GM Goes To Bat On Behalf of Domestic Automotive Industry
WASHINGTON (Sept. 28, 2005) - General Motors Corp. (GM) recently met with U.S. lawmakers to explain how Japan's currency manipulation has severely impacted the U.S. automotive industry - from manufacturing plants to service and repair shops. The company asserts that Japanese trade practices have provided Japanese automakers a huge competitive advantage in the U.S. market and caused more harm to the American domestic industry, in the past and today, than trade with China.
In testimony before the House Committee on Ways and Means, Mustafa Mohatarem, chief economist for GM, provided an overview of the U.S. automobile industry for the congressmen. He made specific comments regarding how Japan's manipulation of its currency, by keeping the yen artificially weak against the dollar, has impacted the domestic industry. The concerns come in the midst of Congress also considering 27.5 percent tariff legislation in regards to similar claims about China.
With 2005 vehicles sales likely to exceed 17 million in 2005, Mohatarem said, "Given the strength of auto sales, one would think that U.S. auto manufacturers, auto suppliers and their workers would be celebrating. But we are not. Despite the strong sales, U.S. auto manufacturers and suppliers are struggling to turn a profit; autoworkers have been laid off; credit ratings for U.S. auto companies have been downgraded; and many suppliers are faced with bankruptcy."
Mohatarem acknowledged that U.S automobile and parts manufacturers have their own internal problems to address. Yet it is important to note that American companies, like GM, are doing fine in international markets, whereas it is in their own domestic markets here in America that huge losses are seen year after year.
"No industry better exemplifies the effects of Japan's imbalanced, mercantilist post-war trade policy than the automotive sector," Mohatarem explained. He then addressed two ways that Japan was creating distress for American firms: First, the legacy of Japan's unfair and mercantilist trade policies; and second, the initiation and impact of Japan's sustained currency manipulation.
"Let me assure you, when it comes to working to secure the health and viability of American auto jobs and the future
well being of this industry, there is nothing more important to consider than the U.S.-Japan relationship."- Mustafa Mohatarem, chief economist for GM
China may be tomorrow's problem, but today, and for a long time, it's Japan.
The success of Japan's postwar export-based economic growth model has long been discussed in business, universities, government trade circles, as well as in Congress. "The reality is that Japan built and grew its economy based on exports, and has fueled that export machine by restricting demand in its domestic market," Mohatarem testified. It is a mercantilist model that others such as South Korea and China have sought to follow, and it has succeeded, in large part, at the expense of its trade partners, he added.
Like a teeter-totter, it's no fun always being on the bottom. Someone has to pay, and in this case, the major trading partner for both nations for years has been America. It didn't have to be this way, Mohatarem said. His testimony is supported by data from the U.S. Census Bureau (USCB) and an April 2005 Congressional Research Report written by Stephen Cooney.
In 2000, the overall U.S. trade deficit worldwide was nearly $370 billion, while the deficit with Japan only was $82 billion and that with China only was $84 billion. Note that 2000 was the year that trade with China first surpassed trade with Japan. By the end of 2004, the overall deficit had near doubled to $666 billion, the deficit with Japan had dropped slightly to $75 billion, but the deficit with China had exploded to $162 billion, the largest single deficit between two nations ever. The difference is easy to see, and hence the bulk of federal, economic and media attention on China. To the automotive sector's detriment, however, the overall data masks the impact of Japan.
Rather than look at overall trade deficits that can lose any single industry like a tree in the forest, the dilemma of the automotive sector's unseen story can be found in breaking out the data that encompasses only vehicles and auto parts. In 2000, the overall U.S. automotive trade deficit was $117 billion, while the specific automotive trade deficit with Japan was $44; data for China wasn't even categorized by the USCB or the Department of Commerce. By 2004, the U.S. automotive trade deficit had risen to $140 billion, and while the automotive deficit with Japan was $44 billion, the automotive deficit with China was listed at a much lower $3 billion.
In summary, while the overall trade deficit China has increased, the $3 billion automotive deficit with China is small. Additionally, the automotive deficit with China is dwarfed by the automotive deficit with Japan. Furthermore, the automotive deficit with Japan has been at high levels for many years, unlike that of China. It is self-evident in seeing the raw numbers that the automotive industry is impacted much more dramatically by the size of and ongoing deficit with Japan. In fact, the automotive sector's deficit with Japan is the largest for any industry sector for any nation in the world, the GM economist emphasized. Downstream, that leads to automakers, parts manufacturers, distributors and aftermarket shops suffering. And, ultimately, it ends up squeezing the pocketbooks of the American consumers as well, who pay taxes and elect government officials.
Mohatarem urged the committee to understand that Japan is the primary threat to the health of the American automotive sector. "Let me assure you, when it comes to working to secure the health and viability of American auto jobs and the future well being of this industry, there is nothing more important to consider than the U.S.-Japan relationship." And this is their case, despite past trade agreements and political pressure that effectively had little net effect.
Smoke and mirrors? In an effort to address the problems in automotive trade in1995, the United States and Japan signed a five-year agreement intended to address the huge structural imbalance in our automotive trade by improving the access of U.S. automakers to the Japan market. The agreement set out a specific course of action that included a detailed set of measures that the Japanese government and industry agreed to take to remove the labyrinth of non-tariff barriers that had been used to successfully keep the market closed to American auto and parts makers.These non-tariff barriers included the interlinking collusive Japanese business practices known as "keiretsu," intricate and nepotistic relationships between Japanese auto manufacturers and their family of suppliers. As well, Japan eliminated restrictions for distribution arrangements between Japanese manufacturers and their dealers that had prevented Japanese dealers from establishing contractual relationships with U.S. and other foreign manufacturers. Additionally, Japan modified regulations that had served as de-facto barriers to American competition, such as the regulations for safety and emission standards that, by any objective standard, were clearly designed for the convenience of Japanese automakers while making it expensive, difficult and very time-consuming to sell imported cars and parts in Japan.
"We have no way of knowing whether Japan's commitments made in 1995 to remove its web of non-tariff barriers restricting access to its auto and auto parts markets were met."- Mustafa MohataremOn the surface Mohatarem explained, it seemed a good agreement, and resulted in a modest increase in traceable sales for U.S. auto and auto parts companies in Japan. But just as the U.S. companies began to undertake the extensive capital investments to test these commitments of the agreement and make inroads, Mohatarem explained how the Japanese government shifted to a new policy direction that undermined the agreement and eroded the trade landscape - currency manipulation.
The weapon of choice Mohatarem told the committee, "With the progressive lowering of tariffs and other barriers to trade, exchange rates have taken on a larger component of competitive advantage."Immediately after making commitments in the 1995 U.S. - Japan Auto Agreement, the Japanese government in 1996 began to use massive financial resources and reserves to intervene in currency markets to deliberately manipulate the value of the yen in order to weaken its value in order to promote Japanese exports, testified Mohatarem. The impact of this was to make U.S. automotive imports into Japan significantly, if not prohibitively costly to Japanese consumers. In pursuing this weak yen policy throughout the late l990s - the very duration of the auto trade pact - Japan effectively undermined the value and commercial significance of the agreement for American manufacturers. Mohatarem said, "As a result, to this day, we have no way of knowing whether Japan's commitments made in 1995 to remove its web of non-tariff barriers restricting access to its auto and auto parts markets were met." In essence, what was conceded in one hand was taken back with the other.
Mohatarem claims that Japan's weak yen currency a policy has given its exporters a huge subsidy and competitive advantage in the U.S. market, causing significant harm to U.S. manufacturers. He pointed out that one clear sign that a country is manipulating its currency is a substantial increase in its foreign currency reserves, which occurs as it buys and holds U.S. dollars. "Japan has seen a massive increase in its foreign currency reserves, growing from $345 billion in July 2000 to $840 billion in July 2005." This amount is confirmed by USCB data and reports to the Federal Reserve.
His assertion is corroborated in a January 2005 international finance discussion at a meeting of the board of governors of the U.S. Federal Reserve, where Alain Chaboud, economist with the International Finance Division of the Federal Reserve, and Owen Humpage, economic advisor to the Federal Reserve Bank of Cleveland), presented a paper titled, "An Assessment of the Impact of Japanese Foreign Exchange Intervention: 1991 - 2004." The authors stated that, "Since the early 1990s, the monetary authorities of the major industrialized countries, with one notable exception, have greatly curtailed their foreign-exchange interventions. That exception has been Japan, where the Ministry of Finance has continued to intervene frequently - and at times massively - in foreign exchange markets."
They provided data showing that the Japanese Ministry of Finance intervened 340 times between 1991 and 2004, purchasing U.S dollars 90 percent of the time, in an attempt to counter or slow the appreciation of the yen. They also noted a trend towards the end of the period, wherein the frequency of the interventions lessened, but the volume of the currency trades increased dramatically, and eventually became all purchases of U.S. dollars.
One further bit of intrigue about currency trading was noted by the authors: Up until 2003, Japanese currency trades were made directly on Japan's behalf by foreign exchange traders, trades that can and are reported in the press, enabling a public record. Beginning in 2003, a new tactic was employed by Japan. The authors stated, "Importantly, the [Japanese] Ministry of Finance requested that the Bank of Japan, its agent, modify its usual mode of operation to make its operations more stealthy."
Currency trades began to be made by the Bank of Japan indirectly through smaller banks, who placed orders with currency traders in the banks' names, a practice that cloaked these trades by Japan from being seen, tracked and reported publicly. In addition, the self-interested Japanese Ministry of Finance took on the responsibility for reporting trades to the public, rather than the independent, impartial sources of the past.
The yen's true value is in the 90 to 100 yen/dollar range, Mohatarem stated. As a result of Japan's massive and disruptive currency interventions, the value of the yen fell from 101 yen/dollar in January 2000 to 136 yen/dollar in 2002. Market forces and U.S. government statements helped to push the yen to slightly more reasonable levels of 105 yen/dollar in early 2005.
Domestic automakers and the entire supply/service chain deserve more considerationand action by administration authorities and representatives,
says Mohatarem.
He told the committee that since then, due in part to ongoing "jawboning" and verbal intervention by high-ranking Japanese officials, the yen is currently in the 112 yen/dollar range. "The damage caused to key sectors of the U.S. economy has been deep and in many cases, permanent." Such is the case with the automotive sector, with bankruptcies, layoffs and impact on American lives.
Artificial exchange rates give foreign auto and parts makers a real competitive edge, which has impacted the American domestic automotive industry. "Japan's artificially weak currency provides a significant per-vehicle cost advantage that amounts to an outright annual subsidy of between $3,000 for small car to $12,000 for a luxury sedan or SUV for every vehicle exported to the United States."
As well, cars produced in America by Japanese companies also benefit heavily from this subsidy because of their high use of imported parts and components, which impacts domestic parts suppliers just as dramatically. He stated that Japanese automakers have used this cost advantage in many ways, such as a dramatic increase investment in technology and production worldwide, enhanced spending on research and development and improving incentives and advertising to boost market share.
For those who may question whether the exchange rate policies of our trading partners affect U.S. competitiveness, Mohatarem said earnings statements just released by Japan's automakers answer that conclusively: "Toyota, Nissan, Honda, Subaru and Japan's other auto companies announced last week that they earned nearly $1 billion in unanticipated windfall profits in the first half of fiscal year 2005. These profits were due exclusively to the artificial weakness of the yen." Much of that windfall came from U.S.-based sales.
According to the Japanese Nikkei news service, the breakdown of these additional weak currency-driven profits include $452 million for Toyota, $253 million for Nissan and $127 million for Honda. "With no sign that the Japanese government will change its exchange rate policy to allow the yen to rise to its true market level, the full-year windfall provided by the Japanese government's currency policy could likely be a check for $2 billion written to Japan's automakers."
Is it any surprise then that the relative competitive performance of the Japanese and U.S. auto companies is so dramatically different? Armed with a significant per-vehicle subsidy, the Japanese companies have embarked on a period of rapidly escalating profits, which they have directed toward increasing market share in the United States.
Where there's smoke, there's fire Mohatarem pointed out to the members of Congress that Japan's manipulation of its currency through intervention trades, to artificially keep the yen weaker relative to the dollar, runs counter to International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) agreements, causing major distortions in U.S.-Japanese trade. He also reminded the members that the Omnibus Trade Act of 1988 required the U.S. Treasury to monitor currency manipulation by other countries and to take appropriate advantage for their products.David Loevinger, deputy assistant secretary at the U.S. Treasury, also testified before the committee. He explained the government's understanding for the economic problems in Japan over the past decade - notably the collapse of its economy from asset overvaluation, the fall of its antiquated and rigid banking industry and low economic growth rate.
He also confirmed in his testimony on exchange rate policy that, "Japan has intervened in the foreign exchange market in the past, sometimes in large amounts. We have discussed foreign exchange market issues with Japanese officials, and they are fully aware of our views that the world economy works best with free trade, free flow of capital and flexible exchange rates for large economies." He added, "Japanese authorities have not intervened in the foreign exchange market since March 2004."
When criticized by committee members in questioning that the government had not been tough enough with the trade practices of Japan, Loevinger responded, "We hear the message."
When Loevinger testified that Japan hadn't intervened in the currency markets since early 2004, Chaboud and Humpage's revelation of Japan's switch to stealthy trading intervention and state-controlled, rather than publicly tracked currency trading reports comes to mind. Is it possible that Japanese currency trading has continued without being caught, let alone proved?
The automotive industry is the third highest valued industry in America, according to the Automotive Aftermarket Industry Association (AAIA). Mohatarem asserts that the domestic automakers and the entire supply/service chain deserve more consideration and action by administration authorities and representatives.
So this leaves one important and obvious question that wasn't asked of the Treasury official. Having "heard the message," what actions will the Treasury and the federal government be taking in the coming days to resolve the problem?
(Sources: U.S. House Ways and Means Committee, Census Bureau, U.S. Federal Reserve and U.S. Treasury)
