Distorted trading system works against auto industry

Posted on November 26, 2008 in Debates, Governance Debates

TheStar.com – Opinion – Distorted trading system works against auto industry: First Auto Pact was outlawed, now Big 3 face unfair competition from Asian producers
November 26, 2008. Tim Armstrong

Despite the dismal optics of their U.S. congressional representations last week, it seems inevitable that the Big Three automotive companies will ultimately receive significant joint U.S.-Canadian financial assistance.

Unclear are amounts, timing and conditions of the assistance package. But it will undoubtedly come, to give the industry a temporary reprieve, and to avoid the damaging consequences – real and psychological – of major failures at a time of unprecedented economic crisis.

Much has been said and written about the indigenous North American industry’s current difficulties and deficiencies, focusing primarily on the failure of the Big Three – management and labour – to respond effectively to the realities of the market: erroneous choice of product, lack of innovation, inferior design, overly restrictive work rules, and so on.

What has yet to receive attention is the impact on the industry’s current plight of the global free trading system under the World Trade Organization (WTO) and whether, as presently constituted, the WTO regimen is conducive to fair automotive trade. Clearly, this broader issue will not be dealt with before the current bailout is approved. But in the mid- to long-term, there are vital trade issues to be addressed.

First, an analogy. The financial services sector is said to have cratered because of a faulty regulatory environment, permitting improvident and reckless behaviour by the industry’s leadership. The WTO system removes or restricts regulatory and other trade impediments – tariffs, export subsidies, dumping, etc. As in the financial sector, it may fairly be asked whether the WTO’s regulations are, in fact, appropriately designed to guard against unfair trading practices.

From 1965 to 2001, automotive trade between Canada and the U.S. was governed by the Auto Pact, which required a ratio to be maintained between national sales and national production in Canada. The Auto Pact was eventually held to be contrary to WTO rules.

What’s wrong, in theory or practice, with an industry central to a nation’s economic well-being being permitted to have national production/sales ratios?

By establishing North American plants, the major Japanese auto manufacturers have, de facto, voluntarily acknowledged this concept; the European manufacturers less so, and the Koreans not at all. But should not the acceptability of this concept be re-examined, in the WTO context, if and when the Doha round of negotiations is resumed?

Another trade quandary relates to the inability of the Big Three to penetrate the large and burgeoning automotive markets in Asia with their North American-produced vehicles. Some say that this is due to their failure to offer products attractive to Asian consumers. Others claim that the real cause is unfair impediments to access to Asian markets – including the near-impossibility of marketing through effective dealership arrangements. These and other perceived restrictions should also be on the WTO’s trade reform agenda.

A more serious concern is China, which fought hard to gain the market access benefits of membership in the WTO and finally succeeded in 2001. Since then, its record as a compliant WTO member is seriously flawed.

Within the past several months alone, it has adopted new export subsidies contrary to WTO rules – a particularly negative step by a country running the world’s largest trade surplus and one that has, ironically, expressed concerns about potential “protectionist” actions by the U.S. and other WTO members facing the near certainty of a prolonged global recession.

Ever since its entry into the WTO, China has maintained a hugely undervalued currency, manipulated to boost its international competitive position. This violates a basic provision of the International Monetary Fund’s rules, which explicitly prohibits the manipulation of exchange rates with a view to maintaining competitive undervaluation, and is also at odds with both the letter and spirit of the WTO.

China’s behaviour is of significant long-term importance to our North American automotive industry. It has identified the automotive sector as a “pillar” industry and has publicly stated its goal of becoming “the world’s largest automotive assembler and parts producer by 2010.”

The New York Times reported last week that Chinese car makers are also seeking aid from their government. This despite the fact that a senior executive of one of China’s largest automotive assemblers, Changfeng Motor, is quoted as saying: “If GM, Ford and Chrysler get a lot of support from their government, it’s not fair.”

Changfeng, it should be noted, displayed cars at the last two Detroit auto shows in preparation for entering the North American market in 2011, with vehicles to be offered at half the price of the cheapest now on our domestic market.

Workers in China earn a fraction of the wages of North American workers. Even offsetting other cost variables – productivity, transportation costs, and the like – overall Chinese production and delivery costs are and will remain significantly below those of North American producers.

The notion, implicit in the WTO rules, of a homogenous, freely and fairly competitive global labour market is an absurd fiction and unless this is recognized, our automotive sector will, in due course, face a far greater threat from China than the one caused by the current recession.

The U.S.-Canada “bailout” or “fiscal stimulus package” (whichever euphemism you prefer) will provide limited breathing space. In addition to whatever industry-specific conditions are attached, there should also be a commitment, by both Canada and the U.S., to raise the trade-distorting flaws in the existing WTO rules.

In particular, attention should be focused, in renewed WTO negotiations, on the realities of the world’s disparate economic regions and the way in which low-wage member countries, with insufficient regard for their own workers’ well-being and the urgency of environmental protection, are permitted to engage in unfair and predatory trading practices.

China’s spectacular growth over the last 20 years – what Hendrik Hertzberg refers to as “a fearsome engine of capitalist commerce” – has raised tens of millions of its citizens from poverty, a cause for universal celebration.

However, unless its illegal trade practices and the WTO’s unrealistic trade rules are addressed, the existing dysfunctional, open-market global trading system will continue to threaten the automotive and other key sectors of our largely integrated North American economy.

Tim Armstrong, formerly Ontario’s deputy minister of labour and subsequently deputy minister of industry, trade and technology, was the province’s agent general for the Asia-Pacific region, 1986–1990.

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