Lessons From Transplant Car Companies: Expect Unexpected Consequences

An interesting NYT piece by Bill Vlasic, Hiroko Tabuchi, and Charles Duhigg asks if there are lessons to be learned from the efforts that got Japanese car companies to shift some of their manufacturing to the United States for the contemporary world of electronics.

I would say that one of the primary lessons is that we ought to expect unexpected consequences. The rise of “transplant” production facilities in the United States is in part a consequence of protectionist moves in the 1980s. One of the main things the proponents of those moves were hoping to accomplish was to bolster the position of the Big Three out of the Detroit and the union jobs they supported. But that effort failed. Foreign car companies started building cars in the American south, away from Detroit, away from the United Auto Workers, and away from the existing auto parts supply chain. What’s more, the political economy didn’t play out in a totally predictable way. When the American car companies needed a government bailout during the 2008 economic crisis, the fiercest political opposition came from politicians who represent states with a lot of Japanese car construction.

A related issue is that America is really big. If you live in Boca Raton or Boston or Billings it’s not totally clear to me that having a car made in Tennessee rather than Tokyo is a meaningful benefit. Lots of countries are much smaller than the United States and when they conduct industrial policy it’s more like what would be regional development policy in the United States.

But having waxed skeptically about manufacturing-promotion many times, let me say that when I got to the part of the article where Larry Summers and Tim Geithner are blasé about currency policy vis-à-vis China, I don’t understand where they’re coming from. Having an inappropriately strong dollar amidst mass unemployment has been folly. In his remarks quoted in the piece Summers seems to assimilate all currency policy concerns as “protectionist” but that’s not right. America needs to be pursuing monetary policies that are consistent with full employment, which given present circumstances means a cheaper dollar and more employment in exporting and import-competing industries. You don’t need to believe in magic manufacturing pixie dust to see the merits of this.