How Trucks and Tariffs Contributed to GM, Chrysler Failures

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 author's 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 they're 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.

Comments

[babyray:]

Is there even a mention of other countries tariffs that by far outpace any that the USA has in existance?

May 06 10:51 AM

[Tdot:]

Whatever the "environmental conditions" were in terms of tariffs, consumer wants and needs, governmental regulations, fuel prices, brand loyalty, peer pressure, etc., it essentially boils down to something akin to a Natural Selection process which drove automakers to build what they built. If consumers did not want and/or need big hauling pickups and SUVs, they would not have spent good money for them.

The "dinosaurs" also adapted and grew to fill out their environment, and flourished for 160 million years before being finally wiped out (and perhaps nearly so, several times through the eons) by global calamity and massive environment change. The Big American Trucks experienced something similar last summer when fuel prices went north and the rest of the economy went south, and the automakers faced extinction.

The point is, The Trucks were bred into their environment, and thrived in it, and then were nearly wiped out by it. That same environment will determine what happens next. If the automakers attempt to push something new into that environment that is not suited for it, then that new thing, just like the Edsel, will die quickly and loudly, possibly taking down the automaker with it.

Ultimately it is up to the Consumers to decide what they prefer, and thus what will thrive in this environment. The automakers that anticipate and provide it will thrive, they others will die out. Simple natural selection.

May 06 11:12 AM

[WayneS:]

When I go past a Toyota dealership, all I see are pickups and SUVs.
They must be (were) making a profit on these as this is how they are financing their hybrids.
As long as gasoline is cheap, Americans will buy pickups and SUVs.
Gasoline gets cheaper every year. A stiff tax is the only way people will buy the economical vehicles they outwardly claim they want.

May 06 11:58 AM

[Mister Jimmy:]

Toyota built a Tundra pick-up truck plant in Texas, and is sorry they did. The construction tradesmen aren't buying, and the average consumer has abandoned the segment. Add to it that the Tundra had a design problem with its crankshaft that caused a number of failures and its easier to see why the remaining market for pick-ups prefers Ford, Chevy, and GMC.

May 06 12:19 PM

[User 62010:]

Lets not forget how the Asian companies get actual support from their governments in negioating trade agreements etc. All kinds of tax credits and breaks. Ask the electronics and the machine tool industries how effective they are. And those same countries keep their currency artificially low to ensure an economic advantange. Yea, lets bust the unions trying to provide a good life for American citizens, instead of filling the pockets of greedy CEO`s.

May 06 12:23 PM

[Blah, blah,...:]

This also fails to note that cars are bought on financing, and houses and commercial properties are built on financing, and people who work in construction drive pick-ups and SUVs almost exclusively. To lose sight of the fact that this collapse was due to the seizing of the credit markets chases a red herring. True, they were too reliant on trucks and SUVs, and true the tariffs were part of that. But they were able to generate huge profits with this product portfolio, until their reliance on these trucks and SUVs made them vulnerable during the run-up of oil prices, which destroyed their cash positions, then the cratering credit markets finished them off.

May 06 12:51 PM

[mycargets52mpg:]

Tom, I agree with your conclusion that this is a story about greed, and let me add, stupidity. Not surprisingly Jenkins, once again, is completely unhinged. Nobody forced Detroit to skimp on quality and features in their passcars. However, by going down that slippery slope, they first painted themselves into a corner and then lost credibility when they belatedly realized that pick-ups, etc. are not the road to salvation. How building crap is a forced outcome of any type of legislation is Jenkins' secret, however obsessed he might be with "government is evil". Other OEMs operating under the exact same set of rules decided otherwise, and are not sorry wrecks. His legislator rant is an insult to the reader, especially since Jenkins keeps listing all the flavors of idiocy GM, Chrysler, Ford engaged in. If that isn't management incompetence, than what is?

May 06 02:19 PM

[Miken:]

The theme of the article would be valid if the foreign producers had not failed so miserably in building full sized pick up trucks in this country, thus avoiding the tariffs. The Toyota Tundra, Honda Ridgeline, and Nissan Titan have all failed to sell adequately to reach the top ten in truck sales. Ford has sold 110,336 F Series trucks, GM has sold 124,501 ( combined Silverados and Sierras), and Chrysler has sold 64,522 Rams in the first 4 months of 2009. Each of the foreign manufacturers have sold less than 30,000 units for the same time period.

Actually, I did see a Ridgeline yesterday, it was the blue one.

May 06 04:03 PM

[Miken:]

Wayne:

They're sitting on their lots simply because they can't sell them. All three (Toyota, Honda, and Nissan) have tried without success to get into this market and failed.

Please see my other post above.


On May 06 11:58 AM WayneS wrote:

> When I go past a Toyota dealership, all I see are pickups and SUVs.
>
> They must be (were) making a profit on these as this is how they
> are financing their hybrids.
> As long as gasoline is cheap, Americans will buy pickups and SUVs.
>
> Gasoline gets cheaper every year. A stiff tax is the only way people
> will buy the economical vehicles they outwardly claim they want.

May 06 04:07 PM

[gejandsons:]

Many Toyata trucks & SUVs are made in USA plants


On May 06 11:58 AM WayneS wrote:

> When I go past a Toyota dealership, all I see are pickups and SUVs.
>
> They must be (were) making a profit on these as this is how they
> are financing their hybrids.
> As long as gasoline is cheap, Americans will buy pickups and SUVs.
>
> Gasoline gets cheaper every year. A stiff tax is the only way people
> will buy the economical vehicles they outwardly claim they want.

May 06 04:44 PM

[Mister Jimmy:]

mycargets52mpg, your statement "other OEMs operating under the exact same set of rules" reveals a lack of industry and economic insight that's simply too enormous to argue about. However, as I told you before, farmers, carpenters, and drywall installers cannot earn a living driving that same 52 mpg Japanese-subsidized phone booth that carries your sorry a** to and from a desk job every day. They need trucks, and prefer the American designed and manufactured brands.

May 06 04:58 PM

[mycargets52mpg:]

Hey Master Jimmy,
I drive a 9-year old German-engineered car, built in Mexico. New, it was cheaper than most full-size pick-ups, yet unsubsidized. As a trained economist, I follow the industry for a living. Your screaming fails to disprove my case, and how your post is supposed to enlighten anybody with some superior insight is a mystery to me. Please try and distinguish customer preferences from regulatory framework, and we may even have a meaningful discussion. Please try and filter your own biases and preconceived notions before you talk about "industry insight" because otherwise nobody will take you seriously.

May 06 05:12 PM

[barnraiser:]

So, if the tarriff is reduced to 2.5% in line with the passenger car, the price of the truck will go down? As a small business owner, I ought to know this! I will call my Congressman and Senator to work on this! The 25% tarriff may have helped the big three in the beginning, but the transplants have since produced them here...now, it stands that all the fat cat gets the extra bonus, and the small business gets hurt!

May 06 05:13 PM

[User 373847:]

I believe the 25% tariff only applies to light trucks made in South Korea, where their own regulations effectively restrict us from selling Anything there.
China only allows selling cars in country, that are made in country, and the plant must be half owned by a Chinese company.
Japan has numerous restrictions designed to stop the sales of any foreign cars, trucks, or motorcycles in their own country.
Several European countries have import duties on American vehicles of 25-30%
Often the reasoning of the countries that place restrictions on imports is that we sell our beef and grain there that is government subsidized, so they place tariffs on cars and trucks in return.

May 06 10:06 PM

[Paul Killinger:]

Lest we forget, it was only in the recent past that small trucks became full sized, and full sized trucks became mammoth. The future will belong to the automaker(s) who decide to build small trucks in the U.S. once more, as they always sold well.

May 07 11:45 AM

[billp37:]

Have you considered the effects of the University of New Mexico Japanese spy sting on the US auto industry?

www.prosefights.org/ja...

May 07 07:28 PM

[WayneS:]

On May 06 04:07 PM Miken wrote:
> Wayne:
> They're sitting on their lots simply because they can't sell them.

That is why I added (were) to my statement.

In response to mycarsgets52mpg, My Buick got over 100 mpg while I worked (I'm retired) because I carpooled with three other people. My first car, a 1960 Rambler averaged over 30 mpg. Chrysler makes a vehicle that gets 42 mpg that they sell in Europe. There is so much misinformation about American Auto Makers. The same propaganda has been repeated for 30 years. American Auto Makers are no worse or better than their foreign competitors in quality. From my own experience, I've had remarkably better luck with American vehicles than with foreign.

May 08 09:59 AM