Smashing Success
A Chinese car signals the end of U.S. economic supremacy
Diary of the Late Republic, #18
Been reading articles (like this one) about the coming tsunami in the form of cheap Chinese electric cars. There’s the BYD Seagull, which will retail for about $11,000, a fraction of anything an American car company can do. Ford and GM have been getting fat on SUVs and pickup trucks; they’ve been bleeding cash trying to sell EVs. The Chinese, who entered the global manufacturing economy at the bottom end, are now making some of the most sophisticated value-added machines in the world. In this particular case, their mastery of battery technology (combined with easy access to the necessary rare earth minerals) gives them an edge that poses a mortal threat to the U.S. automotive industry.
We’ve been here before. Back in the seventies and eighties, cheap Japanese imports from Honda and Toyota had Detroit reeling, upending market shares, union jobs, and capital flows. The government bailed out Chrysler. Then there was the Great Recession of 2008, which threatened to seize up the economy, leading to another, more broadly based, Detroit bailout.
This time, the government’s intervention will more likely take the form of tariffs—if not barring these cars from entering the U.S. entirely. Both capital and labor will want this, and given the importance of the automotive business to the U.S. economy generally, politicians from both parties are likely to respond to demands for protection. The question is how long they’ll be able to get away with it. Assuming consumers will be patient indefinitely, the cost of insulating American industry from competition and innovation is likely to have a long-term corrosive effect. A deeply ironic outcome for a country so dedicated for so long to the self-evident benefits of free-trade capitalism. One that once made the U.S. automotive industry the envy of the world.
Once upon a time, the cutting-edge product in the world economy was Chinese porcelain: beautiful distinctive blue and white housewares sculpted from clay. But it was very expensive. The Dutch—in particular, the Delft company, founded in 1653—perfected a method of producing cheap “China” domestically using composite clays. It was one of a number of industries (shipbuilding was another) in which the Dutch gained a competitive advantage that allowed the seven United Provinces of the Netherlands to throw off Spanish imperial domination and become a European power in its own right. Two hundred years later, it was the Americans with the steel business. The key there was the Bessemer process, first developed in England but deployed with particular effectiveness in Andrew Carnegie’s Thomson Steel Works, which cut the price of a steel rail from $100 in the 1870s to $18 by the 1890s. Such was the stuff—the stuff—of which American industrial supremacy was made. One key industry: the new automotive business, mastered by Henry Ford. By the end of World War II, three-quarters of the world’s cars were made in the United States.
Survival of the fittest, goes the Darwinian maxim. The focus for those who invoke it is typically on the organism in question, but the real key is the environment in which the organism is functioning—one that is always changing and thus shuffling the adaptive deck. The economic environment that fueled American greatness is changing. We’re adapting fitfully, often not admitting to ourselves what it is that we’re doing—or not.
Environmentalists love these electric vehicles, and they may well become the norm. But it’s the economic logic that will ultimately prevail. It remains to be seen at what price.