Summary
America’s automobile manufacturing industry demonstrates the
importance of maintaining a competitive value for the U.S. dollar. Using empirical
data for the last 35 years, this note shows that, when foreign-made cars become
significantly cheaper because the dollar’s value has risen, most consumers can
and do purchase alternative foreign cars, and domestic producers lose market
share.[i]
The future for America’s motor vehicle manufacturing
industry – and for the domestic durable goods production in general – depends heavily on establishing and
maintaining a competitive exchange rate for the U.S. dollar – something that
America has not done for about forty years!
Pre-Plaza Era
Between 1978 and 1985, the U.S. dollar appreciated by nearly
40 percent against its major trading partners.[ii] This overvaluation is
seen in the red-tinted oval labeled “Pre-Plaza Overvalued Dollar” in the lower
part of Fig. 1.
This sharp appreciation of the dollar made it hard for U.S.
cars to compete on price with cars from countries like Japan. As a result, the
share of American producers in new-car sales in America dropped from around 85
percent in the early 1970s to about 74 percent in the mid-1980s, a loss of
about 300,000 units per year.
Plaza Accord Adjustments
In large part because of the strong protests of automotive
and other U.S. manufacturing companies that faced serious market share losses
at home and abroad because of the dollar’s sharp appreciation, the U.S.
Government, through the not-so-voluntary Plaza Accord of 1985, forced Japan and
Germany to revalue their currencies sharply. In line with the agreement, Japan
and Germany used the dollar reserves that they had built up through trade
surpluses with America to buy back their own currencies in foreign exchange markets.
This drove up the yen and the deutschemark against the dollar.
Although the language
of the Plaza Accord made it appear as though the dollar’s value was to remain
firm and that the other currencies were doing the adjustments, in reality the
dollar was devalued sharply against the Japanese yen and the German
deutschemark. The impact of the currency manipulation mandated by the Plaza
Accord gradually improved the competitive position of U.S. manufacturers:
Japanese and the German currency interventions
reduced the value of the dollar on a trade weighted basis. This transition is
seen in the yellow circle at the bottom left of Figure 1.
Figure 1. Plaza Devaluation of the Dollar
Boosted American Car Production
As the dollar became more competitive, domestic consumers began to buy more made-in-America cars and fewer foreign-made cars, raising the domestic producer’s share in the domestic market from about 74 percent to about 76 percent.
3. As the full impact of the more competitive dollar was felt, U.S. producers began to enjoy higher profits and thus had the incentives to invest in new designs, more efficient equipment, and better training for workers. Consequently, the market share of American-made cars rose steadily to nearly 85 percent in 1997 as reflected in the large blue bubble at the top left side of the Fig. 1.
Unfortunately, the situation began to deteriorate after 1997. Thanks to the emerging Tech Bubble, large foreign exchange inflows started to wash onto America’s shores around 1995, and the value of the dollar began rising in 1996 and 1997 (note the shift to the right of the dots between 1996 and 2000 in the blue bubble). Then, not surprisingly, the domestic market share of America’s automobile manufacturers began to collapse – from 84 percent to 79 percent between 1997 and 2000.
Developments since 2000
The story since the beginning of the current century has
been even more distressing and is uniquely complicated (Figure 2). The share of
American automotive manufacturers in the domestic U.S. market fell from
79 percent to about 69 percent between 2000 and 2007, largely the result
of the rising overvaluation of the dollar that began during the Tech Boom and
continued with the housing and stock market bubbles in the first decade of the
current century.[iii]
Figure 2. Exchange Rate Overvaluation and the “New Normal” for U.S.
Automobiles
With the Crash of
2008, the American motor vehicle market seems to have shifted to a “new normal,” one that is even less attractive than the old normal.
The turmoil of 2008 left the relationship between exchange
rates and market shares in 2008 sitting outside of the trends that existed before
and after that year (see
the small yellow bubble between the old normal from 2000-2007 and the new
normal from 2009 to 2015). [iv]
Between 2009 and 2015, a tight negative correlation between
market share and the dollar’s value similar to that observed between 2000 and
2007 resumed. When the dollar’s value went down, market shares went up, and
vice versa.
Starting in 2009, three big changes began to take place:
- The exchange rate index
began falling as the dollar returned to more normal valuations following
the collapse of its wildly excessive values of 2000.
- As would be expected, the
market shares of domestically produced cars began to rise, going from 66
percent in 2009 to an estimated 73 percent in 2015.
- For any given value of the exchange rate index, U.S. automotive
manufacturing industry today has a market share that is about 10
percentage points lower than would have been the case for the same value of
the dollar on a trade-weighted basis between 2000 and 2007.
Do U.S. manufactures face a “new normal” now that puts them at a permanent disadvantage?
The last point above has serious implications, not only for
America’s automotive producers, but for American manufacturers in general. If the
shift seen in Fig. 2 between 2000-2007 and 2009-2015 is permanent, American
manufacturers will have a reduced share of the U.S. domestic market, with
imports rising to meet the rest of the demand. Also they will see their access
to international export markets shrink in like manner.
In brief, what Fig. 2 shows is a significant collapse of demand for
made-in-America products, both nationally and internationally, at any given
exchange rate for the dollar. This means America faces slower economic growth,
more unemployment, and more production capacity lost to other countries unless
corrective action is taken as soon as possible. Such action is especially
urgent given the dollar’s overall appreciation by nearly 30 percent since 2011
(Fig. 3), and its appreciation by over 50 percent against the yen during
the same period.
Fig. 3. The dollar has appreciated sharply since 2011.
Conclusion
When the dollar’s value increases, America’s motor vehicle
producers lose market shares to foreign-made cars. Conversely, U.S. producers
gain market shares when the dollar’s value decreases. After 2008, a “new
normal” developed: exchange rates have had to be significantly lower than
before to assure a given market share. This development, together with the
dollar’s strong appreciation since 2011, indicates that U.S. motor vehicle
manufacturers –
and all other U.S. manufacturers –
will soon face serious problems with foreign competition unless urgent action
is taken to move the U.S. dollar to a more competitive equilibrium rate by
implementing a trade and monetary policy for the 21st century such
as the Market Access Charge (MAC) that I have proposed.
America Needs a Competitive Dollar – Now
John
Hansen, PhD, World Bank (ret.) hansenj@bellsouth.net Americans Backing a Competitive
Dollar-Now!
[i]
This note focuses on the relationship of changes in the exchange rate as a
cause of changes in existing market share levels. The average share of imported
cars in the U.S. market over time is of course driven by many other factors
such as features, brand preferences, and perceived value for price. Also note
that foreign-brand cars assembled in the United States (e.g. Honda and Toyota)
are treated here as domestic made-in-America cars despite imported content that
is substantially higher than for American brands (e.g. Ford and GM).
[ii]
All references to the dollar’s value in this note are based on the dollar’s
trade-weighted nominal exchange rate index with major currencies (DTWEXM)
maintained by the Federal Reserve (www.research.stlouisfed.org).
[iii]
Recall that, in Figure 1, changes in market share tended to follow exchange
rate changes with a lag of about five years as exchange rate changes worked their
way through the supply chain and into consumer behavior. To help clarify the
picture for the period since 2000, this delayed response has been built into
the points plotted in Figure 2 as follows:
The market share for each year is plotted against the exchange rate
index observed five years earlier. This lagging technique allows the full
effect of exchange rate changes to pass through and be seen in market shares.
With an R2 of 0.93 for the period from 2000 to 2007, for example,
the negative correlation between lagged exchange rates and market shares is
very high. A similarly high correlation is seen for the period from 2009 to
2015 in the blue bubble to the lower left in the graph.
[iv]
The exchange rate used in this note comes from the Federal Reserve and reflects
the value of the U.S. dollar compared to the trade-weighted average of the
dollar’s exchange rate with America’s major trading partners
No comments :
Post a Comment
What do you think? Join the Conversation