Thursday, March 7, 2013

Detroit's problem: Trade, not debt

Detroit in its heyday. 
Michigan Gov. Rick Snyder is dead wrong if he thinks a hostile takeover of Detroit will solve that city's problems.

For Snyder to turn Detroit's finances around, he'd have to singlehandedly change U.S. trade policy, eliminate foreign export subsidies and overhaul the tax systems of our trading partners.

Detroit's financial troubles are a trade imbalance masquerading as a debt crisis. Detroit and its people are suffering collateral damage from decades of bad trade deals and trade concessions. There's little Snyder can do to reverse the ravages of misguided Cold War policy.

For decades, the Motor City was the greatest manufacturing city in the world. Then the U.S. government started to dismantle the nation's industrial base in order to achieve foreign policy objectives.

It began in the 1950s, when Detroit's factories shut down like falling dominos. Those were the years when the U.S. government rescued Toyota from bankruptcy by buying its trucks for the Korean War.

Those were also the years when the U.S. made trade concessions to Japan. As economist Judith Stein points out, the U.S. looked the other way while Japan built up its domestic auto industry behind massive trade barriers. The reason? In the aftermath of World War II, the U.S. wanted to control Japan's military and foreign policy and build military bases on its territory. 

The story with Canada was a little different. Canada didn't want to produce a Canadian car but did want to increase Canadian auto employment. So President Lyndon Johnson in 1965 signed a deal with Canada that U.S. companies would manufacture enough cars and parts in Canada to offset 95 percent of the cars and parts made in the U.S. and sold in Canada. (Just FYI, our trade deficit with Canada in January was $4.13 billion, the biggest in four years.) 

Another big problem: discrimination by countries that impose the Value-Added Tax. The VAT is the reason a U.S. car that's almost the same as a German model will cost at least $12,000 more than the German car in Germany. It's the reason German automakers get a rebate on every vehicle exported to the U.S. And it's the reason U.S. automakers pay a tax on cars exported to Germany, plus a tax on the cost of transport, insurance, docking and duties.  (A good explainer can be found here.)

No need to go into the giant sucking sound created by NAFTA. But you probably haven't heard much about the trade deal with South Korea that's now almost a year old. Remember how it was supposed to increase U.S. auto exports? We just learned the trade gap with South Korea is the highest it's been since November 2004.

Snyder has had several years to appoint an emergency financial manager in Detroit. He seems to be hesitating. We're pretty sure why: He knows Detroit's budget problems won't be solved simply by cutting spending and selling off a few assets. Detroit's problems will only be solved by a massive infusion of good jobs.