Trucks And Tariffs: Did They Cause GM And Chyrysler To Fail?


There’s a post on the Economist Free Exchange that talks about America’s love affair with light trucks and how this came to pass.

Here are the authors thoughts:

Yet in parts of America, it does seem that most vehicles on the road are American-made pick-up trucks. I always figured Americans favoured domestic trucks because the US had a comparative advantage in their production or the buyer had a sense of patriotism. I once attended a monster-truck show and observed lots of booing directed toward the lone Toyota among all the Fords and Chevys (naturally the Toyota was cast as the “evil truck”).

But Ryan Avent points us to something far more disturbing than an angry mob of monster-truck fans: import tariffs. Apparently there exists a 25% import tariff on “motor vehicles for the transport of goods”. Regular cars only face a tariff of 2.5%. It is no wonder American carmakers have become so specialised in making large, fuel inefficient vehicles.

There exists a cultural identification with large American trucks, the preservation of which may have been the justification for the tariff. Ironically, though, it may also have been the undoing of the American car industry. 

So, I followed the link over to Ryan Avent’s post to see what he had to say. As advertised, he cited the tariffs that apply to imported light trucks and drew this conclusion:

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.

Now their entitled to draw their own conclusions but there’s a little more to this story than the tariff. The first thing you have to know about this is that light trucks doesn’t mean just pick-up trucks, It encompasses most SUV’s and mini-vans. The second thing is that not only were the American manufacturers blessed with a protective tariff but the light truck market was subject to significantly lighter CAFE standards than passenger cars as well as less stringent emission requirements. 

Why does this matter? Because when you start reviewing the history of Detroit’s last 40 years you begin to see an unholy alliance among the manufacturers, government and the UAW. The regulations regarding trucks are but a part of a pattern of loopholes and concessions granted by Washington to prop up an industry that absent them could not survive. They worked until a major recession occurred and exposed the industry for the Potemkin village that it is.  

Holman Jenkins had an excellent article on the subject. I recommend you read it in its entirety but here are his thoughts on the tariff and CAFE exemption:

Chrysler was bailed out directly with government loan guarantees; the Big Three all benefited from Reagan era “voluntary” quotas on Japanese imports to prop up domestic car prices. But these were temporary fixes. For more than 40 years, a 25% tariff has kept out foreign-built pickup trucks even as a studied loophole was created in fuel-economy regulations to let the Big Three develop a lucrative, protected niche in the “passenger truck” business.

This became the long-running unwritten deal. This was Washington’s real auto policy.

For three decades, the Big Three were able to survive precisely because they skimped on quality and features in the money-losing sedans they were required under Congress’s fuel economy rules to build in high-cost UAW factories. In return, Washington compensated them with the hothouse, politically protected opportunity to profit from pickups and SUVs.

Doesn’t sound much like what you hear incessantly from your Congressman, about how Detroit’s problems are all due to management “incompetence” in deciding to build “gas guzzling” SUVs, does it?

But then uncertain at this point is whether any legislator (other than John Dingell) remembers or grasps anymore Congress’s own role. Yet the muddled, covert bailout continues: Washington’s latest fuel-economy rules actually reward manufacturers for increasing the size and weight of some vehicles. The truck tariff remains in place. The fuel-mileage rules continue to protect the UAW monopoly by discouraging the Big Three from shipping small-car production offshore.

The bankruptcy of Chrysler and likely bankruptcy or its equivalent of GM are nothing more than a point along the curve. I think it’s pretty clear that cultural identification had little to do with the tariff. Ryan may be somewhat correct in his conclusion that reliance on trucks led to the demise of GM and Chrysler but only somewhat. Realistically neither the manufacturers nor the union had any choice but to rely on trucks since they refused to align their cost structure to allow for the profitable production of passenger vehicles. 

This is really a story of greed. Of manufacturers and a union that surely knew of the dead end road they were on yet chose to stay there and enjoy the spoils in anticipation of the final bailout. Now they have it. 

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