The Center for Automotive Research (CAR) published an in depth study of the effects of a free trade agreement (FTA) with Japan on the US automobile industry in August 2012. This is basically what they discovered;
The Center for Automotive Research (CAR) has produced a model of Japanese automotive vehicle exports to the United States that estimates the likely effect of a tariff reduction brought on by a FTA between Japan and the United States that would be a characteristic of Japan’s inclusion in the Trans Pacific Partnership (TPP). Japanese vehicle exports are estimated to increase by 105,000 units or $2.2 billion (an increase of 6.2 percent) due to the elimination of a 2.5 percent tariff. U.S vehicle production is estimated to fall by 65,100 units which CAR estimates would result in a loss of 2,600 direct U.S. automotive manufacturing jobs. An additional loss of U.S. supplier jobs is estimated at 9,000 and the loss of spin-off jobs at 14,900. The total U.S. employment loss then for this scenario is 26,500 jobs.
One of the most often cited problems with such FTAs and the Trans Pacific Partnership (TPP) is currency manipulation which makes an exporting country's goods artificially cheap in terms of the importing country's currency. But the existing problems go much deeper than just the exchange rate.
To begin with, the automobile trade between the US and Japan has been highly imbalanced from the start. According to the above cited CAR report, 95% of the domestic car market in Japan is served by Japanese manufacturers. In 1995, a peak year for US auto and auto parts exports to Japan, failed to reach $5 billion and declined from that point onward. In 2011, the US had an automotive trade deficit with Japan of about $42 billion which accounted for more than two thirds of the total US trade deficit with that country.
Japanese vehicles and parts entering the US market currently face a two to twenty five percent tariff which would eventually be eliminated completely by the TPP treaty. According to the LA Times, Japan currently produces over three million cars a year in the US hitting a peak in 2013 of 3.6 million cars out of 16.4 million or about 15% of all cars made in the US by all manufacturers including the US "big three." If the tariffs are removed, the employment benefit derived from export substitution industrialization or "tariff jumping" whereby Japan manufactures cars in the domestic US market as they have since the 1980s, might disappear. According to the CAR report, a complex econometric model is used to estimate the impact of the TPP treaty on a possible shift from domestic US manufacturing of Japanese cars to importing the same cars made in Japan. The estimates made of US domestic job loss is astounding particularly if coupled with currency manipulation to create an artificially low Yen/US Dollar exchange rate. Here is the conclusion of the 2012 Car study;
In summary, CAR believes that Japan’s inclusion in a FTA will result in the increase in Japanese vehicle exports, all other factors being equal, of about 105,000. CAR’s FTA forecast scenario further estimates the loss of 65,000 units of U.S production and 26,500 U.S jobs. However, CAR’s forecast of production and employment loss in the case of a change in the exchange rate from 90 to 100 yen/dollar and the elimination of the 2.5 percent tariff as a result of an FTA results in a loss of about 225,000 units of U.S vehicle production and a total loss in U.S employment of about 91,500, 26,500 from the FTA, and 65,000 from an appreciation of the yen.
According to a Japanese Automobile Manufacturer's Association (JAMA) report, the TPP stands to reverse the long term trend of European auto market share in Japan increasing over that of US automobile manufacturers by opening the Japanese market to the US. Though there are no tariffs against US auto exports to Japan an number of non-tariff barriers remain in place that would be removed by the TPP. But if the CAR study is correct, the 3.6 million units produced in the US, along with the 409,000 workers employed by Japanese auto makers in the US would be at risk. Also at risk would be the more than 336,000 vehicles exported from the US by Japanese car makers who manufacture here. This is a disturbing possibility and one that surely won't be offset by increased US exports to Japan of US made cars by US car makers.
In addition, there is over $51.3 billion in US made auto parts purchased by the Japanese car industry. The TPP would allow Japan to replace at least some of those by sourcing non-TPP and even some TPP parts for cars entering duty free into the US market. In 2012, according to the JAMA report, 70% of the Japanese cars sold in the US were also manufactured in the US. The TPP threatens that by allowing duty free imports from Japan not only of vehicles but of automotive parts. Since the recovery in 2010, US imports of Japanese cars exceeded a million and a half annually. Since the beginning of the US economic recovery, roughly one in three cars on the road in the US is Japanese whether made here or overseas and Japans share of the US auto market stands poised to grow.
Here is something about auto parts that is somewhat disturbing in light of the TPP's threat to not only US jobs in Japanese auto assembly plants in the US but to US jobs in the auto parts industry whose output Japan currently uses in manufacturing its vehicles. A very recent US Commerce Department report
In 2009, the United States exported approximately $43 billion worth of automotive parts. The top five markets in order were: Canada, Mexico, Germany, China, and Japan. By 2014, the value of automotive parts exports from the United States had risen to almost $81 billion. The top five markets by 2014 had changed to: Canada, Mexico, China, Germany, and Australia.
Japan suddenly drops from the top five list. Does this mean that they are sourcing the auto parts for Japanese built cars outside of the US or that they are manufacturing elsewhere in places such as Australia and China and US manufactured auto parts are destined for Japanese plants in those countries instead of Japan? If, as the USDC reports, that about 75% of all US automotive parts exports in 2014 went to NAFTA countries like Mexico and Canada, then very little of the rest went to Japan since there are three other destinations that imported more than Japans small share. It is likely that almost all of the more than $51 billion in US auto parts purchases made by Japanese auto makers were sourced from the US. The TPP now threatens this US auto parts market not only with export substitution whereby auto parts for cars coming into the US duty free will not be of US origin, but with Japanese auto parts now replacing US market share in other TPP countries.
The US auto parts industry earned about $55.5 billion in revenue for 2014 alone. It has rebounded from the 2008-9 recession along with the rapid recovery in US auto sales. According to HF Research, the three largest Japanese auto manufacturers in the US, Toyota, Honda and Nissan, purchased over 35% of the domestically produced US auto parts in 2014. But according to the same report cited above, auto parts imports have been increasing with the auto industry, and general economic, recovery. About half the US domestic auto parts market is supplied by imports from Mexico, China and Canada in that order by market share. Due to NAFTA, Mexico remains that single largest supplier of auto parts to the US auto industry but China has been gradually encroaching on the US market; between 2000 and 2010, Chinese auto parts exports to the US have seen an eightfold increase! US auto companies increasingly source their parts from cheaper Chinese manufacturers and even encourage their domestic suppliers to relocate to China to lower production costs.
The problem is that despite heavy Japanese use of US auto parts for their US manufacturing plants, the overall market share for domestic US auto parts is falling with the growth of imported assembled vehicles and an increase in the US market share of foreign auto manufacturers in the operating in the US. An EPI report explains;
First, as U.S. automakers’ share of the U.S. vehicle market fell over the past decade, so did the demand for domestic parts, because U.S.-made cars historically have had a larger share of domestically manufactured parts than is the case with foreign-made autos. Second, the number of foreign-owned vehicle assembly plants in the United States has grown...These transplant facilities use a higher share of imported auto parts in their production, so as they gain production share in the United States, auto-parts trade deficits tend to rise. This has deleterious effects on U.S. employment...foreign-affiliated auto-parts suppliers have made significant inroads into the U.S. supplier market through acquisitions, sales to transplant automakers, and sales to U.S. automakers...For example, more Japanese and Korean vehicle assembly plants are operating in the United States and they are buying parts from their parts affiliates located in the United States.
The problem is that the TPP is set to worsen the situation. China is widely acknowledged to have the fastest growing global auto parts industry in the world and much of their exports are to Japan and the US. The problem is that Japan wants to export cars from its home market to the US with Chinese parts which would cost US jobs in both the auto manufacturing and auto parts industries. The terms of the NAFTA agreement prohibit this but the new TPP treaty could eliminate even the modest protections afforded by the treaty as Japan's interest in US market share conflicts with that of Mexico and Canada. One report explains;
Under the North American Free Trade Agreement, at least 62.5 percent of a passenger car or light truck’s net cost must originate in North America to be considered tariff free under the agreement. Mexico wants to increase the percentage to 65 percent in the Trans-Pacific Partnership, while Japan wants it to be about 45 percent — which would allow for a greater number of parts from low-wage countries like China and Thailand to be included...For more than seven years, the U.S., Japan, Mexico, Canada and eight other nations have been negotiating the Trans-Pacific Partnership, or TPP, that would create a massive free trade zone...The pact eventually would end America’s 25 percent tariffs on imported light trucks and 2.5 percent tariffs on cars and auto parts. The tariffs have been in place for more than 50 years. Those tariffs, especially the truck tax, have forced foreign automakers to build truck and SUV plants in the United States and helped keep some would-be competitors out of the truck market dominated by Detroit’s Big Three.
Foreign auto makers are forced by the existing tariffs to export substitute or "tariff jump" in order to access the lucrative US auto market. Foreign cars, whether imported or domestically manufactured, now dominate the US market as Detroit's bit three locate overseas to manufacture and gain foreign market share. Such is globalization; it's more about investment than trade since manufacturers like to produce close to their markets and suppliers. But with the removal of tariffs, as is called for by the TPP, US manufacturing jobs are at stake in both auto assembly and auto parts manufacturing since Japan will no longer use US auto parts or manufacture in the US since it would be easier and cheaper to manufacture price competitive cars in Japan using Chinese auto parts.
Mexico is also a challenge to US jobs with more and more manufacturing taking place there the output of which would enter US markets duty free under the terms of the TPP regardless of the content origin of the auto imports. According to a WSJ report from early this year foreign car manufacturers in the US are already leaving the US to go to Mexico where labor is cheaper than in the US south. The WSJ states that,
Seven Asian and European auto makers have opened new Mexican assembly plants, or disclosed plans for one, in little more than a year...All told, auto makers and parts suppliers have earmarked more than $20 billion of new investments, Mexican officials say.
The problem is that even eliminating the apparently meager 2.5% tariff on automobile imports, the US risks thousands of jobs in its auto industry. According to a US Congressional Ways and Means Committee press release, due to the "...razor-thin profit margins in the auto industry, eliminating the tariffs would provide a one-sided benefit to Japan, leading to more Japanese imports, less American production, and fewer American jobs." Since 2012, with the election of Shinzo Abe as Japan's Prime Minister, an aggressive neo-Keynesian recovery plan has been in effect to counter years of deflation and chronic stagnation. The planned demand stimulus is not to be internal however, but through trade. Abe devalued the already undervalued Yen by 27% making Japanese exports more price competitive. The tariffs, the main reason the US still has hundreds of thousands of auto and auto parts manufacturing jobs, once eliminated will shift many of these jobs overseas, especially in the case of Japanese manufacturers. US corporations will not be harmed as much as US workers who are not similarly globally mobile. The TPP will thus allow Japanese (and other foreign) manufacturing corporations in the US to shift production overseas for cheaper labor while sourcing their parts from cheaper, often non-TPP, sources such as China and South Korea, costing over time thousands of US jobs. Japan's demand that the "local content ratio" (the minimum allowable content of an automobile sold duty free within the trade bloc countries) be 40% instead of the existing 62.5% already set by NAFTA, is a point of contention and threatens US jobs.
But despite Japan's insistence on the lower domestic content ratio, US policy makers and the Obama administration seem intent on going forward with the TPP. This would be a disaster for US workers and the economy because, as one expert explains;
"... the TPP as it stands would erode the preferential position enjoyed by Canadian and Mexican auto-parts makers under the North American free-trade agreement. “The negotiated advantages that Canadian and Mexican auto-parts producers currently enjoy under NAFTA could be wiped away by a TPP agreement that would extend the same benefits to at least nine other countries,” say David R. Hamill and Birgit Matthiesen with Washington-based Arent Fox LLP. “Japan has made it clear that its primary goal within the TPP is to gain wider and deeper access for its auto-parts industry in the U.S. (and therefore North American) marketplace,” the authors write. “If Japan succeeds, there will be cheaper auto-parts competition” from outside North America.
The problem is the glaring discrepancy between the 45% domestic content rule for autos and 30% rule for parts in the US/Japan agreement and the existing 62.5% rule for the NAFTA countries which is at risk due to the lower rule negotiated by the TPP which mostly benefits Japan at the expense of the US and the other NAFTA members. Lower content rules threaten many thousands of US, Canadian and Mexican jobs mostly in the interest of concentrating manufacturing production in low wage Asian countries for parts sourced by Japanese auto makers. This will boost the profits of a few large corporations but will cost jobs in North America. US corporations will eventually be able to locate in low wage Asian TPP partners to set up parts manufacturing but the cost to the US economy in jobs and trade deficits is long term and severe.
The US auto industry opposes the TPP only for the discriminatory treatment the US receives from Japan but supports FTAs in principle having supported NAFTA and other such agreements which have cost American jobs. The motive is support for expanded hypermobility of capital and not increased "trade." Politicians, such as Canadian PM Stephen Harper and US president Barack Obama, are prisoners of globalization and global capital which hems in policy choices and guarantees the increased hypermobility of capital at the expense of local economies. The TPP is in fact "NAFTA on steroids" as many anti-FTA activists point out and will only further concentrate the world economy and income, wealth and property on a world scale even more than did previous trade agreements. The purpose of such agreements is not increased trade but increased concentration of global assets and profits among fewer and fewer large corporations as this has long been the most visible effect of all FTAs since the beginning of the global era.