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.
Read more at Dani Rodrik's Weblog
Correlation is not causation. While that's an interesting anecdote, I don't think it's that simple.
Actually, US produced vehicles were always larger because we're a larger nation with bigger people, wider streets, and post WWII more imperialist with access to cheap oil.
The Europeans and Japanese have always been smaller, had narrower roads (often centuries old roads) and post WWII had less global influence and less access to oil.
Japanese and German makers post WWII were specializing towards compact vehicles, such as early Datsuns, VW Bugs, etc. The large car and truck were always predominantly dominated by US makers.
Point being: it's a fallacy to say the US makers specialized towards large vehicles becasue of this one obscure law. It's more correct to say that makers were already specializing for many reasons and the law was a product of that, which accelerated the trend.
May 4, 2009 9:51 PM | Reply | Permalink
What?
May 4, 2009 10:14 PM | Reply | Permalink
Well..
Have you come home to roost?
HAVE YOU?!
J'accuse!
May 5, 2009 2:11 PM | Reply | Permalink
It was mainly due to the fact that "light trucks", which includes vans, SUVs and pickups, don't have to meet as stringent fuel efficiency requirements as autos due. Congress screwed up when writing the CAFE standards.
Secondarily, vehicles over 6000 lbs Gross Vehicle Weight Rating get a very handsome tax break when bought as a business vehicle, e.g. an Escalade purchased by a part time real estate salesperson.
May 4, 2009 11:27 PM | Reply | Permalink
It's not just the CAFE standards. Trucks also have much lower safety standards. This contributes to making them cheaper to produce. A sedan might cost $15k to build and sell for $17k, while a similar SUV would run $13k to build and sell for over $20k. (That's "dealer cost", not "end buyer cost", i.e., it does not include all those little charges, nor dealer profit.)
May 5, 2009 12:20 AM | Reply | Permalink
Lest we forget, SUVs and trucks don't have to meet the gasoline mileage standards that cars have to meet. This allow us mentally brilliant Americans to buy vehicles with huge engines, and a gasoline appetite to match, and renew our former "longer, lower, wider" contest as a bigger, heavier, higher contest.
I think the big 3 have been making the vehicles that the market exists for. A big part of their profitability comes from the simple fact that those vehicles sell.
As much as I would like to see an American version of the Prius, I really doubt that it would sell here. Things that are made in other countries seem to have an attraction that Detroit can't match.
In the end, it is we who buy those trucks and SUVs that are the problem, not the manufacturer who meets our demands.
May 4, 2009 11:29 PM | Reply | Permalink
"I think the big 3 have been making the vehicles that the market exists for. A big part of their profitability comes from the simple fact that those vehicles sell."
If they are so profitable, why are the US taxpayers being asked to bail them out of bankruptcy?
May 5, 2009 9:37 AM | Reply | Permalink
It is the government that writes the import tarrifs, the fuel efficiency standards, the safety standards, the anti-pollution laws, and the fuel tax laws.
What the consumer gets is what Congress, the Executive, the auto companies and the oil companies have negotiated in Washington.
For example, the unwise anti-pollution laws of the late '60s and early '70s drove manufacturers to build big-block V-8s with abysmal gas mileage. The legislation mainly controlled percent of various pollutants in the exhaust, so manufacturers met the requirements by increasing cylinder size to lower the surface to volume ratio. Combustion was less complete near the cylinder walls, and a bigger cylinder produced a lower percentage of pollutants in the exhaust.
The larger engine also produced adequate power when the ignition timing was changed to reduce pollutants instead of optimizing power.
May 5, 2009 9:44 AM | Reply | Permalink
I drive a Prius, love Japanese culture, and have been to Japan many times. Still, I would prefer to buy an American designed and built car. Supporting the local community is more efficient all around and just makes more sense.
I will buy American if US makers just get their shit together and form a coherent design that isn't a complete Frankenstein!
Stick a hybrid drive train in a stylish AWD Subaru Impreza type hatchback (I do a lot of outdoors, hiking and biking) and that's pretty much my ideal commuter/utility/fun vehicle. I'd never buy a Ford Hybrid SUV becasue it's a rollover prone POS and I just consider them tacky and inconsiderate vehicles.
Everybody I know wants some variation of a hybrid with maximal fuel efficiency, tweaking the sportiness/luxury/utility factors.
If you look at the demographics of college educated workers in places like hi tech California, nobody wears a suit and tie anymore, and nobody aspires to drive a Cadillac anymore. Nobody wears cowboy boots and ten gallon hats either, and nobody wants to drive a pickup truck. Similarly the nouveau riche dot-com bubble burst, lattes make you fat, and nobody wants a useless rollover prone "luxury" SUV anymore that just makes you look like a clueless, inconsiderate, yuppie.
May 5, 2009 3:05 PM | Reply | Permalink
BTW, the American makers catered to a demographic and reinforced it with marketing. Yes there was a market for AWD vehicles, SUV and trucks, but the US makers did a great deal to promote that as a lifestyle through large marketing campaigns. Particularly, they sold the image that people driving SUV and trucks were "real" Americans, as opposed to those liberal/urban/coastal people driving their stylish, compact, luxury imports.
The problem is they invested heavily in a market that was ultimately doomed.
SUV and trucks are inherently a sort of functionality/lifestyle/identity cognitive dissonance. They're unsustainable, ignorant, unsafe, inefficient, reactionary, impossible to park in urban areas, unattractive in context of any meaningful aesthetic, etc.
May 5, 2009 3:13 PM | Reply | Permalink
I did not know that there was such a disparity in tariffs. Interesting post, provides a good place for discussion and puts some of these things in context.
May 5, 2009 10:45 AM | Reply | Permalink
Consumer Reports singled out the Hummer H2 as a terrible value. It's estimated 5 year ownership cost of $82,250, combined with its abysmal road test score of 23, gives it a "bucks per bang" cost of $3,620. The Prius costs $325 bucks per bang.
May 5, 2009 1:10 PM | Reply | Permalink
The cost of my Prius relative to a comparable car was offset by savings in gas long ago. If the car runs for 200K miles as it likely will, as Prius taxis are already doing regularly, then the lifetime savings in fuel will be $thousands.
Plus it's just a great car. Tall people are always amazed how much room there is inside due to good design. It's a hatchback so it carries a lot of stuff. Driving without gear shifts is really nice. That's an experience you can only get from a CVT transmission. It has electronic stability and side airbags plus a lot of safety features.
While it looks weird to some people, I guarantee that's the direction car design is taking. Very soon so many cars will look like the Prius (many already do) and "traditional" cars being built today will look as out of place as those boxy cars from the 80s.
May 5, 2009 10:14 PM | Reply | Permalink
The reason the automakers crashed was the sharp, sudden spike in the gas prices. The price doubled in a very short amount of time and the nation was not positioned to respond. People were too tight on their finances to weather the changes, and the worse the mileage the worse the impact. Filling up the gas tank in the SUV suddenly cost another $50. The new home buyers were buying homes further from their work so this extenuated their circumstance. Overnight, their mortgage payments were out of reach, and probably the ARM helped make this true as well. Overnight, the SUVs and pick-ups were toxic. The Big 3 had nothing left, but even if they did, no one had money to buy a new car in the first place. It seems that people were prepared to pay $50 to full up the SUV, but could not make the leap to $100. The fuel costs shifted to suddenly for the economy to adapt and since every business relies on transporation, those businesses not prepared for the surge fell by teh wayside. The impact of the fuel cost was pervasive, not just in the personal finances, but every business had to deal with it and prices for everything went up. Still waiting for them to come down. Still waiting. Hey, let's be honest, that ain't happening.
May 5, 2009 1:56 PM | Reply | Permalink
The gas prices and financial crisis just accelerated the decline. US makers have been tanking for decades.
May 5, 2009 2:41 PM | Reply | Permalink
Gregor, I think the *main* reason the US automakers crashed *now* is that annual unit sales went from ~16 million to ~9 million in the course of the last six months. That is, sales for all automakers have been almost cut in half. (Toyota projects it will lose $2B this year.)
As kozmik correctly points out, the US manufacturers have been in bad shape for a long time. But the precipitating event here was the Great Recession, not the price of gasoline.
-- ARG
May 5, 2009 4:59 PM | Reply | Permalink
I know, that is what everyone said on the MSM, but personally, it seemed like one could more easily associate the tipping point with the gas prices, but who wants to point their fingers at Big Oil for getting too greedy? There would be repercussions for that much audacity.
BTW, the sales decline is the symptom of the crash, not the cause. I think the recession is also a symptom of the crash. In fact, it is the crash, but not the cause. Sure, these were rough times all around, especially with Detroit failing to stay competitive in all areas of the market, especially small cars, but breaking point, I sincerely believe, the last straw, was the gas prices. We can couple that with the mortgage crsis, but I kind of think people were prepared for their mortgages, even if things were tight, but the fuel issue, a demand for their commute, was not foreseen by the average person and it effected everyone. Nothing is as pervasive as fuel costs, nothing.
May 6, 2009 1:14 AM | Reply | Permalink