A Trying, Yet Worthwhile, Transition

In an interesting twist, European automakers have asked their governments to revise a free trade agreement between the EU and South Korea adopted last July. The reason? While South Korean vehicle exports to the EU have reportedly risen 67% through March, EU exports to South Korea have increased only 7%. And the added competition from South Korean cars is putting pressure on European automakers.

But note the fact that doesn’t prevent overall trade from increasing—meaning even if the mix of European and South Korean cars is shifting in local markets, overall, global economic activity could still increase. Further, in our view, it’s the wrong reaction to ask the government to punish successful competitors, as opposed to auto manufacturers instead finding ways to increase and improve their own competitiveness.

There are plenty of competitive European businesses—including automakers. But it seems some still want a leg up through government policy, arguing free trade leads to things like plant shut-downs and job losses. And in the short term, that’s entirely possible. But in the long run, if European carmakers cut some costs and begin running leaner, more efficient businesses, that likely ultimately opens up room on the balance sheet to invest more aggressively in research and development. And then, just maybe, they begin developing more desirable products—innovating cheaper, more efficient production methods. Maybe they do a little consumer learning and come up with the next design that everyone has to have. Then, as they start rolling out increasingly desirable, yet cheaper, automobile models, they start to see demand go up.

Voila! Suddenly, the same automakers worried about competing with Korea today need to hire to support the demand. Maybe they need to build another factory. Before you know it, they could be recouping lost share, sans government influence. Business is growing, and they’re not suffering so much from the fact consumers have a wider array of choice. In fact, that competition is precisely what pushes them to maintain their lean business model while continually seeking to innovate and stay one step ahead.

Producers aren’t the only beneficiaries, either—as discussed by Milton Friedman in Free to Choose, consumers benefit from heightened competition and greater choice, too. Consider: If the treaty’s modified and imports are again restricted (by increasing cost or other means), European consumers have more limited choices when purchasing a car. That gives European automakers something of a cartel—with fewer options available, domestic producers can charge more than they likely could if cheaper imports were an option. And if consumers lose out, that means everyone does—given consumer spending makes up a significant chunk of global GDP. Allowing cheaper imports from abroad (of whatever sort—cars, widgets, butter) means consumers keep more of their money, which means they can spend it elsewhere.

Granted, this isn’t quick, easy or necessarily painless in the short run. Should the recent trend prove lasting and not passing, impacted European countries could experience some short-term dislocations as resources are reallocated to areas in which the country has a comparative advantage—meaning unemployment could temporarily go up some. But that necessarily doesn’t mean in the long run everyone’s worse off.

So while European automakers may fear the heightened challenge their Korean competitors are currently seemingly posing, we’d encourage them, rather than regressing, to accept the challenge as an opportunity to increase their own competitiveness. In the end, everyone likely wins—consumers and producers.