No. 32 — August 18, 2000

 

Weekly Review

WHITE HOUSE EXPLORING OPTIONS FOR EXPIRING AUTOMOTIVE TRADE PACT
--- by Susan MacKnight

The transpacific automotive trade agreement, finalized in August 1995 (see JEI Report No. 32B, August 25, 1995), attracted more than its share of critics. Most vocal were those who attacked the hardball negotiating tactics employed by the Clinton administration, including its willingness to risk a trade war, to achieve improved access for imported vehicles in Japan, deregulation of the market there for repair parts and expanded opportunities for U.S. manufacturers of production parts to do business with Japanese car and truck builders, all within the White House's signature results-oriented framework. The naysayers also included trade and industry experts who claimed that the goals Washington unilaterally set for the five-year arrangement were nothing more than pipe dreams — even if General Motors Corp., Ford Motor Co. and Chrysler Corp. did everything right, Tokyo followed through on its commitments and Japan's automotive industry became less insular in its purchasing decisions.

What not even the most astute analyst could have seen at the time was how Japan's economic misfortunes would pummel its automotive market and industry. Sales of vehicles, both domestic and imported, already were well below the halcyon days of 1990 and 1991 when the trade pact was signed. However, they rallied in 1996, getting the agreement off to a strong start. U.S. optimism was short-lived, however. Purchases of domestic and imported makes alike virtually collapsed in 1998 and slipped further last year (see Table 1). Sales by Detroit not only were sliced in half within the space of four years, but they also were driven back to the level that had created all the pressure for a market-opening arrangement in the first place (see Table 2).
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Table 1: Registrations of Imported Vehicles in Japan, 1995-99

(in units)

1995

1996

1997

1998

1999

North America

143,232

147,683

102,226

62,644

59,876

Big Three

58,470

78,107

62,459

40,897

32,851

General Motors Corp.

26,870

43,726

36,838

26,759

22,421

Chrysler Corp./DaimlerChrysler Corp.

15,710

17,404

15,366

8,823

7,083

Ford Motor Co.

15,890

16,977

10,255

5,315

3,347

Honda of America Manufacturing, Inc.

50,694

47,893

29,968

8,750

15,596

Subaru-Isuzu Automotive Inc.

--

--

--

4,204

4,686

Toyota Motor Manufacturing, U.S.A., Inc.

32,899

20,152

5,566

4,085

1,267

Mitsubishi Motors Manufacturing of America Inc.

1,014

1,272

672

534

131

BMW Manufacturing Corp.

--

--

3,362

3,291

3,047

Other

155

259

199

883

2,298

Germany

156,766

184,536

177,510

148,995

157,967

Great Britain

30,138

30,852

31,952

19,415

17,075

Sweden

21,883

24,956

20,150

13,434

12,934

France

9,265

10,502

10,262

10,157

11,339

Italy

5,273

7,059

8,075

8,052

7,369

Other

21,605

21,937

14,707

13,172

11,665

Total Imported Makes

388,162

427,525

364,882

275,869

278,225

Total Domestic Makes

6,476,872

6,650,220

6,360,144

5,603,556

5,582,991

Total Registrations

6,865,034

7,077,745

6,725,026

5,879,425

5,861,216

Note: These figures cover cars, trucks of all sizes and buses. The more familiar statistics include only cars and light trucks. The difference between the two is particularly pronounced for General Motors Corp. (see Table 2). It largely reflects the fact that importers in Japan bring in GM-based conversion vans that they sell through their own distribution networks.

Source: Japan Automobile Manufacturers Association, Inc., Motor Vehicle Statistics of Japan.

Table 2: Registrations in Japan of Big Three North American-Built
Cars and Light Trucks, 1993-97

(in units)

1993

1994

1995

1996

1997

1998

1999

General Motors Corp.*

8,525

8,696

9,185

22,101

20,294

18,971

17,546

Chrysler Corp./DaimlerChrysler Corp.

5,699

13,601

14,504

16,170

14,432

8,318

6,377

Ford Motor Co.

5,111

11,953

14,422

14,713

8,853

4,426

2,689

Total U.S. Makes

19,335

34,250

38,111

52,984

43,579

31,715

26,612

*The 1996 sales jump largely reflected the January start of marketing by Toyota Motor Corp. of a designed-for-Japan Cavalier sedan.

Source: Japan Automobile Manufacturers Association, Inc., Motor Vehicle Statistics of Japan.

Japan-bound exports of U.S. production and replacement parts also received an initial bounce from the agreement before falling back in both 1998 and 1999. Nonetheless, at $10.9 billion last year, the Department of Commerce-calculated bilateral shortfall in parts was below its 1994 and its 1995 levels because of a drop in the huge volume of Japanese-made parts brought into this country. However, after a reduction in 1995 as well as in 1996, the U.S.-Japan deficit in vehicles climbed to an all-time high of $29 billion last year. That put the politically sensitive gap in transpacific automotive trade at a record $39.9 billion versus $36.8 billion in 1994 and $32.9 billion the following year and a recent low of $29.6 billion in 1996.

For a Clinton administration justifiably proud of its record of creating new market opportunities overseas for American competitors during its eight years in office and no less concerned about its legacy in the trade field as in higher-profile areas, the widening trade gap and other quantitative indicators of a failed automotive agreement are an embarrassment, Japan's long recession aside. Some type of government-to-government follow-on to the current pact, which expires at the end of this year, is necessary, the Clinton trade policy team says, if only to keep the pressure on Japan when its economy eventually rebounds. To date, however, the White House has not developed a consensus on how to proceed. The holdup reflects a deep split between a once-united Detroit and the American parts industry on the contents of a new agreement.

The world automotive industry has changed over the last five years, especially its Japanese component. So, as a result, have the distribution and marketing strategies of GM, Ford and Chrysler in the world's second-biggest vehicle market. Detroit has not given up on sales of North American-built cars and light trucks in Japan despite the beating its products took in both 1998 and 1999. In the future, though, all three are likely to devote extra resources to promoting models imported from Europe and possibly from elsewhere. They also will rely more on products codeveloped with their Japanese affiliates and on the established dealer networks of these firms.

The new or closer ties between the American and the Japanese automotive industries are a prime example of the globalization that has reshaped the car and truck business around the world in recent years. GM now has strong equity and technical alliances with a trio of second-tier vehicle builders. This past spring, it acquired a 20 percent interest in Fuji Heavy Industries, Ltd., the maker of the Subaru nameplate and a leader in all-wheel-drive technology. In 1999, the world's top automotive builder boosted its stake in Isuzu Motors Ltd., a specialist in light trucks and medium-duty commercial vehicles as well as in diesel engines, to 49 percent from the 37.5 percent owned since 1971. That move occurred soon after GM raised its ownership of minivehicle technical expert Suzuki Motor Corp. to 10 percent from 3.3 percent. The pathbreaker in this regard, though, was Ford Motor Co. In the spring of 1996, it gained effective control of Mazda Motor Corp. by upping the 25 percent stake acquired in 1979 to 33.4 percent. At the time, Ford also agreed to codevelop certain vehicle platforms with its affiliate. For its part, Chrysler, now a unit of DaimlerChrysler AG, is being reunited with former partner Mitsubishi Motors Corp. through its parent's late March decision to buy a controlling 34 percent interest in the number-four automotive builder.

With GM, Ford and Chrysler now counting on business alliances to ensure better access to the Japanese market and planning to use the product development and marketing expertise of their partners to lift sales in developing Asia's potentially huge automotive market, the U.S. industry opposes any successor agreement that could be interpreted as confrontational. The three manufacturers primarily are interested in the establishment of a consultative mechanism between the two governments so that they have a way to gain resolution of problems that might arise in the future.

A bare-bones or even a scaled-back deal certainly is not what the American parts industry has in mind for a follow-on arrangement. In late June, the Auto Parts Advisory Committee, which works with the Commerce Department, proposed not only that the provisions of the 1995 agreement be extended through 2005 but that some additions be made to ensure greater businesses opportunities for U.S. competitors in Japan's original equipment production, original equipment service and independent replacement parts markets.

Interestingly, the first recommendation made by the group is that Japanese car and truck producers release updated plans for boosting purchases of foreign parts for use at home, in their North American factories and elsewhere. The original projections were adjuncts to the 1995 pact; the new ones would have the same status. The revised plans, APAC says, would provide some reassurance to U.S. makers that the downturn in shipments to Japan will be reversed and that Japanese companies assembling vehicles in North America will give "traditional" suppliers the same shot at winning contracts that transplanted Japanese parts manufacturers enjoy.

A related APAC recommendation is that a steady rise in the domestic content of Japanese cars and trucks built in the United States should be one of the markers for judging compliance with an extended agreement. In fact, the advisory group is pushing for a minimum increase of 35 percent over current content levels by 2005. It also wants to go one step further and add as a follow-through gauge "substantial" increases in U.S. sourcing of engines and transmissions, which the biggest Japanese vehicle makers operating in North America build in-house using both internal and purchased components.

Executives with the U.S. operations of Honda Motor Co., Ltd. and Toyota Motor Corp. no doubt bristled when they heard about these APAC suggestions with their implication that Japanese companies assembling vehicles in North America still discriminate against U.S.-headquartered parts suppliers in making procurement decisions. Honda and Toyota are proud of their records of expanded purchases from U.S. companies as onshore production has increased. Without doubt, the higher numbers reported each year by these two firms have given a boost to total U.S. parts purchases by Japanese automotive makers (see Table 3).
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Table 3: Purchases of U.S. Parts by Japanese Vehicle Makers,
FY 1985-FY 1999*

(in millions of dollars)

Change

Total

Absolute

Percent

FY 1985

$1,727

n.a.

n.a.

FY 1986

2,489

$762

44.1%

FY 1987

3,135

646

26.0

FY 1988

4,909

1,774

56.6

FY 1989

7,122

2,213

45.1

FY 1990

9,074

1,952

27.4

FY 1991

10,528

1,454

16.0

FY 1992

13,620

3,092

29.4

FY 1993

15,540

1,920

14.1

FY 1994

19,860

4,320

27.8

FY 1995

21,031

1,171

5.9

FY 1996

22,740

1,709

8.1

FY 1997

24,960

2,220

9.8

FY 1998

28,313

3,353

13.4

FY 1999

31,900

3,587

12.7

*Based on monitoring system established as part of the 1986-87 MOSS (market-oriented, sector- selective) talks on transport equipment. The total includes engine, chassis/drivetrain, body and electrical/electronic parts as well as accessories and production materials.

Source: Japan Automobile Manufacturers Association

In FY 1999, for instance, $28.1 billion of the $31.9 billion worth of parts bought by Japanese vehicle producers went into their North American operations, primarily for their assembly plants. Toyota accounted for a full 40 percent of the purchases. Honda's sourcing represented an equally high proportion. Other than these two companies, both of which continue to add capacity and increase production in North America, only Nissan Motor Co., Ltd. has significant potential through planned growth to raise its parts purchases (see Table 4).

Other recommendations offered by APAC target further deregulation of the aftermarket for parts in Japan. This is a subject that Washington has tackled every year with Tokyo during consultations on progress under the automotive deal. However, both at the review held in October 1999 and at the one the year before (see JEI Report No. 42B, November 6, 1998), the only responses that the U.S. team got to its detailed proposals were either outright rejection or promises to study the White House's ideas.

Reactions like these are indicative of the prevailing thinking at the Ministry of Transport and the Ministry of International Trade and Industry about the 1995 automotive trade pact — specifically, that the Japanese government, like the Japanese car and truck industry, has complied fully with the agreement's terms. That attitude obviously does not bode well for an extension of the arrangement in one form or another.

However, beyond suggesting a voluntary forum for the discussion of automotive issues, which is unacceptable to Washington, trade policymakers in Tokyo have not really showed their hand when U.S. Trade Representative Charlene Barshefsky and other U.S. negotiators informally have raised the matter of a follow-on agreement. All the Japanese side has indicated is that it is willing to listen to what the Clinton administration has to say, although in off-the-cuff remarks, various officials have questioned the need for a bilateral, government-to-government deal in an era of automotive industry globalization. Of course, decisionmakers in Tokyo might figure that Japan has nothing to lose by seemingly being open-minded since the White House faces a perhaps insurmountable challenge in framing a draft automotive trade agreement that bridges the enormous differences between the U.S. vehicle industry and American parts suppliers.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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