ECON 1269 International trade assignment 3
American Automotive industry has one of the biggest markets in the world, and there is also home to many global vehicle and auto parts makers (Select USA, n.d). The number of vehicle sales reached 17.1 million units in 2017 (Select USA, n.d). At this year, American producers export nearly 2 million new vehicles and about 130,00 medium and heavy trucks (valued at $63.2 billion) to 200 markets across the world (Select USA, n.d). Overall, cars industry in the United States is the second largest market in the world for production and vehicle sales. Moreover, the USA is the premier market for the twenty-first century automotive industry, due to an open investment policy, a huge consumer market, an abundant skilled labor force, available infrastructure, and local and government incentives (Select USA, n.d). The impact of trade policies one a given America participating in open trade with the rest of the world. This report will examine the main features of the process of international trade policies that government has imposed on the automotive industry in the US, and what are effects on consumers, producers and government.
Theoretical tariff implies that tariff is duty on imports of goods and services by domestic government, reducing purchase of foreign products. According to The New York Times, the Trump administration charges tariff 20 or 25% on foreign cars which assists the US could negotiate better term for international trade with some countries such as Mexico, Canada and the European Union. the percentage of duty charges extremely high so there are a negative impact of foreign automakers, the new tariff can be levied on up to $351 million of cars and auto part imports (Swanson, 2018). Rick Schostek is executive vice president of Honda North America said that “that is bring an array of unanticipated harmful effects that would only be magnified by tariffs on automobiles and auto parts. To illustrate, more than 90% of steel used to produce our vehicles here is sourced in America. Therefore, we are paying relatively little in the way of tariffs on steel, while the price of domestic steel has grown as a result of the tariff, saddling us with hundreds of million of dollar in new, unplanned cost” (Garnsey, 2018). According to the center for Automotive Research points that the highest percentage of American cars are made in the US which regularly took a quarter or a the third, but almost two over third of those cars made by international companies such BMW, Daimler and Honda (Swanson, 2018). As a result, American tariffs are significant disruptive to operate a business and decrease the value business could offer to consumers and society. In addition, a retaliatory tariff of light trucks run in 1963 by President Lyndon Johnson in response to European tariff on American trading, is called “chicken tax” as importing regulation. Those light trucks have to impose a 25% tariff as imports, and in spite of calling over the last 55 years for its removing but the law has still strande (Sara 2018). This regulation is a serious impact of truck market including largely foreign producers. Consumers of the U.S have shifted away from autos toward light trucks, having the exclusion advantages for American auto industry. There are three top of producers in America such as Ford, GM (Chevrolet) and Fiat Chrysler (Dodge) which make increasing level of domestic selling (Sara ,2018). Morover, the USA is which coutry is largest receipient of Forgeign Direct Investment in the world. Although, there was a significant decrease in automotive sales in 2017, forgien direct investment has ben on the grow (Rsmus, n.d). Based on the 2017 A.T.Kearney FDI Confidence Index, FDI of the USA rose 11% to nearly$385 billion in 2016. This is because, the available skilled workforce and stable consumer environment are a principal factor to attract a lot of international companies. That is given the strength of European and Asia’s automaker as Germany, the UK, France and Japan, respectively, these producers are the main contributors to automotive FDI in America. For example, Toyota and BMW which is large automakers have improved the economic development by their investment in this country, committed $10 billion and $600 million respectively (Rsmus, n.d). Also, FDI in the US provides more chances for growth not only foreign but also domestic automotive firms. Meanwhile international companies can find to grow their market share in the automotive sector, these foreign firms could exert leverage over domestic producers to enhance partnerships and to access more new technologies. Therefore, dynamics play importance which have resulted in the US to become a more affordable investment place than other nations, such as Brazil and central Europe (Trade Government, n.d).
There are three kind of economic agents will be the impact of trade policies such as consumers, producers and government.
- Tariffs: Trump’s administration has imposed up to 25% tariffs on European Union made cars in retaliation to the long-standing of EU 10% tariffs on US made cars, which can lead to average car price growth of approximately $5,000 (Nathan, 2018). China has already risen its levies on vehicles from the United States in retaliatory tariffs. That means that Chinese automakers are going to add cost to more than 100 cars parts involving 10% levy on everything from tires and brake pads to engines and batteries when cars made and sold in American market (Howard, 2018). Auto tariffs are going to becomes a big deal to the U.S consumers. According to Peter Nagle, senior analyst at IHS Markit said that “Tariffs are taxes on consumption. Eventually, the costs will be carry over to the pocket books of people buying cars. This will drive vehicle costs higher and also affect on other industries” (Phoebe, 2018). Besides that, the tariffs is directly impact of the real incomes to domestic consumers in this country that consumption decision lose from the higher import price.
- FDI: automotive firms based outside America have operated in the domestic factories to provide high quality cars at more competitive prices. FDI has enabled foreign multinationals to getting rid of traditional importation costs, meanwhile international investment creates a competitive benefit over American manufactures so lowering aggregate price point. The oversea automakers is competitive pressures toward domestic carmaker about more groundbreaking vehicles, greater variety and lower price for buyers (Business Horizons). Take an example of Toyota as Japanese manufacture in the United States, Toyota has been as consistent in quality and customer satisfaction compared with domestic automakers. Particularly, the achievement of this company provides offering dependable, inoffensive and affordable priced cars rather than domestic automakers. Toyota reaches the highest scoring firm in both mass market category (+1 to 86) and among luxury cars (Lexus rising 2% to 86), Ford’s Lincoln used to stay the first place a year age, decreases 5% to 83 (ACSI, 2017). The graph below showed the domestic and foreign automakers 5-year ACSI trends, the most of US customer satisfaction took more priority of international automakers as Japan and Korea than domestic automakers.
Reproduced from American Customer Satisfaction Index 2017
- Tariffs are a kind of proectionism ans shield domestic industries from intertional competition. Foreign products more expensive than domestic products is caused by taxing imported goods. Thus, domestic producers like tariffs but international producers oppose them. Auto industry expert said that the effect of escalating tit-for-tat over tariffs of president Donald Trump has already felt (Eisenstein, 2018). The new car price are beginning to increase, leading to the auto exports are falling. Resulting of higher price is that the number of sale plunge by as much as 2 million cars a year (Eisenstein, 2018). Moreover, Volvo company forces to reduce to their hiring palcs and scaling back on the car firm’s new assembly plant near Charleston in South Carolina because of the impending higher car tariffs (Fernandez, 2018). Despite car sales already decreasing, automakers have been struggling to minimize the influence on consumers from tariffs-related cost growths.
- “Chicken Tax” as importing regulation: Japanese producers are hit hard by the tariffs on light truck which means they have to take 25% tax made small pickups produced by Japanese car firms such as Toyota and Isuzu can not be competitive with American producers. This action prompted the U.S automobile industry to be more successfully for the kind of importing regulation (Hoffman, 2018).
- FDI: international producers has largely focused on rising the relative strategic position in America. Foreign car companies leverage a competitive benefits in three main sectors such as growing market share, sales and profitability. Through FDI, there are diminished greatly that a lot of the U.S automakers outsource component of U.S made’s automobiles, the difference between “American” and “foreign” cars has become blurred (Business Horizon). For instances, there are some American based production model have lower domestic content than cars produced in America by international -owned producers. Honda Accord and the Toyota Camry registered 70% and 80% domestic content are higher than Ford Mustang and Chevrolet Suburban taking 65% and 67% domestic content, respectively (Business Horizons).
- Tariffs: automotive report alarms hat the significant decrease of car sales is as much as 2 million car a year, leading to the loss of up to 715,00 the U.S jobs and hit as much as $62 billion to the American GDP (Eisenstein, 2018). Moreover, the effect of the trade war can is likely felt in every concern of car industry, experts tension, even at the dealer level. The automotive industry, to illustrate, estimates as many as 117,00 labors at this country 17,000 new car dealership may lose their jobs (Eisenstein, 2018).
- FDI: according to the Administration’s National Export Initiative (NEI) claims that the advantage of expanded automotive investment in America can affect the “import substitution” ultimately job opportunities as same as the way exports do (Trade Government). In fact, the Administration’s establishment of the select USA in June 2011 noticed that the supplement NEI in providing private sector job opportunities , increasing economic growth, and dramatic increase government revenues by persuading business investment in this country (Trade Government). Without FDI, American government has to face unemployment rate, leading to increase the level of social crime.
In general, Myanmar need to apply the protectionist policies due to these followed some reasons. Initially, Myanmar government should develop polices to improve their economic health. For example, there are difference between trade and greatly trade deficit that means the proportion of imports are more than exports because of a crip in their economic growth. Thus, government of Myanmar ought to impose a trade protectionism policy to defend domestic industries from imports and increasingly number of exports from companies in mature. Theoretically, infant industry emerging domestic manufacturers need protection from government against global competition until these industries can become mature and stable (Investopedia). Myanmar government need to levy tariff which create barrier for international firm in mature as well as studying may be rising in an infant industry. Moreover, infant industries in Myanmar should learn and aware about their consumers about the existence of new product which way could grow over the age of company producing their product and can have a positive impact on economic growth in Myanmar. Particularly, the reputation of companies could be enhanced with age, leading to increasing the marginal return by reputation building. Resulting of a positive effect of age on their growth infant industries have good position in both domestic and international market. To illustrate, there are some countries to be successful when they apply this policy such as South Korea, Taiwan, Hong Kong and Singapore, these countries focus on developing domestic industries rather than opening market for international competitors. Thus, Myanmar need to operate immediately the protectionism policy before applying the sweeping liberalisation reforms and attracting the other countries to international investment. Nevertheless, the infant industry protection is seem to run in the short-term since if this policy practices long-term, that will reduce competitive benefits in international trade, leading a weak industry, lack of innovation, suffering the quality of domestic product compared to foreign competitors. In brief, Myanmar government need to follow protectionist policies toward infant industries yet they ought to pay attention of the global context as well as the ASIAN frameworks on international trade and investment.
Taiwanese government adopted the protectionist policy to develop new industries in its infant situation comprised of high import tariff rates and importing regulation (Industrial Policy in Asia, 2007). The principle targets aim protection and promotion were spinning and domestic industries (Industrial Policy in Asia, 2007). Take example of spinning industry, there were ten spinning consisting of Chung Shing Textile, Hua Nang Textile and Taipei Textile, run operation in Taiwan from 1949 to 1952 (Industrial Policy in Asia, 2007). The Taiwanese government practiced the law to improve the spinning industry in 1949 as well as setting up the Spinning Panel of the Taiwan District Production Operation Management Committee as a promotional institution in 1950 (Industrial Policy in Asia, 2007). Special treatment consisted rationing of raw materials for spun cotton, the benefit of exchange rate, an outsourcing system that means to contract out spinning and textile production and help with the procurement of running funds and foreign currency (Industrial Policy in Asia, 2007). Moreover, under the protection of infant industries had been sole the individual sector under a farmland reform program in 1952 which means that the owners of these companies were leading former landowners, including Taiwan Cement, Taiwan Tea and Taiwan Pulp and Paper (Industrial Policy in Asia, 2007). There appears the cost and benefit in infant industry. There starts with difference between the cost of domestic production as well as production’s value. Particularly, the domestic production ‘s cost gained by valuing input at the affordable prices (Development Economic). The simplest way puts the value production is multiply the quantity produced by the import’s unit cost, and this measured to use the exchange rate’s shadow price (Development Economic). By this way, whole production can replace imports and satisfies the demand in excessive the quality demand when the price is equal the unit import cost (Development Economic). As a result, infant firms can demonstrate procductivity development with positive condition. Term of cost, the government use their budget to spending on infant industries in short-term, a negative impact of spending on social welfare. In fact, government will spend more money these enterprises to become mature creating competitive advantages which included the process entail the long updating of human capitals, spending in products and processes, creating cluster and penetrating international market (World Development).
- Investopedia 2018, “Infant Industry Theory”, viewed 10 January 2019, <https://www.investopedia.com/terms/i/infantindustry.asp>.
- Select USA Government n.d, “Automotive Industry in the United States”, viewed 10 January 2019, <https://www.selectusa.gov/automotive-industry-united-states>.
- Garnsey, S 2018, “Tariffs disrupting US car industry, lawmakers told”, viewed 10 January 2019,<https://automotivelogistics.media/news/tariffs-disrupting-us-car-industry-lawmakers-told>.
- Swanson 2018, “On Trump’s Car Tariffs, Companies are United in Dissent”, viewed 10 January 2019, <https://www.nytimes.com/2018/07/19/us/politics/trump-car-import-tariffs.html>.
- Sara B 2018, “How would higher U.S auto tariffs impact the global auto industry?”, viewed 10 January 2019, <https://insight.factset.com/how-would-higher-u.s.-auto-tariffs-impact-the-global-auto-industry>.
- RSM n.d, “Automotive foreign investment in the US continues to rise”, viewed 10 January 2019, <https://rsmus.com/what-we-do/industries/industrial-products/automotive/auto-trends/automotive-foreign-investment-in-the-us-continues-to-rise.html>.
- American Customer Satisfaction Index n.d, “ACSI: American Car Buyer Less Satisfied”, viewed 10 January 2019, <https://www.theacsi.org/news-and-resources/press-releases/press-2017/press-release-automobiles-2017>.
- Phoebe H 2018, “Buying a car before December 31 will save you money”, Detroit Free Press, viewed 10 January 2019, <https://www.freep.com/story/money/cars/2018/09/18/tariff-impact-auto-car-shopping/1343860002/>.
- Nathan B 2018, “How president Trump’s Chinese tariffs affect American consumers”, USA TODAY, viewed 10 January 2019, <https://www.usatoday.com/story/money/2018/07/06/president-trumps-china-tariffs-consumer-impact/762982002/>
- Trade Government n.d, “Direct Automotive Investment in the US”, viewed 10 January 2019, <https://www.trade.gov/td/otm/assets/auto/DAI2012.pdf>
- Hoffman 2018, “If you are not worried about a trade war, you don’t know about the chicken tax”, Forbes, viewed 10 January 2019, <https://www.forbes.com/sites/brycehoffman/2018/03/03/if-you-arent-worried-about-a-trade-war-you-dont-know-about-the-chicken-tax/#4a89024f5455>.
- Fernandez H 2018, “Trump auto tariff threats may hit US consumer’s pockets”, Fox Business, viewed 10 January 2019, <https://www.foxbusiness.com/economy/trump-auto-tariff-threats-may-hit-us-consumers-pockets>.
- Eisenstein 2018, “Tariffs could means a 2M drop in car sales and 715,00 jobs, warns auto industry group”, News, viewed 10 January 2019, <https://www.nbcnews.com/business/autos/tariffs-could-mean-2m-drop-car-sales-cost-715-000-n911411>.
- Development Economic n.d, “Assessing the performace of infant industries”, Volume 16, viewed 10 January 2019, <https://www.sciencedirect.com/science/article/pii/0304387884901032>.
- World Development n.d, “The length of the infant industry period: Evidence from the engineering industry in South Korea”, 10 January 2019, <https://www.sciencedirect.com/science/article/pii/0305750X9390153Z>.
- Industry Policy in Asia n.d, “Political economy of industrial policy in Asia and Latin America”, 10 January 2019, <https://eprints.soas.ac.uk/9854/1/Khan_and_Blankenburg.pdf>.
- Business Horizons, “Automotive foreign direct investment in the US: Economic and market consequences of globalization”, volume 55, 10 January 2019, <https://www.sciencedirect.com/science/article/pii/S0007681312000651>.