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The auto industry and the changing shape of world trade

The auto industry and the changing shape of world trade Anthony Harrington

One of the major ironies of the aftermath of the great crash of 2008 is the way every major country hit by low to no growth is desperate to export its way out of its problems. What else is the "race to the bottom" in the ongoing currency devaluation saga but an attempt to facilitate the capture of export markets by giving one's own national exporters a price edge over the competition?

Why is this ironic? For two reasons. The first and most obvious is that by definition not everyone can be a net exporter - and as a corollary to this, if you are starting from the back of the field, you'll find the front runners already have a tight grip on the choicest markets and that grip is going to be extremely difficult to shake off, so good luck. The second and more subtle reason concerns the rise of massive regional trading blocks. Regional trading blocks promote intra regional trade and as that bucket fills the other bucket labelled inter-regional trade empties.

In its recent report on the future for the automotive industry Deloitte makes this exact point. The report, called  "A new era. Accelerating towards 2020 - An automotive industry transformed", sets out the dilemma facing OEMs in advanced markets:

"The expected growth of trading blocks (e.g., the North American Free Trade Association (NAFTA), European Union, ASEAN and Mercosur) will drive the continued development of regional production systems, with a migration to lower-cost locations within each region. High exchange rate volatility adn rising transportation costs have led OEMs and suppliers to focus more on low cost sourcing within a region. OEMs will increasingly look to balance production and sales footprints to reduce exposure to adverse exchange rate shifts. The overall effect of this shift is that by 2020, there will be fewer cars sold as imports from outside a trade zone (e.g. Korea to the United States, or Japan to the European Union)."

Deloitte goes on to make the point that while there will still be foreign brands sold within each region, for the most part, these "imports" will be nothing of the sort, since they will all be manufactured locally for local sale, and with much of the sourcing for manufacture being done within the trade block. While there will be some repatriation of capital to the OEM's head office and home nation, the larger part of the positive economic effect coming from the manufacturing and sales processes will be felt locally. This is, of course, already creating an interesting blurring between the idea of national wealth and global wealth.

Already in the UK there is a furor over foreign companies who appear to be doing well locally but who are able to "dodge" UK takes through various cross charging mechanisms between their own group companies. What is at issue, it seems, is not the legality of moving profits to tax regimes that are more benign for the group, but rather, the morality, and companies are discovering that the reputational damage for being seen to be indulging in "amoral" tax avoidance, can be extreme as consumers vote with their feet. In a funny kind of way, this means that Starbucks, a US company, finds itself having to behave in the UK as if it were a UK company - a neat enforcement of the business school maxim: think global, act local.

Auto companies, in their turn, are increasingly having to "think local". They are not only moving production to the local market, to be closer to the consumer, by manufacturing and sourcing locally, or at least within the region, they are also dispensing with a large part of the foreign exchange risk they would otherwise be running. New manufacturing hubs in Greater China and South America are virtually a foregone conclusion. The impact on capital flows and ultimately on brand characteristics is going to be interesting. Will BMW still be German and Toyota Japanese? Will it even matter?

Further reading on global trade

Tags: ASEAN , automobiles , automotive industry , Deloitte , European Union , industry , Mercosur , NAFTA , North American Free Trade Association , Regional trade blocks , trade , world
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