Prestowitz

Honda makes a move

An announcement by Honda Motors especially caught my attention today. The big Japanese auto maker said it’s planning to increase its production in the U.S. by up to forty percent over the next two years. In fact, it’s going to be shifting production to its U.S. factories or some of the cars it normally exports ...

Justin Sullivan/Getty Images
Justin Sullivan/Getty Images

An announcement by Honda Motors especially caught my attention today. The big Japanese auto maker said it’s planning to increase its production in the U.S. by up to forty percent over the next two years. In fact, it’s going to be shifting production to its U.S. factories or some of the cars it normally exports from Japan.

Readers under the age of fifty may not fully appreciate the irony of this move, but those who remember the U.S.-Japan trade wars of the 1980s will understand that this is huge.

As counselor to the secretary of Commerce at the time, I was one of the chief U.S. negotiators with Japan at the time, and I remember only too well the plant closings and massive layoffs by Detroit’s big three as Honda and the other Japanese auto makers flooded the U.S. market with inexpensive, high quality, gas sipping cars. Try as it might, Detroit couldn’t match them. Even more humiliating were the efforts of the Big Three to export their luxury cars to Japan where they never sold more than a few thousand cars. (And those mostly to Yakuza gangsters who for some reason had a special preference for Cadillacs.)

Detroit constantly complained of unfair trade, arguing that the Japanese market was closed, that the Japanese producers were selling at high prices in their protected domestic market and then dumping cars at cut rate prices in the U.S. market, and, most importantly, that Japan was manipulating the yen to be undervalued against the dollar, thereby subsidizing its auto exports while at the same time imposing an indirect tariff on imports. But no one listened to these "excuses." The Japanese along with most of the U.S. media and most U.S. economists put the blame squarely on the shoulders of the U.S. auto executives. It was argued that they paid no attention to quality, failed to develop the economy cars the public wanted, made ruinous deals with the United Auto workers, failed to invest adequately in new technology, and managed only for the sake of tomorrow’s bonuses. As for the exchange rate, it was argued by many economists that Japan’s currency policies didn’t matter and that even if Japan stopped manipulating the yen, there would be no benefit for the United States because production would simply move to other low cost Asian locations. (Sound familiar in light of present experience with China?).

While there was some truth in all these criticisms, it was also true that the yen was under-valued and that its undervaluation was a major factor in Japan’s export success and Detroit’s competitive failure. Because of the currency problem, Detroit was always under pressure to cut costs, restrict investment, and reduce prices which, of course, also reduced profits. Conversely, Honda and the other Japanese makers were able to add more quality and frills and still sell at lower prices. Of course, that wasn’t the whole story. But it was an important part of the story, and this new announcement by Honda is evidence of the significance of this part of the story.

The yen has finally become a very strong currency just as the dollar was in the 1980s. Japanese producers and exporters are struggling as a consequence. Profits are down, and major manufacturers like Honda, Toyota, Nissan, Sony, Hitachi, and others are off-shoring production while cutting corners on quality and new product development. Now, it’s Ford and GM and Chrysler and the Koreans who seem to have the hot shot managers who know how to make the cars the public wants.

But it’s not really the management. It’s just really hard to be a hot shot manager when your currency is over-valued as Japan’s is today. It’s also important to realize that currency moves may have to be very large before they have an effect. The yen was at Y260-240/$ in 1984. Now its at Y77/$. The move to Y180/$ had little effect in terms of trade flows. At present levels, however, it’s having a major impact.

I recount this history both for its historical significance and for its implications for today’s global imbalances and trade and currency policies. The undervaluation of the Chinese yuan is having the same effect today as that of the yen had thirty years ago. Hopefully, we will not have to wait another thirty years for the rebalancing.

 Twitter: @clydeprestowitz

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