hard.

Today’s action includes positions in the United States and in a number of countries around the world. In the US, affected employees will be notified directly by their managers today. In other countries, local leadership teams will provide more specific information about the impact to their organizations.

With this announcement, we are mostly but not all done with the planned 5,000 job eliminations by June 2010. We are moving quickly to reach this target in response to consistent feedback from our people and business groups that it’s important to make decisions and reduce uncertainty for employees as quickly as possible, and so that organizations can concentrate their efforts and resources on strategic objectives.

As we move forward, we will continue to closely monitor the impact of the economic downturn on the company and if necessary, take further actions on our cost structure including additional job eliminations.

For those of you directly affected by today’s announcement, I want to thank you for your contribution to Microsoft and assure you that we will continue to provide support as we did during the previous job eliminations.

And for everyone across the company, I want to reemphasize how much I appreciate the way you have pulled together to help the company respond to this difficult economic environment. There’s no doubt that these are very challenging times. But together, we are making the right choices to ensure that we will continue to deliver great products and position ourselves for strong future growth and profitability.

[Jan]

The moral of this story is that government support for manufacturing works for a while even when it is haphazard and corrupt. My goodness, imagine how well it could work if our complacent Commerce Department were to trouble itself with research and planning.

[wjd123]

Not so fast Robert Lawrence, not so fast. The chicken didn't come home to roost because of those tariffs a half century ago; the chicken came home to "a" roost built by liberal economist and kill-the-beast republicans.

The last I checked neither Japan or Korea import many American cars. It's not only that they have non- tariff barriers to keep it that way but, cultures that keep it that why. (OK, I don't know enough about these cultures to say this definatably, but I know enough to be suspect.)

Americans don't much care what car other Americans drive, despite the best efforts by unions to see that they do. Would I be wrong in thinking that this is not the same in Korea and Japan: that their cultures give buy Japanese or buy Korean imperatives more weight.

If this is true then comparative advantage would only be true when exported products are competing in countries with the same cultural mores. Different cultural mores would make comparative advantage, not so comparative and no so advantageous to one of the exporting countries. This doesn't mean that comparative advantage isn't a lovely mathematical model but that it's not a lovely empirical model.

As for the chicken that has finally came home to roost because of tariffs on trucks, let's look at another part of its journey. The part that allowed America to sell a product on which there was enough profits for auto workers to keep their middle class affiliation. They were able to buy a house, to send their kids to college, to have health insurance for their families, to draw a pension in old age, and, after death, to pass that pension on to their widows.

In other words auto workers, their children, and their widows were freed-up by tariffs to participated more fully in our economy.

The alternative would have been free trade in which labor arbitrage drove unions from our political economy, which in turn would have driven down wages and benefits. Economic insecurity would have kept these workers, their children, their widows form full participation in our economy. Any meager savings they may have managed would have gone into preparing for their uncertain future.

The freedom of corporations to practice labor arbitrage in the name of free trade and competition in a global economy would have led to a different political economy at home. Price- factor equalization would have kicked in with a vengeance for American workers while those few on top would have reaped most of the benefits of free trade. Oh, that's right, that's what happened as lower tariffs set corporations free to play one political economy off against another.

Those tariffs so long ago were the beginning of an industrial policy for America. Too bad economist sold out workers and democracy. The chicken didn't come home to roost because of tariffs; it came home because of economist.

Economist with their mathematical models gave us one Republican administration after another in which businesses were allowed in the name of laissez faire to continue a global economy which wasn't sustainable and a political economy at home stripped of democratic checks and balances.

The roost the chicken has come home to wasn't made by tariffs on poultry and retaliatory tariffs on trucks. The roost was made by liberal economist with their mathematical models of comparative advantage and kill-the-beast republicans with their laissez faire market ideology.

[BlakeChaplin]

What SUV has three doors? None. All have five. Tell me about how the Yen is manipulated favorably for Japanese exports. Your article is very flawed.

[beezer]

Just out of idle curiosity. Are we still stopped from selling those chickens?

[raivo pommer-eesti.]

Travelers from Spain

Last year, the City welcomed a projected 382,000 visitors, a 20% increase over the previous year. Spanish visitors collectively spent an estimated $389 million in 2008. Travelers from Spain stay on average more than six nights and enjoy shopping and dining out as their top two activities. 84% who visit New York City come for leisure purposes and 84% stay in hotels.

“Currently, Madrid ’s tourism promotion office has an institutional agreement with NYC & Company to grow the image of both destinations,” said Pablo Bautista, CEO of the Madrid Tourist Board. “This exchange between both cities’ tourism offices started last year in New York City with the presence of the City of Madrid in a campaign that promoted its cultural and tourist attractions.”

Bautista has underlined the importance of such a cooperation between New York and Madrid and has mentioned that "there is a strong intention to reinforce in the future these agreements between both cities that will create new joint initiatives".

The New York City ads appear on street furniture throughout Spain in cities such as Madrid, Bilbao , Barcelona, Sevilla, and more. The posters promote the City’s new Real Deal promotion (nycgo.com/realdeal), which offers discounts at the City’s hotels, attractions, cultural organizations, shows, , a yearlong initiative to boost gay travel to New York City in 2009 during the 40th-anniversary year of the Stonewall Rebellion, the birthplace of the modern Gay Rights Movement. The ads launched on April 20 and will be in place until early June.

As part of the promotion, Viva Tours is offering Spanish consumers a five-day package from 749 euros, which includes air, hotel and transfers from Spain to New York City. The prices are valid through June 19. Viva Tours travel packages can be booked by Spanish consumers through a local travel agent.

“As the leading tour operator of the Spanish market in America, and particularly in New York, this agreement with NYC & Company represents a unique opportunity to reinforce our most important international destination,” said Enrique Martin-Ambrosio, General Manager of Viva Tours. “At this time, we are managing approximately 30% of the holiday packages that Spaniards are contracting to the United States, thanks to the exclusive agreements we have with the airline Iberia, which has an extensive presence in America . Furthermore, Iberia has two daily direct flights to New York City from Madrid as well as another one from Barcelona. We hope that alliances such as this one presented today will help us to increase this quota, increasing our leadership.”

[raivo pommer-eesti.]

Spain Chrise

unemployment rate has topped 17%, and economists expect it to hit 20% next year. But Depression-era scenes don't dot its landscape.

Spaniards aren't, en masse, sleeping under bridges. Tent cities haven't sprung up outside Spanish towns. Labor has yet to call a single major strike.

Europeans are notoriously quick to take to the streets to defend their economic interests. Yet, as the Continent endures its worst economic crisis since the end of World War II, things seem unusually calm.

Even Friday's May Day marches were more muted than expected. Though hundreds of thousands of people across Europe took part in the annual demonstrations, calling on governments to support jobs and workers, overall participation was less than unions had hoped for, considering the severity of the downturn.

Exact reasons for the subdued mood vary from country to country, but a common theme emerges: The very factors that make some European economies sluggish and inflexible during times of plenty also help cushion the impact of the downturn.

Spain exemplifies this. During the good times, its economy is held back by low productivity, an extensive underground economy and scant labor mobility. Studies show that Spaniards are unusually reluctant to move away from their home region -- a trait that acts as a drag on the economy.

Today, however, being close to one's extended family is a lifeline. Members of Spanish families help one another pay the mortgage, so there are fewer foreclosures. Even when they lose their homes, Spaniards rarely end up on the street. For the most part, they move in together.

"The family represents kind of a social-welfare network that allows the country to withstand a much higher rate of unemployment," says Rafael Doménech, chief economist for Spain and Europe at BBVA bank.

Then there is the question of who would lead any unrest. The huge job losses in Spain have been borne almost entirely by temporary workers -- women, immigrants and the young -- who aren't represented by anyone. The types of workers who tend to belong to labor unions -- middle-aged men on full-time contracts -- have scarcely been touched by layoffs. In fact, the latest jobs report showed they had slightly increased their number in the first quarter of the year -- even as 800,000 temporary and self-employed workers lost their jobs.

Another issue Spain shares with other southern European countries is its extensive black economy. During the good times, economists have encouraged countries like Spain and Italy to bring the black market under control. In the bad times, however, that market can give many Spaniards secret, undeclared sources of income that can keep them afloat.Analysts say it could represent as much as one-fifth of the Spanish economy, providing work for people who are formally unemployed.

[raivo pommer-eesti.]

President Obama predicted Wall Street, whose shenannigans he blames for the nation’s economic collapse, won’t play as dominant a role in the economy after he’s done reforming the financial system.

Obama said he expects that government efforts to fix the economy will cause long-term changes and lead people to search for jobs in other parts of the economy, Obama said in an interview in this week’s New York Times [NYT] Magazine.

“I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader,” Obama said.

Obama is restoring more regulations on the financial sector to avoid some of the risk-taking that helped cause the current economic problems.

“Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s,” he said.

“It just won’t be half of our economy.”

[BuY]

Thanks Dani Rodrik's for this weblog