The Big Three, Revisited

Dani Rodrik features a guest post by Robert Lawrence today, who tells me something I didn’t know:

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.

I couldn’t believe that was actually true, so I went and checked the US Harmonized Tariff Schedule, and sure enough, there’s a 25% tariff on “motor vehicles for the transport of goods,” including those with a gross vehicle weight under 5 metric tons. This is compared to a general rate of 2.5% for passenger cars. (Oddly enough, bikes are subject to fairly high tariff rates; something to look into, cyclists).

This seems remarkable to me. Obviously, foreign firms eventually responded to this state of affairs by placing plants producing trucks and SUVs in North America. But this is astounding. I can’t believe it isn’t a regular part of the conversation that the automakers are failing despite the fact that the major cash cow of the past decade was protected with a 25% tariff.

UPDATE: You know, I should have closed by saying that it’s probable the Big Three are failing because rather than despite the fact that their major cash cow of the past decade was protected by a 25% tariff.

Comments

  1. Rob says:

    Big tariffs on bicycles doesn’t seem to stop Walmart from stocking a plethora of “Made in China” (and other such countries) bikes.

    For all the blame that we seem to be putting on auto makers for building vehicles that “Americans don’t want” – it’s worth considering that pickups, SUVs, Hummers, etc. were in huge demand for the better part of the 90s and early 2000s. When gasoline crossed $4, Priuses became one of the first vehicles to ever appreciate in price even after it was driven off the lot. Then gasoline collapsed and Prius sales plummeted.

    It seems justifiable to suggest that the American consumer is (at least to some extent) to blame. Americans’ tastes and preferences change constantly. No manufacturing process in existence can switch its production to meet the wild variations in consumer demand.

  2. Evan says:

    I was thinking that it was protection for people who bought parts from oveseas and assembled them here, but a closer, if still inexpert, reading suggests that there’s a 30% tariff on everything that’s imported. Which is kind of strange, because *everything* is imported. The US bike industry is entirely boutique. Even custom frames are usually the only domestic part on the bike.

  3. Karl Smith says:

    Is this a major factor?

    I haven’t done a careful accounting but I wonder to what extent the big three represent actual US auto manufacturing.

    My understanding is that Accords are made in Marysville Ohio. I know the 3 series BMW is made Spartanburg South Carolina. I think that Camrys will now be made in Indiana.

    Does the tariff just encourage manufacturing to take place here in the US regardless of make?

  4. BruceMcF says:

    Its not the 25% tariff per se … its that the choice of which market segment to specialize in is determined by government tariff policy.

    GM product development is largely distributed globally … trucks in the US, sedans in Europe, compacts in East Asia, etc. So if Fiat buys Opal, there could well be a hole in the middle of the GM product line, as GM re-establishes sedan development within its shrunken global company.

  5. RawCode says:

    It isn’t an import if it was manufactured here.

    Right?

    Toyota has eight factories in the US to make imports.

    http://en.wikipedia.org/wiki/Category:Toyota_factories

  6. Wow – I didn’t know that either.

    In this era, a 25% tariff on anything seems pretty ridiculous.

  7. Ryan says:

    Items are made, for US customs purpose, wherever the major assembly is done, so autos assembled in the US from parts made overseas are domestically manufactured and not subject to import duties.

    That said, manufacturing components that are imported are subject to their own tariffs, depending on their classification and country of origin.

    Most clothing is subject to import tariffs of 15-30%, so everyone has a bigger beef with that tariff generally than cyclists have for bicylce tarriff’s, specifically.

  8. cynicalone says:

    Mr. Avent,
    The fact that you believe the tariff has not been part of the conversation speaks more about you than anything else.

    In other words, there is sometimes an external cost to government action.

    I don’t believe you fully take those costs into account when you propose a myriad of government programs.

    I don’t agree with many of your opinions but I have read your work at the Economist, Portfolio, and here.

    Sir,
    Broaden Your Horizons.

    By the way,
    Mercantilism is not broadening your horizons. You got lucky.

  9. Peter says:

    @Karl Smith, others

    Yes, if Toyota makes a truck in Kentucky or wherever, that’s not an import. Which is part of why domestic automakers are getting killed.

    What this tarrif implies to me is that for the past couple decades Detroit hasn’t been making -any- competitive automobiles and has been simply hiding behind a tariff and the huge natural barriers to entry in the auto manufacturing industry. Well, the barriers were broken and they’re dying.