Alan Tonelson and Megan A. Chidester take on the Southern senators and their stance that foreign transplants can fill the chasm left by the Big Three and their suppliers.

If Disneyland – and especially Fantasy Land – were built today, California might not have been the no-brainer choice. Strong competition may have come from places like Alabama, where U.S. Senators like Richard C. Shelby live in a world utterly divorced from economic reality.
Shelby and colleagues like fellow Republican Bob Corker of Tennessee have blazed new trails of fatuous grandstanding by pillorying the Detroit automakers’ request for massive government restructuring loans, and digging in their heels in opposition.

It’s been laughable enough that they and the likes of Senate Minority Leader Mitch McConnell of Kentucky and Shelby’s fellow Alabamian Jeff Sessions have posed as defenders of free market purity. After all, their states collectively have spent billions of dollars in tax breaks and other subsidies to lure foreign automakers’ factories and other facilities.

Even worse are their claims to be taxpayer champions when bankruptcies at the Big Three and throughout their supply chains would trigger far greater public expenditures than even the Big Three’s most recent $34 billion bridge loan request. Floods of unemployment benefits checks and food stamp disbursements, and additional draws on the already straining Pension Benefits Guarantee Corporation, would be only the beginning.

But nothing reveals the Shelby-ite indifference to facts like the root assumption of their anti-Detroit stance – the conviction that the United States simply doesn’t need a U.S.-owned automotive industry, and that the foreign transplants can and will fill the chasm left by the Big Three and their suppliers. The misinformation they and their allies in government and business have spewed out are turning the auto bailout debate into a narrower version of America’s thoroughly warped globalization debate.

The Shelby-ites are smart enough politically not to say this outright (unlike the libertarian ideologues at the Wall Street Journal op-ed page and elsewhere). But it’s hard to draw any other conclusion from claims that the Detroit automakers need to fire about 40 percent of their total workforce (presumably with no impact on a reeling U.S. economy). Why else would Shelby – whose shows of downright nastiness to admittedly unlikable Big Three execs were the worst kind of piling on – have so conspicuously noted that “In the South…we have about 124,000 people employed in the automobile industry. They are competing.” Sessions has edged even closer to the line, telling Bloomberg Television, “We have a very large and vibrant automobile sector in Alabama. I don’t feel like this (the Big Three crisis) is the end of the world.”

Shelby et al obviously have swallowed the widely circulated transplants fairy tale, which portrays the foreign automakers as companies committed to a strategy of strengthening the U.S. economy by increasingly supplying the world’s biggest automotive market from their new U.S. facilities, not their home countries. Not only have the transplants been steadily substituting U.S.-made vehicles for foreign, their partisans claim. The U.S. content of these vehicles keeps rising, too.

It’s only another small step to suppose that these companies would predominantly use U.S.-based workers and factories to service the customers presented on a platter to them by Detroit’s demise.

Sadly, all the evidence points in exactly the opposite direction, with the transplants still relying heavily on imports to meet U.S. demand and still channeling most of the growth and employment benefits to their home countries. Consequently, multiple bankruptcies would most likely bring America’s days as a significant automotive producer to an end.

Although automotive output as well as employment has nosedived in the United States recently, the transplants by no means deserve all the blame. Between January, 2005 (a generally normal economic period) and October, 2008 the Big Three’s well documented woes and the worsening economy have also played major roles in driving domestic motor vehicle production (including heavy trucks) down 34.4 percent on a monthly basis in inflation-adjusted terms, and depressing parts output by 17.9 percent.

But contrary to the transplant fable, their imports have clearly worsened the situation. Official inflation-adjusted trade figures are not available on a detailed, country-by-country basis. But the current-dollar figures are revealing, especially since inflation wasn’t exactly raging in the automotive sector in those years. During that 2005-2008 time frame, auto and light truck imports from Germany, Japan, and Korea combined actually increased 6.7 percent. This figure was only held down by a huge 49.9 percent crash in Korean vehicle imports, and doesn’t even include heavy trucks. Germany and Japan sent 26.6 percent and 16.7 percent more worth of vehicles to the United States, respectively during this period.

And remember – these figures have nothing to do with the popularity advantage the foreign brands hold over their domestic counterparts. If the transplant fable were true, most of the resulting new demand would have been filled by U.S.-made vehicles, not imports. And that should have been especially true for Japanese and Germans, whose operations have been here longest and thus have had the greatest opportunities to Americanize.

But what about 2008 alone, when the entire motor vehicle industry – including the foreign brands – hit the skids? U.S. motor vehicle production (again, including heavy trucks), has sunk by 26.5 percent over the first 10 months of this year. But total German, Japanese, and Korean vehicles imports are off only 12.5 percent. In this case, though, the combined figure masks unusually sharp variations. Imports of Japanese and Korean vehicles both dropped sharply – by 29.8 percent and 24.1 percent, respectively. But imports of German vehicles shot up by 52.8 percent.

The auto parts industry displays the same kinds of trends. The Detroit automakers certainly do import significant numbers of parts from these countries. (And GM is now importing small cars from Korea.) But everything known about the auto industry tells us that imports from the transplant countries are generally used by the transplant companies.

Despite the 17.9 percent drop in U.S. parts production in real terms from January, 2005 to October, 2008, total parts imports from the three transplant countries dipped only by 2.7 percent in current dollar terms. German and Japanese parts imports decreased by 10.3 percent and 7.7 percent, respectively, during these years – consistent with the idea that established transplants eventually turn to some domestic U.S. parts production, but hardly figures revealing a major drive to Americanize. Parts imports for the newer Korean automotive facilities surged by 44.2 percent.

The data for 2008 alone, however, also substantially belie the Americanization thesis. Domestic U.S. parts output so far is down 12.4 percent through October in real terms. But during this worst year in decades for automotive production in America and worldwide, total transplant parts imports actually edged up by 0.128 percent in current dollar terms. German parts imports decreased by only 6.75 percent, Korean parts imports fell by just 4.47 percent, and Japanese parts imports rose by 3.63 percent.

Once again, if the transplants were determinedly Americanizing, their parts imports logically would be falling as a percentage of the U.S. economy’s parts production either in an up market or a down market. But these figures indicate that imports are playing a larger role in transplant operations, at least since 2005.

Comparing Detroit imports of vehicles and parts with the transplants’ trade flows is difficult, because foreign procurement by the Big Three and their top-tier domestically owned suppliers appears to be concentrated geographically. But although they source heavily from Canada and Mexico, so do the transplants – including vehicles.

All of which reinforces two big imperatives for U.S. automotive policy, and for the broader national recovery strategy that President-elect Obama had better get right. First, because boosting the U.S. economy’s levels of output is the only viable way out of an economic crisis caused by consuming too much and producing too little, any government support for manufacturing or any other genuinely productive industry must require that the new products turned out with taxpayer money be overwhelmingly Made in America. This maxim should hold for the auto industry, for so-called green products, and for all U.S. government procurement.

Second, in order to carry out this policy intelligently, both U.S. and foreign-owned companies that sell in the U.S. market need to open their procurement books so that decision-makers can figure out how much domestic American content they currently use, and how much higher these levels need to rise. Washington programs that ignore these questions are likeliest to subsidize foreign growth with U.S. taxpayer dollars, and sink the American economy deeper into deficits and debt.

Insisting on such “truth in manufacturing” policies would not only revolutionize U.S. manufacturing and globalization policies. It would revolutionize American politics as well. For starters, the Shelby-ites would have to bid adieu to Fantasy Land.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C.. A contributor to the Council’s AmericanEconomicAlert.org website, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). Megan Chidester is a Research Assistant at the Council. The views expressed here are their own.