Did the Four Horsemen Destroy the Auto Industry?

Did the Four Horsemen Destroy the Auto Industry? by Darin Gilley

The day of reckoning has arrived for the U.S. auto industry and much like the four horsemen of the apocalypse (strife, war, famine, death) our nation's policies (tax, trade, health care, energy) have helped decimate American manufacturing. As a result, America has gone from the world's greatest creditor nation to the world's greatest debtor nation.

Let's look at how these long-standing policies have virtually eliminated several industries from the productive side of the American economy - shoes, TV's, textiles, electronics, and potentially the auto industry.

Horseman No. 1 - Tax Policy

Other nations gain an advantage through their use of a Value Added Tax (VAT) system. A VAT is a levy on the "value added" to goods and services as they pass through each stage of the production process. The advantage is gained when a foreign manufacturer exports their goods to the U.S., where at that point the exporting nation rebates the Value Added Taxes back to the manufacturer. This allows foreign goods with no tax cost component to "compete" with American goods that must include U.S. taxes as part of their price. This generally gives goods from VAT nations a 10 percent advantage. To make matters worse, VAT nations assess the tax on American goods entering their market.

U.S. Rep. Mike Michaud of Maine estimates this produces a $375 billion burden on American goods and services. Fortunately, he plans on introducing legislation in the next session of Congress to address this problem. This simple tax issue will immediately assist the auto industry and other manufacturers to be more competitive.

Horseman No. 2 - Trade Policy

America cannot continue to lead a free trade agenda while other nations strategically subsidize, support, and protect their industries at our expense. For example, the U.S. House Ways and Means Committee has found that Japan manipulates its currency to give their vehicles a $2,000 - $8,000 advantage when imported into the U.S. This also raises the cost of American vehicles that are imported into Japan by the same amount.

Currency manipulation and other non-tariff barriers allow Korea to export over 600,000 vehicles to the U.S. last year while only importing 5,000 from America.

We could learn from Europe as well. If a foreign automaker wants to open a car plant in Europe they must use 80 percent locally produced parts, far higher than the 35 percent average content American transplants currently use. This would generate almost two million American jobs. In addition, Europe puts a ceiling on the amount of state subsidies provided so that those plants actually benefit the local economy and not siphon off tax dollars to shareholders.

Horseman No. 3 - Health Care

The United States pays twice as much per person for health care as other industrialized nations. It has been estimated that if GM were a Canadian company it wouldn't be asking for help. Economist Dean Baker estimates if GM had purchased the same health care used in Canada it would have saved over $22 billion over the last decade. In fact, if health care costs were the same here as in other industrialized nations 80 percent of the Big 3 losses would disappear.

Horseman No. 4 - Energy

In the late 1990s a barrel of oil sold for $10. The Big 3 enjoyed strong sales and consistent profits. In 2008 a barrel of oil sold for $147. If legislators had developed an energy policy then, all industry, but especially the auto industry, would have had a foundation on which to design, engineer, and build vehicles.

Instead we watched our elected officials vote to unleash the "market forces" that came with deregulating the futures commodity market (Commodities Futures Modernization Act). This resulted in gas exploding to over $4 a gallon. The consequence of this decision was the entire economy devolving into a recession while oil companies reported record profits.

Obviously, the financial crisis is the immediate cause of the worldwide auto crisis but these four policies or lack thereof have long been a cause of American manufacturing decline. It is time for responsible legislators to take the reins and look for solutions that will put domestic manufacturing on at least a level playing field in their own market. Our economic recovery depends on it. No nation has ever consumed its way to greatness, nations must produce their way to greatness.

A version of this article originally appeared in the St. Louis Post-Dispatch