protectionism costs

Say No to Walls

Donald Trump
In trade we trust. Can you hear me? Source: Picture alliance [M]

Once again, politicians of all stripes are questioning the point of free trade. In France’s presidential election, 10 of the 11 candidates called for “patriotisme économique.” In other words: “French should buy French.” The American president has said essentially the same thing: “America First” means “buy American products and create jobs in our country.”

When it comes to making cars, the opposite is actually true: Protectionism can prevent investment and technological progress. It therefore poses a threat to livelihoods and is even life-threatening for many people.

It’s been 200 years since the British political economist David Ricardo formulated the theory of comparative advantage upon which the benefits of free trade are founded, building on Adam Smith’s principle of absolute advantage a century earlier. Ricardo held that specialization and division of labor allowed foreign trade to thrive, resulting in increased prosperity for all the participating trading partners.

And 200 years later, he is still right. It makes more economic sense for two countries to diversify the production of goods: One country is better at growing wheat, the other at weaving cloth. The countries exchange goods, protecting resources, and in both countries, people are fed and clothed efficiently and effectively. If each country fended for itself instead, there would be less wealth, fewer jobs and more resources and time would be needed.

It is shocking that these facts are still questioned, after some 200 years over which free trade has been a success. Ever since Ricardo, the poverty rate has dropped steadily worldwide. Now it is less by half what it was back then or, depending on the calculation, even just a quarter of it. And that’s with seven times as many people on the planet.

Nowhere do we see the benefits of free trade as clearly as in the automotive parts industry, which is highly dependent on this global exchange.

All of us still profit from this global division of labor, all the more so since World War II. Data shows average employment is highest in those OECD countries most strongly engaged in economic exchange worldwide. Without China’s production output, growing prosperity would have been lower or even come to a standstill in many countries, most of all in the US and Europe. Globalization has also promoted education and innovation. All of this has helped a huge middle class grow in China, which in turn offers growth opportunities for US and European companies.

Nowhere do we see the benefits of free trade as clearly as in the automotive parts industry, which is highly dependent on this global exchange – Continental included. More than 227,000 men and women work in 427 locations in 56 countries worldwide on the mobility of the future. To make automotive parts, we have contracts with 2,800 suppliers from all around the world who, in turn, are supported by about another 17,000 subcontractors.

That’s what enabled us to deliver 1.8 billion products to our customers in 2016. To achieve that, we bought 122 billion component parts and processed them in 100 of our plants for auto electronics worldwide. On average, each one of our products crossed a border four times, and these products in turn are installed in three out of four cars worldwide.

Why all the expense and effort for such a global exchange and global networking? The sole purpose of a global automotive industry value chain is to ensure safe and sustainable individual mobility for people worldwide.

We’re not quite there yet: every year, 1.3 million people die in street traffic every year worldwide. Technology like non-locking wheels when braking, electronic stability control, safety belts, airbags and driver assistance systems – like emergency braking assistance or blind spot detection– have certainly led to improvements. But we need to create more solutions as 1.3 million deaths a year are unacceptable.

But it isn’t enough just about developing technology for more safety, it must also be affordable for drivers and that’s where free trade helps. It makes possible the cost-effective production of car parts through division of labor. Reasonable production and labor costs attract investments in factories. What matters are offering competitive and fair wages, taxes, social benefits, and energy costs, as well as education and inventive spirit.

Moreover, free trade allows these developed and produced parts to be exported and used outside of the country of origin, creating economies of scale. The more often a part is used by customers worldwide, the cheaper it is to produce it. Large-scale production is what makes innovations and products available and affordable. Protectionism prevents this exchange, or at least makes it harder.

he North American Free Trade Agreement (NAFTA) offers huge benefits for the entire auto industry.

So without free trade, lifesaving technologies would either not be available in some markets or be too expensive for many to buy. That’s why we can say that those who build protectionist walls are endangering human lives.

We at Continental are investing in the United States: we have invested $2 billion there over the past five years and further, comparable investments are already in the works. Protectionism would slow down such decisions, reduce their scale or wipe them off the table completely.

As a rule, these investments don’t pay off until after a couple of years. This is due to the economies of scale and the constant effort to make new technologies more affordable each year, so it will eventually be bought and can be fully developed. That makes it hard to just move an established factory someplace else. Factories become more efficient with every additional investment. And for that to make sense, we need conditions to be reliable for years to come.

Continental employs more that 18,000 people in the US today – almost doubling in the years following the financial crisis. The North American Free Trade Agreement (NAFTA) offers huge benefits for the entire auto industry. The free trade agreement ensures more safety in the car, in road traffic and transport. It promotes employment in the US, Mexico and Canada and makes safe, clean, and intelligent cars affordable. And that way, it ensures prosperity and jobs in all three NAFTA countries and many others too.

That’s helping our systems and our customers make traffic accidents part of the past – and that’s where protectionism belongs too.

To contact the author: gastautor@handelsblatt.com

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