Just as the American auto industry is bouncing back from near-death — in large part thanks to the Obama administration’s aid and intervention — a new specter is haunting the industry: the rise of the Chinese auto industry and especially auto parts production.
That specter is the offspring of Chinese trade and industrial policies — many in likely violation of the World Trade organization rules — and U.S. car companies’ short-term greed, abetted by inadequate, flawed U.S. policy.
Earlier this week, a group of Democratic legislators from the auto heartland – including Senators Sherrod Brown (Ohio), Debbie Stabecow (Mich.), and Robert Casey (Pa.) – and union leaders called for the Obama administration to investigate Chinese trade violations, pointing to three new studies of the Chinese auto industry and government policy that gave credibility to their appeal.
Obama himself could benefit from calling for such investigation: It could demonstrate seriousness about his State of the Union pledge to enforce trade laws — a winning pledge especially with many voters from working-class households, whose support is critical for the president’s re-election.
Auto parts production is economically important as well. Most parts production is both highly capital intensive, which should make it promising for an advanced industrial economy, and the focus of a large part of U.S. private industrial research and development. Parts manufacturers are also major employers, accounting in the U.S. for an average of nearly 690,000 jobs and three-fourths of auto industry employment over the past decade. But the number of jobs is dropping faster in parts production than in final assembly, the more highly unionized part of the industry.
China is one reason for that decline. After starting from almost nothing in the late 1990s, China hasbecome the world’s biggest producer of and market for motor vehicles, even though a small fraction of the population owns a car.
As the European, Japanese and North American industries have struggled in the recession with overcapacity to make vehicles, China has hurtled forward, growing 150 percent since 2004. China is expanding its industry with a mix of firms that are, among other forms, state-owned, owned by provincial or municipal governments, private and domestic, foreign-owned, or joint ventures of any of the above.
Seeing autos as a “pillar” of their industrializing economy, the Chinese government has used subsidies and directives not only to expand its auto and truck manufacturing but also to try to leapfrog to global leadership in “new energy” technologies, such as hybrid, electric and fuel cell engines.
It also exploits the desire of foreign corporate investors to produce in China and sell in its market by demanding as a price of admission that those firms transfer technological know-how to Chinese businesses (though many companies simply counterfeit foreign products) and export from China to external markets, primarily the United States.
Two new reports from the Economic Policy Institute—one by Robert Scott and Hilary Wething of EPI, the other from Usha C.V. Haley, professor of international business at Masey University in New Zealand — and a study by the Washington trade law firm of Stewart and Stewart – lay out Chinese strategy in detail.
But Haley in particular also shows the complicity of U.S. final assembly firms, like GM (despite owing its survival to public assistance in the U.S,), and leading parts manufacturers like Delphi, Visteon and Johnson Controls, also are complicit in strengthening China’s industry at the expense of American workers. And that’s the reason the U.S. parts producers are not joining the call for investigation of China’s practices, as the former Big Three used to protest Japanese imports.
Since 2001, Haley calculates, the Chinese auto parts industry has benefitted from $27.5 billion in subsidies, with another $10.5 billion committed over the next decade to restructure a fragmented industry. He figures China can sell its parts for 30 to 50 percent below competitors mainly because of the subsidies, not because of low wages (auto workers earn more than most Chinese factory workers, and labor accounts for only 5 percent of parts costs).
China is now the world’s fourth largest exporter of auto parts in the world and to the U.S.in particular. The U.S. – unlike Japan, Korea, and Germany, auto producing countries that trade with Chinabut have large auto parts trade surpluses – has run a rapidly increasing deficit in auto parts. It reached $9.1 billion, or 29 percent of the overall U.S. auto parts trade deficit in 2010, according to Scott.
China, according to Stewart and Stewart, often demands that foreign auto companies in China incorporate specific levels of domestic Chinese parts, against WTO rules. The government cuts taxes, makes easier credit available, and subsidizes exports for Chinese companies. It encourages foreign firms to locate in export processing zones, thus pushing them to export. It also has restricted sale (thus raising the price) of rare minerals needed for high tech auto and other products. (The WTO recently ruled that practice a trade violation).
Haley notes numerous subsidies for industries – such as coal, steel and power – that supply vehicle and parts producers. But the government also helps its auto parts companies by imposing high tariffs, encouraging takeover of foreign companies to gain their technology, financing R&D, and direct grants. And Scott notes that Chinese producers gain advantages from the government’s currency manipulation.
“However,” Haley writes, “the growth of China’s auto-parts industry also reflects the global strategies and manufacturing and distribution decisions of multinational corporations, notably U.S. corporations.” Auto companies from other countries are likely to incorporate their domestic suppliers in their global strategy, Haley says, but “U.S. global auto strategy currently centers on manufacturing in China and exporting back home.”
“China is cheating,” says Steelworkers president Leo Gerard. And those unlawful policies were one of several reasons that U.S. auto parts employment dropped 45 percent from 2001 – 2010, a loss of 389,000 jobs. As the Chinese industry gains size and sophistication, Chinese policies arelikely to be a much more significant cause of job losses
The U.S. government should demand that China abide by trade rules, using the WTO and its own trade law remedies. But that’s just a start.
For progressives, the issue is complicated. After all, most American labor and left analysts argue for us to adopt more aggressive trade and industrial policies, including helping and pushing the auto corporations toward “new fuel” vehicles. Even though the U.S. government has rarely enforced rigorously requirements placed on the domestic industry, it has pursued a haphazard industrial policy of its own, including weak forms of some of China’s policies. Economist Ha Joon Chang also reminds us that most rich countries did not get that way by following WTO free-trade rules, but through many of the tactics China now uses.
Few on the left want to abandon the use of government policies to steer the economy toward social goals, such as good jobs or environmental sustainaility. Nor do they accept corporate free trade rules that ignore interests of workers as well as nations. Yet governmental intervention that turns predatory, as China’s does, is hardly sustainable or desirable. Some rules of fair trade are needed even if the current “free trade” rules are jettisoned.
The world economy needs a way for China to develop and for workers in the U.S. to preserve jobs and a standard of living. Enforcing existing trade laws on China is a start of the discussion, but the unspoken task is for the American public to gain more power to hold this nation’s own corporations accountable, here and in China.
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David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.