In the wake of President Donald Trump’s protectionist stance for domestic manufacturing, many observers have spoken in defense of free trade. AIER has its own history of publishing in this area. In this post, I want to highlight one point that we touched on briefly in the December edition of AIER’s “Business Conditions Monthly” – domestic manufacturing workers being “protected” in any given instance are usually themselves users of imported goods. And I don’t just mean consumers stopping at the store after their shift – they are customers at work, too.
Recently, Ford Motor Co. has been in the news for canceling a planned new plant in Mexico and instead investing in improvements to an existing plant in Detroit, so let’s use the example of the auto industry. One of the models affected by the plans was the Ford Focus, so it is natural to say that those cars will now remain “Made in America.” But the final product isn’t the whole story. The car is assembled in Michigan, but many of the parts are made somewhere else. The engine will have been manufactured at a separate Ford plant, and the brakes at another. Ford may buy tires from Goodyear, which were made in yet another plant, and the natural rubber used to make those tires may have been imported, and so on for a thousand different parts.
Is the Focus made in America or not? One answer is to find out how much of the value of the car was manufactured domestically. The total value of any final product can be divided into two parts: the “value-added” of the final product, in this case the price of the car minus the cost of all of the inputs; and the value of the parts themselves.
According to a 2014 U.S. Department of Commerce report, “What is Made in America?”, the gross U.S. output of the category “motor vehicles, bodies and trailers, and parts” was $522.4 billion in 2012. The report estimated that only 22 percent of the value of this industry is due to final value added, leaving 78 percent in intermediate inputs. It further estimated that 82 percent of these inputs are bought domestically, which suggests that about 86 percent of the value of this industry (22 percent plus 82 percent of the remaining 78 percent) is domestic. But there is one more step. Some of those intermediate goods bought in the U.S., like the Goodyear tires, are themselves made partially with imported material. After accounting for that, the final estimate is that 71 percent of the $522.4 billion was created domestically.
Put another way, about $150 billion of the final value in cars and auto parts produced domestically was made abroad. This long circle returns us to the original arguments in favor of trade. Tariffs may protect the domestic producer at the expense of consumers and overall gains from trade. But when domestic producers are also shoppers on the global market, as is the case in the auto industry and many others, these protections are self-defeating right out of the gate.