The Trans Pacific Partnership (TPP) could be a boon to United States auto manufacturers. The TPP is a proposed free trade agreement between the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. If ratified, the agreement will open these lucrative growing markets to United States auto manufacturers by eliminating or at least significantly reducing the existing import tariffs and other trade restrictions currently in place. General Motors, Ford and Chrysler currently face import tariffs ranging from 5 percent (Australia) to as high as 70 percent (Vietnam) in the eight other countries currently participating in negotiations. The United States currently maintains one of the lowest import tariffs in the world at 2.5 percent. This is part of the reason why the Big Three only account for about 45 percent of all vehicles sold in the United States with the rest made up of Japanese, European and Korean imports. As the United States market becomes increasingly saturated, the domestic manufacturers will need to continue to look to sales abroad to continue to find revenue growing opportunities.
Domestics Need to Look Abroad to Continue Growth
General Motors, Ford and Chrysler once dominated sales in the United States but they have seen their share decline during the past 30 years as Toyota, Honda, Nissan, and more recently Hyundai have encroached on their turf. As market share becomes increasingly divided in the United States, the domestics will need to look abroad to continue their growth. General Motors and Ford have already made significant strides in gaining market share in developing markets around the world. In the first quarter alone, sales in North America only accounted for 30 percent of all vehicles General Motors sold worldwide, while North American sales accounted for nearly half of all vehicles Ford sold globally. The TPP will give the Detroit Three an opportunity to continue to grow by opening up these lucrative markets like never before. The eight other member nations currently participating in the TPP talks combined for more than 2 million vehicle sales in 2011.
Most vehicles sold in developing nations tend to be lower priced compacts so any price reductions that would result from the elimination of restrictive import tariffs could drastically improve the ability of GM, Ford and Chrysler to sell to these price sensitive consumers. Although 2 million vehicle sales across eight countries may seem like a drop in the bucket compared to the 14 million+ vehicle sales expected in the United States this year, it’s the potential for future growth that makes the TPP so enticing. A nation like Vietnam that has a population of 87 million and only 110,000 vehicle sales in 2011 could see sales increase by more than 3 million units over the course of the next five to ten years. This is assuming that at some point the ratio of new vehicle sales to the overall population begins to mirror more developed nations such as the United States or Australia, which currently sell approximately one new car per 20 citizens. Across all eight countries in the agreement, we could see vehicle sales eventually increase by more than 5 million units overall using similar logic. If the Detroit Three are able capture even a small portion of this expected growth, they should see a sizable boost to their overall bottom line.
Japan Would Make a Fitting Addition to the TPP
The 2.5 percent import tariff currently in place (25 percent for light truck imports) in the United States is only bested by Japan, which has no import tariffs. Although not yet an official member of the TPP, Japan’s Prime Minister Yoshihiko Noda has publically stated that he would like his country to participate in the negotiations to ultimately become an active member of the agreement. Japan’s intent to become a full participating member of the TPP has been met with resistance from General Motors, Ford and Chrysler, which claim that although Japan has no tariffs currently in effect, they restrict their auto market to foreign competitors through non-tariff barriers and artificially low exchange rates.
Although it is difficult to quantify the claims of the Big Three (in fact, the Yen is at an all-time high relative to the dollar), what is clear is that Japanese consumers clearly prefer homegrown vehicles over imported foreign competitors. Japan’s auto sales in any given year are typically comprised of 95 percent domestically produced vehicles. This could be the result of Japan’s preference for small cars, which until recently have not been the strong suit of domestic manufacturers. Whether the lack of a United States automaker presence in Japan is due to local preference or more subtle trade restrictions, we hope that the Japanese and Detroit Three can find some middle ground because consumers would benefit from the lower prices on Japanese produced vehicles that could result from a reduction of the United States 2.5 percent import tariff.
— Alec Gutierrez, senior market analyst of automotive insights, Kelley Blue Book