The Beltway
An occasional column by Gabe Nelson, Automotive News' D.C. correspondent, analyzing the auto industry's relationship with Washington.
GABE NELSON

Why global trade alliances will eclipse the power of Detroit, U.S. automakers

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Gabe Nelson is a staff reporter for Automotive News.
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WASHINGTON -- We don't regard Chrysler, Ford and General Motors as the Big 3 anymore, and for good reason. Detroit's near-total dominance of the American car market and the U.S. policies that shape it is a fading memory.

They operate in a global industry now. The protectionist rules put in place to guard countries' native automakers -- such as America's "chicken tax," the costly legacy of a 1960s trade dispute with Germany -- are passe in an era of free trade.

But if the United States finishes the European and Asian trade alliances that are at the core of President Obama's diplomatic strategy, we could see a new, global Big Three or Gang of Four, in which the members are nations, not companies, and the dominant strategy is lowering trade barriers, not raising them.

The members of the free-trade club would be the auto industry's old powerhouses: the United States, Europe and Japan, with the possible addition of South Korea. The club's mission would be to make those markets much less hospitable for China and other countries that won't do business by the club's rules.

The events of May gave us a clear view of the potential perks of membership in the new automotive Big Three or Gang of Four and the pitfalls of being left out.

China felt the sting on May 23, when the Geneva-based World Trade Organization sided with a U.S. complaint about Chinese duties on cars and trucks. The duties, set from 2 percent to 21.5 percent, touched about $5 billion worth of U.S. exports in 2013, affecting large-engine models such as the Jeep Grand Cherokee and Cadillac Escalade.

In its ruling, the WTO found that China hadn't shown that U.S. exports were hurting Chinese businesses before retaliating. It underscored a bigger point: The Obama administration is willing to go after China for the sort of tactics that were once commonplace in the United States but are being phased out by the new gang.

U.S. Trade Representative Michael Froman: "China must follow the rules, just like other WTO members."

Photo credit: BLOOMBERG

"The message is clear," U.S. Trade Representative Michael Froman said at the time. "China must follow the rules, just like other WTO members."

Until the United States, Europe and Japan are satisfied that China is following the rules, they will never lower their historical trade barriers for Chinese cars. But clearly they are willing to lower those barriers for their friends, judging from the fervent support that President Obama, Japanese Prime Minister Shinzo Abe and leaders of the European Commission have given mutual free-trade deals.

That's why the industry was watching Washington and Singapore in May, as Obama's negotiators pressed for European and Pacific Rim trade deals.

Lobbyists for U.S., European and international automakers made a presentation May 20 in Washington saying that regulatory barriers such as different crash test standards are equivalent to a 26 percent tariff on cars traded between the United States and Europe. They said easing those barriers would lead to a big increase -- estimated at 71 percent to 347 percent -- in trans-Atlantic auto trade.

No matter how cheaply China can make cars, it couldn't match the cost advantage that would be available within the group of favored trading partners.

So why aren't those trade deals a done deal?

A lot of obstacles remain, from the negotiating table to the halls of Congress. American and European automakers are willing to have Japanese automakers in the club, but they complain that Japan's policies make it hard to crack Japan's car market.

Even if the process is slow, creating a new automotive bloc has become the dominant strategy for the auto industries of the United States, Europe and Japan, and that will be crucial for them to maintain their market dominance in the decades ahead.

Yes, the world's auto powers are investing huge amounts of money in China to take advantage of its rapid growth, but by encouraging closer ties in the rest of the world, they can try to keep China's industry contained to China.

You can reach Gabe Nelson at gnelson@crain.com.

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