President elect Obama may be on the path to making a major change in US trade policy, and that's making East Asian countries extremely nervous. A particular point of tension is already developing between the United States and the Republic of Korea.
The Bush administration signed the Korea-US Free Trade Agreement on June 30, 2007, but the agreement has as yet to pass through either the US Congress or Korean National Assembly. Opposition is strong in both countries although the groups in opposition differ. Korean farmers are concerned that the agreement will allow an avalanche of cheap food into the country, while in the Unites States opposition has been strongest in the automotive sector. As negotiated the agreement would phase out the current tariff (2.5%, 25% on pickups) immediately on vehicles with engines smaller than 3000 cc, and over the next three years for larger vehicles. While the agreement would require the Koreans to drop their tariff (8%) on American vehicles, auto imports into Korea represent a miniscule percentage of auto sales in the country.
What the agreement would do though is allow Korean and other Asian companies a platform to attack the pickup sector, undermining one of Detroit's few bright spots.
This is where the Obama administration comes into the picture. Obama's Korea adviser, Frank Jannuzi, has stirred up trouble with the Koreans over a call to renegotiate the auto section of the agreement.
``It cannot be a good thing that the United States exports 5,000 automobiles a year to Korea and Korea exports 700,000 automobiles here. And the price for this is not paid, with all due respect, by politicians. It's paid by American workers,'' Jannuzi said last week at a Washington conference organized by the Korea Economic Institute. ``So, we need to do some work.''
Senator Obama has said that the KORUS FTA does not ensure effective market access for certain key manufacturing and agricultural products, the advisor said.
``And he cannot support it in its current form. That said, there is no denying that Senator Obama supports free trade. He is not a protectionist. He wants to deepen the U.S.-Korean economic relationship. And I personally hope that we will find ways to move forward on the trade agenda under the Obama administration.``I am not an economic specialist. But it doesn't take one to understand the importance of the U.S.-ROK economic relationship. It is the seventh largest trading relationship that the United States has in the world. We need to do more to cement our economic ties which are in fact mutually beneficial.''
The Korean government is not amused, and has ruled out a renegotiation of the agreement.
This should be interesting, and a real test. The current Korean government is unlikely to back down on this, and Obama is likely to be forced to decide whether to fold or scuttle the agreement. Which will he choose?
Comments
Wow
China too has absurd tariffs on autos so this is one hell of a test.
I hope they don't back down, our auto industry is only on life support as it is.
I believe Korea is where a farmer literally committed suicide in martyrdom protest, so maybe they will deal with a trade on food tariffs to help Korean farmers.
But this is fairly amazing because the problem with China is they have a 25% tariff on US autos versus a negotiated complete tariff drop by Korea.
Still it's the cost of living which enables them to undercut US automakers, the PPP of a country, so maybe OA (Obama administration) can do something clever like some of the deals they made in the 80's to require foreign auto companies to manufacture in the United States. Not ideal since so many Japanese manufacturing are not unionized in the US but at least it forces the Koreans to employ US workers.
I'm really impressed, I honestly wasn't expecting something like this.
A breakdown in the KORUS process
might lead Korean companies to restart plans to open a plant in Georgia, but it's not likely.
The Won is down 30% on the dollar over the past year. Which means that Korean auto profitability has skyrocketed. Japanese manufacturers face a different problem. The Yen has appreciated about 15% on the dollar over the past year. So Toyota has to eat an equivalent loss on each Prius engine they import from Japan.
They are going to be looking to cut costs, and one likely target is wages. Toyota has an aging workforce, and has sufficient cash reserves to implement a two-tier wage system, and offer buyouts to get rid of older workers before they start to become a burden.
About a year back a memo leaked from Toyota's Kentucky plant saying that the wanted to cut the prevailing wage from $27/hr to $12/hr over the next few years.
Obviously, the macro effect of that on the communities where Toyota is located is going to be dire. That would drive down demand in these communities and would touch off a downward spiral in employment.
I'm really wondering
If they literally put in some sort of PPP leveler into trade deals or some sort of exchange rate equalizer.
I imagine that would lead to disaster but otherwise this is what we get, MNCs hunting the globe to labor arbitrage, squeeze workers. I have to go do some reading on this fundamental problem. Surely some economist somewhere has proposed some solutions.
I hold Bill Clinton responsible for all of this.
If that snake hadn't of consumated everyone of Reagan's fantasies, we wouldn't be anywhere near this mess. People trusted that sob to look out for the US on trade, and he threw this country under the bus.
MI is in meltdown.
Chrysler is cutting 5,000 by 12/31. GM just cut another 5,000. Even with the loans, these companies will never be the same again. We have thousands of unemployed white collar with grad and post grad degrees unable to find employment. Houses are not selling, foreclosures are mounting, and values are crashing. Bankruptcies, omg, and we are being told we haven't seen the worst of it, even with federal help. That sob Clinton destroyed MI economy, and then all those DFrs in DC did absolutely nothing but let MI die.
Yup
it's ground zero for most of the failed trade, labor, economic policies as well as foreclosures.
Why I sided with MI to count in the primary, they lead the nation in disaster.
News tonight is that the Chrysler-GM
deal is dead, and that Hyundai has lined up as a suitor.
This makes sense.
The Korean automakers want to expand into pickup trucks. Chrysler provides a convenient launching pad.
As well, KORUS may be dead, which means that 25% tariff is still in place. But if they export components for final assembly in Chrysler plants, they may be able to get around it.
This is similar to how the Japanese automakers expanded in the US in the 70's and 80's.
Do the component work at home, ship the parts to the US for assembly. So the value is added in Korea, not the US.
And even better, a rival is taken out.
Things are going to be sketchy for Detroit for the next year or so.
Obama has made noises like he will come in with loans for Detroit. We'll see.
I'm not optimistic. And I don't need to tell you what the economic impact of Chrysler, GM, and Ford collapsing would be. Michigan, Ohio, Indiana, would all pounded.
Something like 1 in 5 jobs in these states relates directly to the auto industry, and the macro-effect of demand reduction would ensure people in totally unrelated sectors lose their jobs as well.
Even things like higher education could be affected, because a reduction in state revenue would mean that they have to start cutting budgets.
Getting my master's it always struck me just how fucking ignorant my classmates where to the role played by manufacturing and the auto industry in particular in keeping the US economy running.
They seriously believed that all the "greedy" UAW workers could lose their jobs, and it wouldn't put them in the street too.
But we know the irony of this.
Michigan is probably going to have 10% unemployment for the October numbers, and it's sad, because the BLS has been pulling statistical tricks to take the long term unemployed out of the labor force. Between the September and October numbers they reported that the US labor force shrunk by nearly a million workers. Does that make sense? Or, were they fucking with the numbers to make things look "less" bad.
It's astounding
how ignored manufacturing is, even at the university level and this has been going on for some time.
Well, if the Obama administration puts a nice "no tariff deal" after all to Korea, it would make even more sense for them to take over or partner with GM.
I suspect (although Japan as far as I know are the ones most advanced in battery technology) but I believe Korea isn't far behind, so that might also give a boost up on hybrids, alternative fuel vehicle design.
At least "no deal" period, we're going under isn't your post!
Middle, you should email Tonelson, economist, he also specializes in manufacturing sector and might be a good resource for you.
One of the interesting things is that GM
has decided to order the batteries for the Volt from LG Chem, which is a Korean company.
I remember a time when they would have turned to AC Delco for this.
All hop is not lost. I had a long, interesting conversation with one of my current profs about industrial policy.
We have had it in this country, but we are going to need to if we plan to get through this crisis.
That means that we can't cling to this belief that the "rise of the creative class" means that we can do development and design in this country, and offshore the actual process of manufacturing.
This is simply not the case.
We have to have a manufacturing base in this country. Our way of life is economically unsustainable without it.
advanced manufacturing
that's not shit. They act like labor arbitrage just puts workers on a shelf and magically they don't lose their expertise, or teachers don't lose their expertise, or businesses don't lose their expertise.
There was a good segment on Lou Dobbs today on manufacturing. It hasn't been this low since 1942 and they were talking about how manufacturing needed new policy from D.C.
Philip LeBeau (CNBC) is militant on reviving manufacturing
The idea of a manufacturing rebound is gaining traction. But the hour is getting very late. Lebeau on CNBC is very vocal in favor of the midwest and manufacturing, and autos.
Should I post a 2.0 version of INDIREFI? This one goes into detail on the financing for infrasturcture. Hint: using Enterprise Funds, with similar (Treasury) liabilities and same industrial targets. EFs will not increase the size of the Federal or state deficits.
Burton Leed
good for him
We agree and hopefully Obama will steal some of the ideas from Hillary for she was much more "on" manufacturing and he had pretty much nothing.
I have no idea what INDIREFI is so feel free. This is a community blog & the only sacrilege is to write economic fiction.
One alternative to an across the board ...
... tariff reduction is a countervailing credit. Say the US exports $1 in autos and automotive components to Korea for each $20 in autos and automotive components exported by Korea to the US. Then:
Korean exports to the US get a 5% reduction in tariff rate ($1/$20, max 100%)
An advantage is that, of course, no trade agreement is required. Its up to the Koreans to work out how they are going to increase imports of US autos and auto components in order to pull down the effective tariff rate.