Note to Big Three: Invest in America
By Robert E. Scott
March 30, 2009

March 30, 2009 | EPI Policy Memorandum #140

Note to Big Three: Invest in America

by Robert E. Scott

The trend is clear: more and more of “Big Three” auto production is taking place in countries other than the United States.

While GM, Ford, and Chrysler production in Mexico increased in 2008, it fell in the United States and Canada (see Figure A). GM has invested $3.6 billion in Mexico in the past three years and is increasing its commitment to Mexican production by having its new Aveo subcompact built there instead of in the United States (Black 2008). And the Big Three plan even greater future investments outside of the United States: GM announced plans to invest $1 billion in Brazil (Ortolani 2008), and Chrysler is investing $570 million in a new engine factory near Saltillo in the Mexican state of Coahuila. At the same time, GM and Chrysler are seeking nearly $22 billion in additional restructuring aid from the Obama administration.

Taken together, these facts make an “Invest in America” requirement an essential component of any further government assistance for U.S. auto companies.

To address GM’s and Chrysler’s plans to rapidly shift additional production to Mexico, the Obama administration and Congress should adopt three policies as a part of any auto restructuring plan:

• Stabilize Domestic Content: Require that the domestic content of cars and trucks sold in the United States, on average, equals or exceeds the 2008 domestic content shares. This will limit offshoring of parts and vehicle production by GM and Chyrsler.

• Cap Imports: A standstill agreement on the number of cars and trucks imported from Mexico, as a share of actual sales; Mexico could share in the benefits of recovery, but not at the direct expense of autoworkers in the United States or Canada.

• Reform labor rights in Mexican auto assembly plants: Anti-democratic labor laws and lax enforcement policies have systematically kept wages low in Mexico and encouraged companies like GM and Chrysler to outsource production there. Weak labor rights are endemic to Mexico, and reform of labor rights in auto plants could help pave the way for improvements throughout Mexico’s labor market. Key reforms would include:

· Eliminating unelected, employer-dominated “protection unions;”

· Enforcing and strengthening of union members’ democratic right to decide if they want to be represented by a union of their own choice; and

· Ensuring that auto companies and their suppliers allow independent unions to have access to their workers in Mexico and that employees can freely choose a bargaining representative of their own choice.

The data in EPI’s forthcoming Briefing Paper (Scott 2009) show that the Big Three automakers have shifted production to Mexico, and absent any external constraints, will use the period of relief resulting from government restructuring aid to continue this shift. In fact, GM’s and Chrysler’s restructuring plans call for even more U.S. plant closings in the United States, which will further reduce their manufacturing footprint in the United States.

The United States has a national interest in the maintenance of a vibrant auto sector. It is a major source of demand for a host of advanced manufacturing industries, including robotics, machine tools, electronics, and computers. The manufacturing sector also generates more than half of all domestic research and development spending, and it employs twice as many scientists and engineers, as a share of its workforce, than the rest of the economy.

The bankruptcy of one or more U.S. auto companies would cost between 900,000 and 3.3 million jobs, adding up to two percentage points to the national unemployment rate. If we stand by while domestic automakers shrink their U.S. footprint to a fraction of its former size, something similar will result, but the process will simply be more drawn out (Scott 2008).

The auto industry is a pillar of the U.S. manufacturing sector. Between December 2007 and February 2009 the U.S. lost 247,000 jobs in autos and parts, and an additional 121,000 jobs in support manufacturing industries. For production workers (most of whom do not possess a college degree), manufacturing provides some of the best jobs in the economy. Average weekly earnings in traded goods industries were 16% to 19% higher than earnings in other, non-manufacturing industries.

The United States cannot afford to let the industry fail, but neither should it finance the auto industry’s abandonment of its domestic production base. An “Invest in America” requirement is an essential component of any further government assistance for U.S. auto companies.

The Obama administration today released its new “Path to Viability for GM and Chrysler.” The plan provides critical bridge financing for an additional 30 days (for Chrysler) to 60 days (for GM), and it embraces the proposed Chrysler-Fiat alliance. However, the plan also requires the firms to engage in more significant, aggressive restructuring of “manufacturing, headcount, brand, nameplate, and retail network[s],” and it does so under the threat of “utilizing the bankruptcy code” to force restructuring on the companies if they fail to meet the government’s demands.

These demands are likely to further reduce the manufacturing footprint of both firms in North America, and could reinforce their established outsourcing strategies. It may enhance the likelihood that when demand for vehicles does recover, as it ultimately will, an even larger share of the vehicles sold by GM and Chrysler will originate abroad. This would conflict with the President’s announced “commitment to support an auto industry that can help revive modern manufacturing.”

REFERENCES

Black, Thomas. 2008. “GM Mexican Plants Expand as Carmaker Seeks Funds for Rescue.” Bloomberg.com. December 17. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aImmc_hK.uGE

Ortolani, Alex. 2008. “GM to Keep $1 Billion Brazil Investment as U.S. Aid is Sought.” Bloomberg.com. November 18. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an9dgTbNOQKo#

Scott, Robert E. 2008. When giants fall: Shutdown of one or more U.S. automakers could eliminate up to 3.3 million jobs. EPI Briefing Paper #227. Washington, D.C.: Economic Policy Institute. December 3.
http://www.epi.org/publications/entry/bp227/

Scott, Robert E. 2009 (forthcoming). Invest in America: Ensuring that GM and Chrysler invest here and that the benefits of the automotive restructuring and industry recovery are broadly shared. EPI Briefing paper #233. Washington, D.C.: EPI.