United States trade policies and their effect on the automotive industry - Essay Example

Trade United s Trade Policies and their Effect on the Automotive Industry The desolate outlook for the United s' auto industry comes as no surprise for most everybody. In the beginning of 2006 Ford Motor Company and General Motors, two of the "Big Three" automakers, announced staggering layoffs in the tens of thousands and debilitating year over year losses in the billions of dollars. In addition to these layoffs, both General Motors and Ford have planned for multiple plant closures and the selling off of controlling shares of assets or subsidiaries in their ongoing struggle toward profitability. These announcements come as a blow to the tenuous economic recovery of the United States. The recent trends regarding the economic recovery of the United States remains slow but promising. According to Employment Situations published by the U.S. Bureau of Labor and Statistics, the current average unemployment rate for the United States is 4.7%, (2006). The effect the impending massive job loss in the automotive industry will have on the unemployment rate and the overall health of the nation's economy is uncertain. In the four years between 2000 and 2003, an estimated 5.2 million people lost their jobs. Over 2 million of those lost jobs were in the manufacturing industry ("Employment Situation," 2006). The cause for the ongoing decline in America's auto industry are many and range from increasing fuel prices and the growth of the global economy to poor product design and increased foreign competition. Although all of these issues are contributing factors in the decline of the American auto industry, none are as contentiously argued as issues of United States trade policies. According to Section 2102 Congressional Statement of Purpose on trade, there are 6 defining factors to U.S. Trade agreements (2003): To foster economic growth. Reduce or eliminate trade barriers. Trade 2 The establishment of fair and equal international trade. Provide protection of American industry and labor against "injurious" import competitions. To open market oppoutunites for U.S. commerce in non-market economies. To provide "reasonable" access of products too less developed countries or nations. In the process of attaining these goals U.S. trade polices have drawn harsh criticisms due to the nations' 2005 trade deficit in manufactured goods of $726 billion and to the apparent effect they have on the U.S. economy, its' labor force and worker rights and wages (Scott 2006). As the trade deficit in manufactured goods continues to rise, so too does the loss of jobs in the manufacturing industry. The United States finds itself unable to compete with low labor and production costs in foreign countries. For automakers such as Ford and General Motors, this has lead to the movement of production plants to outside the U.S. as well as the massive volumes of lay offs the industry is currently experiencing. The autoworkers that have been fortunate enough to retain their jobs face the issue of the downward pressure on wages and benefits that is caused by the rising trade deficit and the lower labor costs in foreign countries. Currently, the cost of labor in Mexico is the lowest of any developed nation (Bernard). Labor costs are one of, if not the number one, highest expense of any corporation. While moving U.S. production plants to Mexico creates jobs, increases the standard of living and stimulates the economy for that country, the U.S. labor force cannot compete with these low wages and benefits and therefore, lose bargaining power. The loss of bargaining power is exacerbated by the low level of government enforcement of labor laws in some foreign countries. In the United States this loss of bargaining power often results in the acceptance of lower wages and cuts to benefits and pension programs by U.S employees. Trade 3 While jobs are being exported to foreign countries such as Mexico, auto parts are being imported to the United States at an increasing rate. In 2004, the United States imported $77 billion of auto parts. As imports have been increasing, exports have been trending downward to the point of remaining stagnant (Klier&Rubenstein, 2006). This downward trend and other factors are causing U.S. trade policies in the auto industry to come under heavy fire, particularly the North American Free Trade Agreement (NAFTA), the automotive trade agreement between the United States, Korea and formerly with Japan. Japans' trade agreement with the U.S. was allowed to expire in 2000 (Levin 2006). Entering into automotive trade agreements with so-called "closed markets" such as that of South Korea has proven to be a major detriment to the U.S. automotive industry due, in part, to severe trade imbalances between the two countries. In 2005, the United States imported an estimated 600,000 cars from South Korea while South Korea imported under 8,000 vehicles (Levin 2006). The job loss experienced in the U.S. by this and other larger automotive trade imbalances further denote the need for amendments in trade agreements between the United States and foreign countries. These changes and amendments should not only include aid to the furthering of developing and emerging markets to enter the global economy, but the preservation of the auto industry in the United States as well. While the U.S. holds a number of trade agreements with many nations of the world, none has had a seemingly larger effect on the nations economy than that of the North American Free Trade Agreement. The North American Free Trade Agreement was signed in 1993 and went into effect in January 1994. This trade agreement between the countries of the United States, Mexico and Canada was drafted to promote the removal of trade barriers, economic liberalization and increase foreign investment. According to the United States Congressional Budget office report The Effects of NAFTA on U.S.-Mexican Trade and GDP, the job losses experienced in the United Trade 4 States due to the removal of trade barriers and the lowering of duties and tariffs by trade agreements such as NAFTA will be "offset to a greater or lesser extent by jobs gained in construction and investment-goods industries because of the inflow of foreign investment that must accompany the trade deficit. Whatever the net effect, wages adjust over time until demand for labor again equals supply so that there is no effect on the aggregate level of employment in the long run (although some redistribution of employment among industries may occur)." (2003). To put the significance of this statement by the Congressional Budget Office (CBO) into perspective, the U.S. auto industry accounts for 4% of the country's Gross National Product. Since 2001, an estimated 2.8 million people have lost their jobs in that industry alone (Levin 2006). According to the U.S. Department of Labor statistics, between 2001 and 2006 only an estimated 2.1 million new jobs have been created in the United States. This includes public, private and government sectors (Roberts 2006). Traditionally, the offset of unemployment for the auto industry is not said to occur within that industry, but by other industries such as the aforementioned construction industry, business and finance, the service industry as well as in health care. This is often referred to as the transitioning of the United States economy from a production based economy to knowledge and technology based economy. The positive undertones in these and other outlooks however are offset themselves by the slow down in construction, the off shoring of tech industry jobs and the growing global market. The long term benefits or detriments of trade agreements are difficult to predict. Most experts state that the agreements are necessary for the United States to compete in the global market and they open the opportunity for developing countries to enter into the fold of this global economy. The entrance of developing and emerging markets into the global economy is said to Trade 5 foster competition in world markets, which is often an asset to consumers by driving down the price of goods and services. Unfortunately, the negative economic by-product experienced by the U.S. auto industry is that these developing countries have huge comparative advantage due to significantly lower labor costs, resulting in massive job losses and increasing trade deficits in the United States. Job loss in the automotive industry is often discussed on large scales and in mass generalizations. Rarely is it broken down into smaller scales of single communities and families. Economists and politicians alike speak of the creation of millions of new jobs but rarely speak as to whom these new jobs benefit. The creation of jobs in business and finance sectors, for example, are of little significance to the people that have worked on a General Motors production line for the past 25 years and at the age of 50 find themselves not only faced with having to find a new job, but quite possibly, one for less pay and in a different field. It is also often not mentioned that the loss of jobs in mass quantities has a domino effect on the economy of which no one can predict the end result. Those that lose their jobs also lose disposable income, which results in fewer consumers spending which affects all other industries. This results in a decline or continuing stagnation of the nations economy. This decline or stagnation would further the loss of jobs and hamper the creation of new ones, respectively. There is not concrete answer as to how U.S. trade policies will continue to affect the U.S. economy because no one knows for certain how the future will unfold. The current unraveling of the U.S. automotive industry could truly be what is described as growing pains contributed to the expanding global market, increased competition and the transitioning of the nations economy. Though if current trade agreements are not amended and new ones more carefully constructed, the U.S. automotive industry may soon find itself unable to compete, driving it toward extinction. Trade 6 References Arnold, B. The effects of NAFTA on U.S.-Mexican Trade and GDP. Retrieved 10 May 2006 from http://www.cbo.gov/showdoc.cfmindex=4247&sequence=0 Beckham, S. (2006). An Oversight Hearing on Trade Policy and the U.S. Automobile Industry. Retrieved 8 May 2006 from http://democrats.sentate.gov/dpc/hearings28/ beckman.pdf Bernard, E. (n.d.). What's the Matter With NAFTA Retrieved 8 May 2006 from http://www.law.harvard.edu/programs/lwp/eb/nafta.pdf Cowan, C., Faust, D., Welch, D. The Good News About America's Auto Industry. Retrieved 9 May 2006 from http://www.businessweek.com/magazine/content/06_07/b3971057.htm Griswold, D. (2003). Trade and Protectionism. Retrieved 9 May 2006 from http://www.aworldconnected.org/article.php/561.html Isidore, C. (2005). G.M.'s Big Shakeup. Retrieved 8 May 2006 from http://money.cnn.com/ 2005/11/21/news/fortune500/gm_cuts/ Klier, T. and Rubenstein, J. (2006). Chicago Fed Letter. Competition and Trade in the U.S. Auto Parts Sector. Retrieved 9 May 2006 from http://www.chicagofed.org/publications/ fedletter/cfljanuary2006 222.pdf Levin, C. (2006). Statement of Senator Carl Levin at the DPC Oversight Hearing on Trade Policy and the U.S. Automobile Industry. Retrieved 8 May 2006 from http://www.senate.gov/levin/newsroom/release.cfmid=251708 Schott, J. (2006). Speeches, Testimony and Papers. NAFTA and Autos. Retrieved 9 May 2006, from http://www.iie.com/publications/papers/paper.cfmResearchID=612 Scott, R. (2006). Trade Picture. Retrieved 8 May 2006, from http:www.epinet.org/content.cfm/ webfeatures/economicindicators/tradepicd20060210 Trade 7 Scott, R. (2003). The High Price of Free Trade. Retrieved 8 May 2006, from http://www.epinet.org/content.cfm/briefingpapers_bp147 Section 2102. (n.d.). Congressional Statement of Purpose. Retrieved 9 May 2006 from http://www.washingtonwatchdog.org/documents/usc/ttl19/ch12/sec2102.html Segal, R. (n.d.). Are You Worried About the Decline of the U.S. Auto Industry Retrieved 9 May 2006 from http://www.theautochannel.com/news/2005/11/13/148034.html Smitka, M. (1999). Foreign Policy and the U.S. Automotive Industry By Virtue of Necessity Retrieved May 2006 from http://www.h-net.org/business/bhcweb/publications/ BEHprint/v028n2/p0277-p0286.pdf U.S. Bureau of Labor and Statistics. (2006). Employment Situation Summary. Retrieved 9 May from http://www.bls.gov/news.release/empsit.nr0.htm Read More