from Follow the Money

Auto parts, China, protectionism

December 8, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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I have long thought that China's move into auto parts was a possible (political) trigger for a new set of stress on Bretton Woods 2 -- the point where the shift of manufacturing production out the US prompted in part by weak Asian currencies (and in part by other factors) potentially ended America's willingness to sustain basically open markets for Asian goods.  

Electronics parts production and assembly for the US market has long been in East Asia.   Auto parts production for the US market ... not so much.

Chinese (and for that matter Indian) exports of auto parts are rising.   And now it seems that (profitable, I assume) Chinese auto parts producers are interested in buying the (unprofitable/ bankrupt) US parts producers -- often parts producers spun off from GM or Ford.   Wanxiang wants to buy what was once Visteon from Ford ...

Talk about symbolism.

Wanxiang rather clearly doesn't envision continuing to pay UAW wages.   The FT reports:

“We have seen that the quality of [Ford’s] assets is all right, but because of high labour costs the business is not always profitable,” Mr Lu [Wanxiang's chairman] told the FT.

Wanxiang is understood to be interested in acquiring Ford’s advanced design and production technology and in improving prospects for distribution of its own car parts in the US.

Any deal would probably face strong political opposition from unions fearing job losses and transfer of production to China.

Wanxiang’s interest in Ford underlines an important shift in the car-parts industry. While analysts say it could take a decade for China’s carmakers to become a global force, the country’s components companies, which combine low labour costs and an improving reputation for quality, are flexing their muscles.

China’s exports of car parts rose 75 per cent last year to $15.2bn and were a further 38 per cent higher in the first two quarters of this year. Wanxiang supplies both Ford and GM.

The assets under discussion involve Automotive Components Holdings, a group of 17 plants and six other facilities that Ford took control of last year as part of the bail-out of Visteon, a parts maker spun off by Ford in 2000. Ford plans to sell or close all ACH facilities."

In some sense, it doesn't matter to US labor whether a Chinese firm buys Ford's auto part business, a European firm buys Ford's auto part business or an American firm buys Ford's auto parts business.   What matters is whether any of those firms have any long-term intention of continuing to produce auto parts in the US, with American labor.

But Chinese owernship is highly symbolic of the shift of the locus of much manufacturing toward Asia.  Christopher Dodd won't be pleased.  Also in today's FT:

Mr Dodd said. “But it’s pretty difficult to explain to the American people day after day that a major competitor of ours, now a member of the WTO, is still fixing its own rates at a great disadvantage to us.”

"Us" is a loaded term.   "Us" includes a lot of buyers of cars -- who might well benefit from more imported auto parts and a fair number of producers of automobile parts, who won't.  "Us" also includes a fair number of people who will gain from selling more US debt -- whether treasuries, agencies and mortgage-backed securities -- to China, and  fair number of people who will see more of their future income used to make interest payments to China over the next twenty some years.

The issues here -- in my view -- go beyond US protectionism and the politics of trade. 

They also touch on the nature of the adjustment process that will bring the US trade deficit down over time.   At current exchange rates, it still makes shift to move the production of additional goods out of the US -- not to invest to produce more tradable goods and services in the US.

Remember, in the late 1980s, the migration of Japanese car production to the US (so called transplants) played a big role in bringing the US trade deficit down.   The move in the yen led Japanese firms to build cars in the US that were formerly imported from Japan -- in the process creating a set of new auto boom towns on the sourthern edge of the US manufacturing heartland (Tennessee, Kentucky, etc).

Look at Figure 1.2 of this report.  In 1986, the US imported 4.2 million cars and trucks, with transplant production of 0.7 million.  In 1996, imports has fallen to 1.7 million units, while "transplant" production had increased to 2.4 million.   That shift clearly helped bring the US trade deficit down.  The rebound in imported cars since 1996 has -- in turn -- contributed to the widening deficit.  Since 1996 both transplant production and imports have been rising.

I had assumed that a shift in the production of now-imported German, Japanese and even Korean autos to the US was one potential channel for reducing the current US trade deficit.  But right now, it seems like US auto firms are slowly in the process of trying to save themselves by shifting more parts production out of the US -- and likely by eventually shifting some auto assembly out of the US as well.

That may make economic sense at current exchange rates.  But directionally, it certainly seems to make the "adjustment" process that is needed to reduce the US trade deficit harder.

The eventual adjustment process that lowers the US trade deficit (something necessary just to keep the current account deficit constrant) requires some combination of the US exporting more and importing less to close -- over time -- a 6% of GDP gap between what the US imports and what it exports.   I have long thought that the most likely adjustment (or at least the most pleasant) would combine a slowdown in the pace of US import growth so that imports stabilized as a share of US GDP while US exports grew faster than US GDP.

That is still possible if the US imports far more auto parts (and autos) than it does now.   But a further shift in the locus of auto parts production toward Asia implies a higher level of imports as a share of US GDP, all else being equal.  And so too would the amount that the US would eventually need to export.   The shift of some sectors out of the US needs to be matched by the development of new exporting sectors.  There are only so many 747s the US can sell to the world ...

In the interim, though, the US will likely pay for more Asian auto parts the same way it pays for imported Asian electronics: by exporting debt, not by exporting goods or services.  

Strike  that.   If Wanxiang does buy what was Visteon, the US will be financed part of its trade deficit by selling real assets -- not just debt -- to China.   That would be a bit of a change.

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