Global Trade Issues

Five questions with…

Five questions with…

Governor Matt Blunt, President, American Automotive Policy Council.

Today’s Topic: Detroit, Japan and the Trans-Pacific Partnership: Legitimate Market Opportunity or Invitation to Disaster?

Governor Matt Blunt is the President of the American Automotive Policy Council and the former governor of Missouri. He was elected Missouri’s 54th governor in 2004, carrying 101 of the state’s 114 counties. As governor, he erased a $1.1 billion budget deficit, cut taxes, enacted lawsuit reform, fostered a business climate that created over 70,000 new jobs, and increased education funding by $1.2 billion. In 2011, its three member companies appointed him AAPC president. In selecting Gov. Blunt, Chrysler Group LLC, Ford Motor Company and General Motors Company noted his leadership as governor of one of the U.S.’s top automobile and component producing states.

As part of our continuing online series examining opportunities and barriers to free trade among global markets on November 5th HUMAN EVENTS caught up with Gov. Blunt. We talked about the Trans-Pacific Partnership, Japan’s interest in joining the TPP, and what their entry into the agreement might mean for the U.S. auto industry and the broader economy.

HUMAN EVENTS: Gov. Blunt, it’s a pleasure and a privilege to welcome you to this week’s “Five Questions”. U.S. automakers have traditionally favored large regional trade pacts, such as NAFTA, and seem to take a generally supportive view of the Transatlantic Trade and Investment Partnership (T-TIP), the European Union variant of the TPP. What is it about the Trans-Pacific Partnership in particular that gives Detroit pause?

Matt Blunt: Well you’re correct that the American auto industry is committed to free trade. In fact, we’ve supported every free trade agreement that America currently has – every single one of them. We’ve been ardent supporters of many of those, such as the NAFTA, which we think has helped make the North American continent more competitive in the global economy.

Similarly, we believe that the Trans-Pacific Partnership has real potential to open up new markets, and that if we have a reasonable playing field, U.S. manufacturing, and certainly the U.S. auto sector, can compete with anybody in the world.  The fact is, we export more cars and parts than anything else from the United States – it beats aerospace, the second-highest sector, by billions of dollars. So we’re committed to exports, we’re committed to trade; we think the TPP has tremendous potential to open markets that today are currently closed.

That said, we do have concerns about the addition of Japan to the Trans-Pacific Partnership, given its decades-long history as a closed market. It’s essentially the most closed automobile market in the world. If you were to look at all the OECD (Organisation for Economic Co-operation and Development, an international economic organization of 34 countries founded in 1961 to promote economic growth and world trade) economies you’d find that the average important penetration is about 45%, and that’s in fact about where the United States is – 45% of our vehicle sales are imports, right in line with that average.

In Japan on the other hand, 94% of automotive market share is held by the Japanese auto manufacturers – only 6% import penetration – which really makes Japan an outlier in this crucial area. And they use a host of non-tariff barriers (NTBs) to keep their marketplace closed – regulatory hurdles in particular, and a number of concerns we’ve outlined to the United States Trade Representative.

But one of the most significant NTBs is clearly Japan’s manipulation of its currency. We’ve recently seen a further devaluing of the yen – essentially a 30% decline – and that’s had a real impact.

HE: For the edification of our readers, when a trading partner like Japan pursues a policy of currency manipulation, such as the current government’s weak yen strategy, how does that impact Detroit and the broader U.S. economy?

MB: It affects us in three key ways. What they’ve done in this bout of currency devaluation is essentially devalue the yen by about 30% — so on the typical vehicle, that’s about $5,700. You don’t have to know a lot about the auto industry to know that’s far more than the industry would expect in terms of profit margin.

It’s a massive subsidy, and as I alluded to earlier, it affects us in three ways. One, it affects us in Japan – it’s just a further impediment that keeps the market closed and keeps it as a sanctuary market for the Japanese auto manufacturers. This has global implications because of the scale necessary to be competitive in the global auto sector. Two, it affects us here in the United States. You see it in a number of ways: you certainly see it in the profit the Japanese auto manufacturers are capturing that has nothing to do with the quality of their product, nothing to do with their business model.

It’s really entirely driven by the weak yen and it’s billions of dollars in profits that they’re capturing, and it’s also translating into cost reductions, which is the third way the weak yen strategy puts us at a significant competitive advantage. As the yen value was plummeting, Nissan reduced their prices by 23%! That gives them a real competitive advantage in this market, and it’s not a fair advantage because again, it doesn’t have anything to do with the quality of the workmanship or the quality of the product.

HE: So you’re competing not only with Nissan, and with Toyota, but thanks to the weak yen strategy you’re also competing with Japan, Inc.

MB: Absolutely, and it affects us in markets where we compete head-to-head. As I mentioned, we export more cars and parts than anything else. The Middle East is a great example. It’s a large market dependent on imports. We export a lot of cars to the Middle East, and we’re competing head-to-head with our Japanese competitors, and essentially they’re getting a $5,700 export subsidy that we don’t have access to.

So it has real implications in terms of profits, and most significantly it impacts jobs. The Peterson Institute, which is a non-partisan, well-regarded public policy institute in Washington, has said they think that globally, the United States suffers the brunt of the penalty for other countries’ currency manipulation, costing the U.S. somewhere between one and five million jobs. This bears special emphasis: these are likely millions of jobs lost due to the cumulative currency manipulations of other countries, including Japan.

HE: And when you yoke this weak yen strategy to endemic auto manufacturing overcapacity, you’ve got in Japan a near-perfect, highly protectionist export engine that leverages every unfair competitive advantage inherent in this monetary policy.

MB: There’s no question about that. Most people are unaware of the overcapacity that exists in Japan. Essentially they have the capacity to produce 11 million vehicles, they produce nine million vehicles and it’s a five million-car market. They need a weak yen to sustain this export-driven economy that unfairly thrives at the expense of other trading partners.

Clearly, Japan is refusing to do what we have done. In the United States, Chrysler, Ford and General Motors went through a very challenging restructuring and had to make many difficult decisions as a result. They ultimately right-sized, brought their capacity in line with demand, and now they’re growing and continuing to increase their exports – this year they’re on track to export over a million vehicles from the United States into other markets – and they’re adding jobs. But again, the Japanese are really refusing to do what we’ve done, and that’s to address the fact that they have this tremendous overcapacity in the auto sector and they are maintaining that overcapacity at the expense of other trading partners.

HE: How crucial, then, is the inclusion of strong, unambiguous and enforceable monetary policy disciplines into the final TPP agreement to make Japan a welcome participant?

MB: We think it’s absolutely vital – and just to be clear, we’ve always been advocates for a currency discipline in the Trans-Pacific Partnership, even before Japan joined the negotiations – but when they joined it became even more critical that we establish a strong currency discipline to insure that nobody got the benefit of the trade agreement if they were manipulating their currency to undermine their fellow partners.  And because of the magnitude of currency manipulation’s impact to swamp all of the benefits of a trade agreement we think it’s absolutely vital for strong, enforceable currency disciplines to be firmly in place.

TPP, if it is truly to be a world-class, 21st century trade agreement that addresses tariff barriers and non-tariff barriers, has to eliminate every instance of currency manipulation, which is the biggest impediment to real free trade. I’ll say it again: it’s vital.

HE: Governor Blunt, your organization, the American Automotive Policy Council (http://www.americanautocouncil.org), has been highly vocal (http://www.americanautocouncil.org/trans-pacific-partnership) in articulating your members’ concerns about Japan’s entry into the TPP. How would you characterize your progress to-date in educating and enlisting the support of the White House and Members of Congress on the importance of making non-tariff barrier issues like currency manipulation a critical component of the deal?

MB: I think we’ve had real success. Clearly we’re still working with the Administration and trying to convince them that this is a necessary provision in a successful TPP. We’ve had bipartisan majorities in both the U.S. House and the U.S. Senate sign letters that unambiguously call for a strong currency discipline.

For example, 230 House members – a firm majority – signed a letter asking the President to address currency disciplines in the TPP. In the U.S. Senate we had sixty United States senators – Republicans and Democrats – come together to send a message to the U.S. Trade Representative Ambassador Michael Froman, and Treasury Secretary Lew, that they thought it was really necessary if you’re going to have a successful agreement that you have to address this tremendous impediment to free trade. You know, in an era when Washington doesn’t agree about much, they clearly agreed that it was important to address currency manipulation in the Trans-Pacific Partnership.

HE: So it’s fair to characterize your position as “there’s no rush, let’s hash it out, put the requisite monetary policy disciplines in place and really get it right”.

MB: Oh absolutely. The TPP could easily stand as a model for other trade agreements, and clearly, other economies are interested in joining the Trans-Pacific Partnership even after the negotiations are complete. I firmly believe we really are going to establish a framework in the TPP and consequently, we shouldn’t rush into a bad agreement. Sometimes we get so excited about securing free trade agreements that we agree to things that really undermine free trade.

We want free trade that works — as a conservative I believe it’s important that we have free trade that works, and including a currency discipline is intrinsically vital to that effort.

HE: HumanEvents.com readers are grassroots conservative activists fundamentally supportive of free markets and fair trade. What can our readers do to convince the Obama Administration and Congress that Japan needs to level the playing field for U.S. auto manufacturers and related stakeholders in the value chain such as suppliers before it should be allowed to join the TPP?

MB: Reaching out to their Members of Congress is just a critical step they can take and let them know this is a priority for them. In many cases you’re going to find that your Member is already on board and demonstrating real leadership on this issue; in other instances we’re still making the cases that you should include such a discipline.

Grassroots outreach is so important because, at the end of the day, this really comes down to an issue of basic fairness. You shouldn’t be able to gain the benefits of a trade agreement and deny those same benefits to other countries because you manipulate your currency. So, we think it’s vital that markets set the rates for currencies, not government. You shouldn’t have government intervention determining what a currency exchange rate is. The marketplace should do it. So let the market work and don’t allow countries to intervene.

HE: As you pointed out earlier in our discussion, Detroit made some very hard choices and went through a fundamental restructuring. Hard choices were made and the U.S. auto industry emerged leaner, stronger, and better able to compete in global markets – but the playing field has got to be level. Perhaps the time is right for Japan to take a similarly hard, clear-eyed look at its weak yen strategy and ask, “is this still necessary, and is this really something that’s going to be in our best interests going forward?”

MB: It’s time. Often in trade agreement negotiations, if they really are about free trade, the process will prompt countries internally to do exactly those difficult things. A well-negotiated Trans-Pacific Partnership could open up markets, it could lead to export growth for the United States and the other participating countries, and lead to the creation of jobs here in the United States and throughout the Pacific Rim.

A poorly-negotiated TPP will do none of those things. This is why it’s so important that we get this right, given that it’s going to be a standard going forward, and given the size of the economies participating. The Trans-Pacific Partnership will cover forty percent of global trade representing tens of trillions of dollars in trade value. This really is an opportunity to get free trade right in the Pacific Rim.

HE: I want to thank our guest for this week’s “Five Questions,” Gov. Matt Blunt, President of the American Automotive Policy Council, for helping to shed some much-need light on this complex and tempting yet still challenge-riddled trade issue. Gov. Blunt, thank you.

To learn more about this issue HumanEvents.com readers are encouraged to visit the American Automotive Policy Council’s Trans-Pacific Partnership online resource at http://www.americanautocouncil.org/trans-pacific-partnership and follow the issue on Twitter @USAutoCouncil

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