Can the WTO Successfully Police Global Auto-Parts Industry?

WTO Parts II

By Tim Esterdahl

A recent World Trade Organization ruling that favors U.S. automakers may pave the way for an advantageous ruling on another U.S. complaint; however, such a ruling could hit consumers in the pocketbook.

In May the WTO ruled that Chinese tariffs on vehicles exported from the U.S. to China violated world trade policies; those tariffs have been eliminated. Now the U.S. government is hoping the WTO will provide a similar outcome to its charge that China subsidizes its auto-parts exporters. This practice gives Chinese exporters an unfair advantage over U.S. auto-parts suppliers, according to the Obama administration. The subsidies allow Chinese auto-parts makers to undercut the prices of their competitors. This explains why American consumers see so many "Made in China" labels on parts in U.S. auto stores. To keep costs down and consumers happy, these retailers stock the lowest-priced merchandise that meets U.S. specifications. That merchandise often comes from China.

We contacted the Specialty Equipment Manufacturing Association, which has a long history of trying to bring global auto suppliers together. This was the assessment SEMA offered in a statement:

"The free flow of U.S., and foreign, branded specialty automotive equipment benefits everyone — enthusiasts and industry alike and is a proven engine of global economic growth. … A condition of joining the WTO [there are 159 WTO members, and China is among them] is a pledge to avoid instituting policies which would interfere with trade.

"At issue — and the basis for a U.S. case pending before the WTO — are Chinese subsidies of auto parts firms which agree to manufacture in China and meet government-set export targets. The incentives include grants, loans and preferential tax treatment among other benefits. WTO outright bans such export subsidies due to their market distorting nature.

"While U.S.-branded performance products are manufactured worldwide, including in China, a significant portion of these products are made in the U.S. American firms should reasonably expect to gain market share at home and abroad if they can produce better products at more attractive prices than their competitors. But U.S. companies shouldn't have to compete against firms receiving government subsidies and shouldn't be forced to make decisions on where they manufacture based on a government's manipulation of the marketplace."

If the WTO rules in favor of the U.S., like it did on the auto export issue, this could be good news and bad news for consumers. On one hand, U.S. auto part manufacturers (and their employees) would benefit from such a ruling. On the other, consumers might pay more for repairs and after-market parts.

Parts Prices Could Rise

Most parts from original equipment manufacturers are made in the U.S., Japan, Mexico or Canada. However, "some of the parts that make up each component come from Chinese manufacturers," said Jason Lancaster, president of Spork Marketing, which specializes in auto parts marketing. "Therefore, all parts [manufacturer or otherwise] may tick up a couple of percent in terms of cost."

Pickup truck prices could also rise with automakers passing any increase in parts prices to the consumer. The 2015 Ford F-150 is a good example. Aluminum costs more to produce than steel. Will Ford eat the price increase or pass it along to consumers? We don't know yet.

Auto repairs done with manufacturer parts would get more expensive if the WTO rules in favor of the U.S. A&J Collision Repair owner Jody Gatchell said that there are a few insurance companies that require manufacturer parts be used in collision repairs. Once again, like Ford, the increased prices of these parts have to be paid for somehow. Most likely it will come in the form of higher premiums and/or those insurance companies dropping the manufacturer equipment requirement.

Effect on After-Market Prices

A favorable ruling would affect after-market body parts more than most segments of the auto industry since most of them are manufactured in China. This could impact insurance rates, but probably not. Labor costs more than parts when it comes to repairs, and the cost to repair a particular vehicle is a relatively small portion of the typical insurance premium.

Any price increase would affect shops like Gatchell's Arizona business. He said it is common for repair shops to use after-market or used parts. Unless the insurance company insists his shop use a specific manufacturer part, he searches for a cheaper part. So the higher prices would cause his shop and others to work harder with less in order to control costs.

A WTO ruling on this issue seems imminent in light of the recent export ruling. Such a ruling could impact consumers for years to come.

Cars.com photos by Mark Williams

 

WTO Parts 2 II

 

Comments

@Lou BC - I'm address you, the goofball with the typepad account.

@Dafuq - what da ...?

You are confused my boy,

"For you old farts let me tell you about something new:

Globalization

Communication and transportation technology, combined with free-market ideology, have given products and capital unprecedented mobility. Northern countries want to open world markets to their goods and take advantage of cheap labor in the South, rather than dumb expensive labor in the US. They use international financial institutions and regional trade agreements to compel poor countries to "integrate" by reducing tariffs, privatizing state enterprises, and relaxing environmental and labor standards.

The results have large profits for investors!

You see "Buy American or say Bye to America" no one really gives a sh&t what you would do...lol

https://www.youtube.com/watch?v=-VTciPTiiFc

Posted by: Lou BC | Jul 9, 2014 5:47:56 PM"

That is the "Fake Lou"

Your reply:
"
@Lou BC

Well I'm 18, and this has nothing to do with "Old farts". Taking away American jobs isn't globalization, globalization would mean integration of work, For example Ford has a lot of design work done on there engines in England, but didn't take any American engineers jobs away.

I live in Seattle, and we actually have employers that respect the American workforce, Boeing, Microsoft, Amazon etc.

Posted by: Dafuq | Jul 9, 2014 11:54:07 PM"

On the subject of globalization, it is affecting jobs in the USA. Companies will go to where labour and manufacturing costs are cheaper.

The big problem with the USA is the widening gap between the have's and have not's. Walmart relies on food stamps to support its workers to the tune of billions of dollars. If one removes the 0.1% and 1% from the picture and applies metrics like health, education, violent crime etc. the USA compares directly to most third world countries.

@Lou BC--That is why I posted that link on the other article which caused such a ruckus. Talk is cheap, if more workers are earning less than a livable wage then the taxpayer ends up paying the difference in government programs such as food stamps, disability, heating assistance, health care, and etc. There is more incentive for laid off workers to go on disability than to take a job with a non livable wage. There is a happy medium between a social welfare state and one where those making a subsistent wage have to rely on the taxpayer to make up the difference. Is there a perfect solution, no but something needs to change.

As for international trade and globalization it is what is and we have to adapt to it. The lower technical goods requiring less skill will go to the cheapest labor market. Also economies evolve starting with developing which produce textiles and furniture and then evolve to electronic items and then to products requiring more skill such as computers, vehicles, and industrial equipment. Post WW II Japan went through this cycle and China is going through this cycle. Vietnam is emerging as a country that produces inexpensive textiles and furniture and they will eventually transition to another level. We cannot turn the clock back and we cannot stop globalization.

@Trucker - well said.

Conservatives, especially large "C" ones line up on one side of the debate with Liberals on the other side. They argue vehemently that one approach (THEIRS) is the only one that will work.
I feel that there does need to be a blend of policies covering social programs. Other countries have a decent blend so why can't the USA?

@Trucker
@LouBC

Guys, you seem to think this is all about "finding the right balance" or picking the right social-policy approach.

To accept that notion means you trust the people in government to make smart and moral decisions, which is probably asking too much considering what I read in the papers.

Instead try thinking about it like this, and please: Forget liberal or conservative labels. Capital is the money you've saved or the money you've been able to borrow. Capital is going to flee from countries where bureaucrats (people who had a hard time finding work in the private sector) want to tell the rest of us what to do.

Capital is going to RUN to the places where governments welcome innovation and investment.

Two great examples: Hong Kong and Switzerland

After WW2 most of Europe was a war zone--literally. Yet investment poured into Switzerland.

Germany, France, Italy Britain, Holland all had social welfare governments and it took 25 years for them to return to their former condition (Britain middle class never did; the smart ones headed to the US, the Far East and Australia)

A hundred years ago Hong Kong was a putrid dump. Today it's an amazing 21st Century city where every square inch of land has a modern skyscraper sitting on it.

The Chinese in Hong Kong and the Swiss in Europe created a reputation for allowing investment and innovation to do their thing. The rest is history.

It doesn't matter that they buy almost everything they consume from other countries--they've got the damn money, why not? They have no steel mills or auto assembly plants, instead their innovative economies are financing the next generation of steel mills, manufacturing plants in other places. Capital doesn't care, it just moves to the best location.

@papa jim--The Average taxpayer ends up footing the bill for the subsistent pay. It is doubtful that the system will change. Yes we need to be more innovative as an economy but even with innovation the lower skill jobs are still going to go to where the labor is cheaper. The US has been transitioning to a service economy which for the most part are lower skilled and lower paying jobs.

You gave the example of Switzerland but did you know that they have a very restrictive policy as to who can come into their country. In Switzerland if you lose your job you get full pay for up to six months and if you don't find a job within that period of time the government will get you a job whether it is the type of job you want or not. Hong Kong is also restrictive. The US has fewer restrictions than most other countries. The problems are not as simple as just the flow of capital. We as a country have to decide what are priorities are. We have a Congress that will not work together to find pragmatic solutions--both sides are more interested in fighting each other and scoring points to win the next election. Those of us in the middle are told to just shut up and pay for everything.

@papajim - "Capital doesn't care, it just moves to the best location."

That is true and as you have said, governments mismanage.

BUT just like one cannot trust a government that we elect, one defiantly cannot trust those who are unelected and interested in generating wealth.

Companies have left the USA to China for example because profits are higher............. why?

They are avoiding legal obligations to provide a living wage, a safe workplace, and a safe place to live.

Car companies do the same thing. Brazilian cars are extremely unsafe compared to ours...... why?

They are avoiding legal obligations to provide a safer product.

Like it or not, there needs to be a blend.

The old saying about Communism versus Capitalism applies here:

In Capitalism Man exploits Man.

In Communism it is the other way around.

@Trucker and Lou

Fellas, appreciate the give/take, but you missed my point. I'm not advocating for a particular viewpoint, I'm just stating a fact.

If our companies are to compete successfully in the global marketplace, they'll need to assure their investors that they can get competitive returns on their dollar invested. Lacking the ability to consistently offer solid returns, those investors will take their money elsewhere!

Please don't fall for the Hollywood image of the greedy CEO and his buddies.

Some of the biggest investors in the world are the various public school teacher pension plans. The plan managers for those funds are just as ruthless as any Wall Street hedge fund manager.

If we fail to offer capital a safe and reasonable place to grow, it will grow somewhere else. Just ask Detroit.

@papa jim--Not debating where investment should go, it will go to where the highest rate of return can be earned. Capital has no moral obligations, capital is capital just as money is money. The US is not going to eliminate food stamps or other social welfare programs regardless of who is in power. If anything those programs are growing at a faster rate as more of the middle class workers lose good paying jobs and either take jobs that earn a subsistence wage or go on disability. This is not a question of the big bad capitalist this is a matter of how we as a society decide to handle this. The problem will not go away on its own. Education is one solution, but then just getting a degree in a field that has no or limited job prospects just compounds the problem. One solution to employment is to have more apprentice programs where not everyone is encouraged to get a college degree. There is no shame in being an electrician, plumber, mechanic, air and heating technician, and other trades. Mike Rowe of dirty jobs fame and former spokesperson for Ford is going around the US spreading this message. Mike has a advanced degree in Music, but could not make a living singing so he created a new career for himself. We as a society have to decide where our priorities are. We cannot ignore what is happening and just hope it goes away.

--Not debating where investment should go, you said

@Trucker

If you want to have an innovation society, then the whole conversation has to be about attracting and developing capital.

All the rest is just moving the deck chairs on the Titanic.

Changing the way we educate kids will not change the future for Detroit nearly as much as attracting capital and creative people.

Unfortunately, creative people who already have capital are NOT going to Detroit. Creative people who live there will scram the first chance they get, because creative people who DON'T have their own access to capital will follow the money to the same places that investors go to get their best returns.

Who would have picked Alabama to have big-name foreign automakers building plants there, or South Carolina?

Twenty years ago that was just a dream. Today in South Carolina a 100 year old European arms manufacturer has moved there to take advantage of better conditions.

In less than 60 years Brazil has become one of the big players on the world stage--because capital from around the world went there to grow. Russia lost 20 million (civilian and military) lives in WW2 and today they are on the verge of returning to the world stage in a big way. India too.

Ignore capital preservation and formation--you become Detroit.

@Papajim - you say you are neutral but the way you are wording your reply gives me the impression that you are saying that if we do anything about poverty, lack of education, lack of appropriate health care or do anything to help those less fortunate we will chase away investment and growth.

Education or the lack therein will eventually affect the USA's ability to generate wealth.
Example:
Bill Gates came from an upper middle class family. He went to Harvard.
Warren Buffet's father was a congressman. He also went to university.

Would both of them been able to succeed if they came from a single parent Walmart employee family?

I forgot, the discussion was just focusing on the generation of capital.

@LouBC

Your snarky close notwithstanding--BTW the PUTC article we're commenting upon is based on flimsy premise that a UN-style debating society called WTO can police anything. Ask the EU member nations how well that idea is working!

Unless individual nations can effectively embargo products and control their borders, trade barriers won't work. Maybe it worked in 1815, but it probably never did. There really wasn't as much global demand 200 years ago.

You listed a raft of social issues that have social solutions, but the WTO will sure as f**k have nothing to do at all with solving them. Brazil being a textbook example--they have a thriving economy but a third of the population lives a 3rd world life.

I'm open to discussing solutions to social problems but trade barriers won't fix 'em. Iran has effective trade barriers, but who'd want to live there?

@papa jim--Capitalism in its pure form will not work as socialism will not work in its pure form. Capitalism in its true sense has little or no regard for the well being of humans. If you want capitalism in its truest form you would have to go back to the American Industrial Revolution to Andrew Carnegie, John D. Rockerfeller, J P Morgan, and Henry Ford. True capitalism you price your product to where the weaker competitors either cannot compete or you buy them out. You pay labor at the lowest rate possible and you squeeze as much efficiency and productivity out of them as possible. Most Americans would be unwilling to go back to a pure capitalist society as they would be unwilling to go to a pure socialistic or pure communistic society. It is hard to put humans into a pure theoretical model because we do not act rational. There is nothing wrong with having theoretical models but to assume that human beings can fit into a pure model and that the outcome will be exactly what the model says it will be is unrealistic.

America is not a totally capitalistic society nor will it ever be and it will never be a completely socialistic society even though we have programs like Social Security, Obama care, disability, food stamps, and a few other programs. We as a society have to strike a balance between capitalism and not letting the masses fall into destitution. Full employment and workers earning livable wages while encouraging capital investment in the long run is the answer. What built the US was the rising middle class and what would destroy us is a continually erosion of the middle class. Striking a balance between capitalism and society as a whole is what is necessary.

@Jeff S

Capital is like gravity---it's a law of nature.

You cannot change human nature any more than you can change the laws of physics.

If I see a kid fall from his bike on the sidewalk and skin his knee (he had an encounter with gravity), I can say that I don't LIKE what happened to the kid, but it won't change gravity one iota.

I can tell the kid not to fall off his bike again, but he probably will. His human nature compels him to behave that way.

I can regulate capital to the extent that the Soviets did during the post war era and eventually all capital disappears apart from real estate and timber. Less than 20 years after the Soviets collapsed capital has returned to that place and today Russia is a leading global entity again.

Because the Russian people never stopped being human, they wanted to exert their wishes in creative ways. Even the brute force of the gulags and the Soviet military-industrial state could not make it die.

We're talking laws of nature here Jeff.

@Lou, Trucker, papa jim and Jeff S,
Barriers to trade create inefficiencies in industry in which no one benefits.

Poor protectionist and regulatory barriers breeds more poor policy to defend the protectionist stance. This goes on and on. Just look at the US energy and vehicle industry stance.

This is a classic example of poor decision making for a quick fix to protect unions/corporation disguised as "in the national interest".

Products from China are mainly of good quality and will only improve and become more expensive.

As for the statement on capital. I think it's a balance between borrowings and savings that will make or break a country or individual.

Just look at the value of leading US stocks. These are unsustainable. Why? Because of the borrowings that lead to the asset values. Even look at the poor decisions being made through the investment of printed and borrowed money in developing nations.

I don't want to think about where we will be in a decade.

Just look at the value of leading US stocks. These are unsustainable. Why? Because of the borrowings that lead to the asset values. Even look at the poor decisions being made through the investment of printed and borrowed money in developing nations.

@Big Al

Stocks properly go up or down when investors believe that future income streams (or not) become better understood. Unstable currency fails to deliver the key buying and selling signals that investors need to perform their important work.

@papa jim—Give me a specific example of a real country where there is pure capitalism that is unencumbered by government regulations and by human nature. I doubt if you can, because even in Switzerland they have many regulations. The Swiss will be more than welcome to bank your money but you cannot do anything you want in their country. Hong Kong is the same way in that you can invest your money there and buy anything you desire but you don’t have total freedom to do whatever you want and they have regulations more cumbersome than the US if you want to do business there. Capitalism might be objective but humans are not. It is very hard to operate in a vacuum. The US has much more opportunities than most countries in the flow of capital. Even with that we will never be purely capitalistic. To understand the principles of capital and the flow of capital is necessary but to assume that an economy can be a pure form of capitalist principles not subject to government interference and human biased is naïve. If we as a country were purely capitalist we would not have had government intervention when GM and Chrysler were failing. In pure capitalism there is no such thing as too big to fail. I am not arguing against capitalism, I am just stating that there are not pure and true forms of capitalism. Having said that it does not mean that the principles of capitalism are not valid it just means that it cannot exist in a pure form.

@Jeff S

you have used the phrase "pure capitalism" several times. Is there any other kind?

This isn't a philosophy or a religion! You either is or you ain't.

It really does not matter what judges, politicians, attorneys, governments (or you and me) say or do about this because capital will always seek the most fertile soil.

Which is why I compared it to gravity. Unlike gravity, the rules governing capital do not exist for birds, chimps or whales--it is a totally human product.

Just like gravity it is neither cruel nor forgiving. It just is.

@papa jim--Pure capitalism would not support any intervention of government in anything. You still have not named any country that practices pure capitalism. It is more likely to find a socialist or communist country but even that is very rare. When has the US been purely capitalistic--possible the turn of the last century? Even in the period before the Civil War the North assessed large tariffs against imported farm implements and textiles from countries such as England. A major part of the conflict between the North and South was the South was trading directly with England getting higher prices for their cotton and in turn paying cheaper prices for English made farm implements. Having slave labor also helped lower the cost of cotton production in the South.

Yes there is capitalism but you have yet to name me one pure capitalistic country with no government regulations. There can be countries who have a more favorable environment for investments but there are no pure capitalistic countries. Lowering or eliminating tariffs like Hong Kong has done makes for a more competitive market but they have regulations that make it much harder for outsiders to do business.

@Jeff S

You are talking about a different topic.

Regulation and policy are about government. Trade is about capital and economies. There are many points of view about government and policy, but talking about trade and capital is about human nature. Some areas of policy favor capital and some don't.

As I noted several times, the creation and movement of capital behave like a physical force. Always have.

@papa jim--I am not going to argue about the flow of capital, capital will flow where there are less restrictions. The times of a total capitalistic society will not happen, but we as a country can do more to keep investment in the US. The corporate tax rate could be changed from being one of the highest in the World to be at least competitive with other countries such as 10% or less. That would not solve all of our problems but at least it would give corporations and investors more of an incentive to keep investments in the US.

@Trucker

Thanks for your comment. I'd just point out that avoiding restrictions to capital and trade is not enough.

The pathetic African nation of Zimbabwe probably has few restrictions on capital but nobody in their right mind is investing there because the human capital is sadly lacking.

Like with the city of Detroit, Zimbabwe has lost a generation of bright young people who had the sense to look around and make tracks for higher ground.

But I take your point about the perfect being the enemy of the good. I'm not proposing that a perfect and harmonious relationship with investors can be built in the US today.

Taxing income as much as our government does means that the most productive citizens and the most productive companies are being dis-incentivized.

In the meantime, a whole generation of young people here are wondering how to pay off their school loans in an economy that has steadily lost ground as a producer of good quality jobs.

The most creative of that group will be wondering whether or not to invest here--or elsewhere.

@papa jim--That is precisely the point, you need to look at the skill level of the workers as well. Just getting a college degree is not enough, it is what that degree is in and the skill level. Too many young people are getting a degree in Arts, Humanities, or a general degree like Business Management. A favorable tax system along with a skilled workforce and not too many regulations are favorable to capital growth.



The comments to this entry are closed.