What Is American?

DAN BOBKOFF: What does it mean for a product to be American? Or to be from anywhere?

SEAN MCALINDEN: We see this confusion: What is an American car? What is, even, maybe a Japanese car?

DAN BOBKOFF: Globalization is real, but most of us still think of certain things as being from a place—a Toyota is Japanese, GM is American. And it's not just cars. We all know the iPhone was designed in California and assembled in China. But the truth is the iPhone is a global product.

YUQING XING: There is no way products can be defined by where they are made.

DAN BOBKOFF: I'm Dan Bobkoff. On this edition of Just Business, we'll look at the auto industry as an example of just how complicated this has become, and we'll get a whole new way to look at global trade. It's not just imports and exports. It's the whole supply chain. Forget made in the USA. We're talking made in the world.

Stay with us.

[End of Introduction]

DAN BOBKOFF: You hear this kind of thing from politicians every election year:

VOICE-OVER: I’ve started something in Washington called the Buy America Caucus.

VOICE-OVER: We want you to have "Made in America" stamped on your product.

DAN BOBKOFF: But when you get down to it, what does "Made in America" really mean today? Consider this ad for a pickup truck:

VOICE-OVER: It's designed in Newport Beach in California and it's built in the heart of truck country in San Antonio, Texas.

DAN BOBKOFF: The truck they're talking about? A Toyota Tundra. Meanwhile, many supposedly American trucks are built in Mexico and Canada.

The auto industry has become truly global. In the United States, GM sells a Buick designed in Germany, Chrysler is majority-owned by an Italian firm, and Honda builds more cars in the U.S. than in Japan.

A little later in the podcast we'll talk to an economist who is at the forefront of a new way of measuring trade. Here's a preview: Under his model, the iPhone actually creates a U.S. trade surplus with China.

But, first, let's look at the auto industry as an example of just how complicated this question is. It has implications for policy and for anyone trying to support jobs in the U.S.

Sean McAlinden is the chief economist at the Center for Automotive Research. I asked him what makes a car—or anything, really—American.

SEAN MCALINDEN: Some people would say it's the ownership of the company, where its headquarters is located. Others would say it's the domestic content or the amount of, let's say, employment and income that Americans receive from the sale of a car. Obviously some Japanese nameplates—most famously, the Honda Accord or the Toyota Camry or the Avalon—have very high U.S. content levels, equivalent to some of the highest levels of some of the so-called Detroit companies. On the other hand, the headquarters and product development operations of the American companies are, despite their global operations, largely located in the United States, and those for the Korean and Japanese firms are located in their countries.

So it's a really tough call. Thanks to the international automakers, we've managed to maintain a fairly sizable automotive industry, because they have decided to relocate so much of their essential production in the United States and buy parts made by U.S. suppliers.

It's a tough one to really calculate. The government doesn't do a very good job through the so-called Labeling Act, because even there they count Canadian content as U.S. content and really don't get a very tight definition on what the percentage of parts made in the United States really is.

DAN BOBKOFF: And some of those Hondas and Toyotas are actually designed and engineered here in the States, right?

SEAN MCALINDEN: That's correct. The classic example now would be the Toyota Tundra pickup or the Toyota Avalon. But a larger and larger share, I think, of the final design of their major intermediate cars—the two leading passenger model on the market, the Camry and the Accord—final designs are tailored here in the United States for this market.

DAN BOBKOFF: Let's talk about GM a little bit. You had an interesting example about that. Here's a company that is still part-owned by U.S. taxpayers and yet it's looking less and less American as you project into future years.

SEAN MCALINDEN: There isn't any question about it. They already produce and sell more cars outside of North America, not to mention the United States, than they do in the United States. By 2018, they are forecasting that they will be selling 80 percent of the vehicles they sell worldwide outside of North America.

There's nothing wrong in that, of course. We want our companies to be successful globally. That's a major directive from the administration. It's just that the U.S. market is not going to be important in the long-run fortunes of General Motors or Ford, not nearly as important as it has been in the past. That's because the market is growing so much more quickly in large developing markets like China and India.

GM is 32.5 percent owned by the U.S. government. Some people would say, "How much more American can you get than that?" Then there are quite a few Americans that would say the opposite, "How un-American can you get?"

There are some buyers, GM believes, that are avoiding the company for that reason, government ownership.

Interestingly enough, Chrysler's majority owner is Fiat, an Italian company, perhaps about 58 percent, 59 percent of the ownership of Chrysler, and its results are being reported at the end of the year in the Fiat annual report, not in a separate Chrysler document.

DAN BOBKOFF: What is Honda planning to do in the U.S. market?

SEAN MCALINDEN: With the construction of their new large-scale assembly plant in Mexico, and also, from some other input that we have received from the company that they may cease imports of vehicles from Japan—any model, even their Acuras—not too far into the future, maybe sometime next year, all of the vehicles they sell in the United States will be produced in North America: Canada, the United States, and Mexico.

Their importance in the Ohio economy is so large that much of the comeback we read about in Ohio manufacturing that President Obama or the Republican governor is taking credit for, is actually Honda's comeback after the tsunami. That's how important they are in mid- and southern Ohio, with 160 first-tier suppliers and tens of thousands of jobs, supplying their other assembly plants in Alabama, Indiana, and Ontario as well. It's really a huge success story in terms of foreign direct investment in the United States.

DAN BOBKOFF: Of course, we're used to thinking GM is American and Honda is Japanese. But we tend to forget that most of these cars are made of maybe 30,000 parts, and most of those parts come from other companies all down the supply chain. Those are global companies as well.

How complicated is it to try to figure out where all the individual components of a vehicle come from and how that all adds up?

SEAN MCALINDEN: It's very, very difficult. In the United States alone, we have about 4,900 separate parts-making establishments from about 4,000 companies. In Mexico they have well over 400,000 auto parts workers, primarily working for auto companies located in the United States. Worldwide there are about 8.5 million workers working in both vehicle and parts-making plants, and perhaps 50,000 to 60,000 companies. Many of them supply each other.

Confusingly enough, in the United States about 65 percent of the suppliers that GM, Ford, and Chrysler have are also used by Honda, Toyota and Nissan. So they even share the very same suppliers in the United States and are now sharing the same suppliers in Mexico.

So you really can't say, "Well, my GM truck has more American suppliers attached to it, let's say, than a Toyota truck." It's just not going to be true.

DAN BOBKOFF: Since we have four tiers of suppliers—meaning suppliers supplying suppliers supplying suppliers, et cetera—I guess for you it must be very hard to track what's being built where and who's buying from whom.

SEAN MCALINDEN: It's fairly impossible, frankly. During the terrible tsunami last year, the automakers, the Americans, Japanese, and others, found out they really didn't know who the suppliers were, even at the second tier. Their first-tier suppliers didn't always tell them who they relied on in the second and third tiers. That's usually where there is a lot of cross-sharing between companies, at those lower levels, and when some of them got knocked out in Japan, everybody's production began to suffer very quickly.
There's not a lot of information. The industry overall, globally, has been working very, very hard and trying to identify those links, to try to back them up to reduce risk of production interrupts.

DAN BOBKOFF: Do you think we're moving to a point where maybe calling things domestic or foreign or made in the USA is becoming somewhat meaningless? Or maybe just more complicated?

SEAN MCALINDEN: Frankly, these are global products produced by global companies, relying on engineers from all over the world in their design. Essentially the last argument you're going to have on whether it's an American car is who basically owns the company—that's about it—and not how it's produced.

Ethically, if you have loyalty to a particular state or region or community, you could obviously make a choice on that basis—"that pickup truck is built in my backyard." That could be a Tundra in San Antonio, Texas, as much as a Chevy pickup in Fort Wayne, Indiana. To someone in southern Texas, that's their patriotic truck, if you think that way. But that might make more sense than, let's say, "American."

I don't know. They are so expensive, I'm not sure people really care, outside of those regions where the vehicles are actually produced.

DAN BOBKOFF: Do you think we'll ever get to a point where we're no longer thinking of things as—as I said, with the iPhone example, there are two ways to look at it. You can look at it as a product imported from China or as a product that has parts from all over the world, designed in one country, built in another and sold, in many others. Do you think we'll see the same thing in other industries, too?

SEAN MCALINDEN: Certain American vehicles, no matter where they are built, will be recognized as sort of American icons. The pickup trucks built by GM, Ford, and Chrysler are probably the most American of all the things that they build. Yet they build quite a few of them in Mexico. But they still build a fair number here.

Do we think we'll ever get to that point? Not in Michigan or, perhaps, northern Ohio, like in Toledo. I think the rest of the country is almost at that point, to tell you the truth. It's good for Detroit. The best way to compete is on the basis of the product that you build and design. It's not on what kind of flag you’re flying.

DAN BOBKOFF: What do you think matters more in terms of a nation's economy, where a car is built and where the workers are, or where the profits go?

SEAN MCALINDEN: I think it's where the car is built in the auto industry. Unlike Google, Microsoft, or Apple, we create jobs. They don't have an industry that produces 700,000 or 800,000 jobs for their companies. These are well-paid jobs for a part of the population that is willing to work hard and make a good rate of pay and learn over time, to make a high value-added here in the United States. It's amazing to see, per sales dollar and per profit dollar, how few jobs these famous IT constructions have actually created in the United States, directly or even indirectly.

DAN BOBKOFF: If a politician came to you and said, "I want to look good driving an American car, and my two choices are a Toyota Camry or a Ford Fusion built in Mexico," what would you recommend?

SEAN MCALINDEN: That would be a tough one. I own, myself, three Fords. Two of them are built in the United States, one in Kansas City, one in Dearborn, Michigan. The third is built in Mexico. I had a chance to talk to an old friend of mine, the president of the UAW [United Auto Workers union], and I said, "Well, Bob, can I park that Mexican Lincoln MKZ at the union local down at headquarters?"

"Oh, no, I'm sorry, Sean, you can't."

"But," I said, "the engine and transmission and climate control unit—a huge hunk of the car's value—and the design for the car are all American-made. We ship it to Mexico. They just final-assemble the car."

"Sorry, can't do it. My guys just won't stand for that."

Even though the content was still fairly high, just because it's assembled in Mexico was bad enough that you can't park it near a UAW local. At the same time, we were still building Mazda 6s in the Michigan Flat Rock plant. So I could have parked my Mazda 6, a Japanese nameplate, at the union local, but not the Ford Lincoln. That's getting a little bit silly.

DAN BOBKOFF: Sean McAlinden is the chief economist at the Center for Automotive Research in Ann Arbor, Michigan.

Every year a website called cars.com comes out with a list of the most American vehicles. They measure that based on where it's built and where the parts come from. For what it's worth, four out of the top five this year came from Toyota and Honda.

But it's actually more complicated than that. When the Center for Automotive Research tried to track the supply chain for modern cars, McAlinden says they found it nearly impossible. That's because these cars, which are made by global companies, are comprised of components made by other global companies. The seat might come from one supplier, and that company has its own list of suppliers, each with factories around the world. After a while, it's hard to know where anything is coming from.

That brings us to Yuqing Xing. He's an economist with the Asian Development Bank Institute. He caused a bit of a stir a couple of years ago when he published a paper showing two very different ways of looking at the iPhone and trade. Under the current policy, a country gets all the credit for its exports. If an iPhone is built in China, it's considered a Chinese product.

But there's another way to look at this. If you calculate the value added by the iPhone at each stage of its production, many companies and many countries are involved. An American company makes the glass for the screen. A Korean company makes the memory chips. By that measure, the iPhone actually creates a U.S. trade surplus with China.

YUQING XING: Apple itself contributed nothing to the manufacturing process. The rest of the companies which are located in the supply chain contributed. China contributed about $6.5. That is about 3.6 percent of total manufacturing value. A Japanese company, Toshiba Murata, contributes about 34 percent of the manufacturing value. Germany contributes 16.8 percent, South Korea 12.8, and the rest of the world contributes about 27 percent.

All the i-products, all the products designed by Apple Computer, are not labeled as made in China—not just iPhone. If you look at iPad, iPod, it's assembled in China and designed in California. Apple Computer does not say where the product is made. I think Apple is very clear: There is no way it can be defined where the products are made.

DAN BOBKOFF: So we're really talking about one product and you have all these different countries that are benefiting from this. It's really not a China-take-all, the way it's often made out to be when you hear politicians and lawmakers talk about trade.

YUQING XING: Our mindset still frames it in the older fashion of international trade. If we think about how international trade was done 200 years ago, each single product simply was made exclusively in a single country. But modern trade is based on a supply chain or production network. This actually is true of many manufactured products.

Unfortunately, we have not changed the way we label products. That’s why we often label this country—it's made somewhere. That place actually is the final place to finish the product. China, fortunately or unfortunately, has become the exporter platform of multinational companies from various parts of the world. Most of the products actually finally are shipped out of China to the rest of the world, so they label that as made in China, even though China's contribution is very tiny.

Because of this, I think politicians just simply pick out the products and say, "Oh, this is made in China." They try to reduce the made-in-China imports. Unfortunately, if they really impose any kind of trade sanction on products labeled made in China, they may hurt themselves.

Another thing, I think, is when U.S. politicians or policymakers think about a Sino-U.S. trade deficit, I think they should also think about other countries' trade balance with China—for example, Japan and Germany. Japan actually manages to have even a trade surplus with China, and Germany has a very small trade deficit with China. The labor cost in both Japan and Germany, if not higher than that in the U.S., at least matches that in the U.S.

If those two countries do not have a significantly high trade deficit, why does U.S. run a huge monetary deficit with China? I think this is a question American politicians and scholars should really think about. When agencies like WTO [World Trade Organization], OECD [Organisation for Economic Co-operation and Development], World Bank, and the Asian Development Bank, even the U.S. Trade Commission start to do the research on how to use a value-added approach to measure the global value chain of manufactured products, I think in the future we'll be less concerned about where those products are made.

DAN BOBKOFF: One of the interesting takeaways from your paper is that if you look at the iPhone under the value-added approach, America actually comes out quite well.

YUQING XING: Yes, I agree with you 100 percent. The retail price of the iPhone is $500. Of the $500, I think Apple takes away $320. That's a significant portion of the whole value-added for iPhone. But we should also realize, in terms of job creation, I think Apple Computer actually created more jobs outside of the U.S., because you need only a few hundred genius designers and software engineers to design new products.

DAN BOBKOFF: We're talking about products here, things like the iPhone that's an individual product from Apple. But are we also moving away from thinking of companies as from specific countries? We like to think of General Electric as an American company and Honda as a Japanese company. But is that also an outdated way of thinking, do you think?

YUQING XING: GE's origins started in the U.S.; Honda's origins started in Japan. But now I think those companies (and others like them) have become multinational companies. If they have international operations, in particular, if they receive a significant portion of their revenue and profits from the global market, I think where they originated becomes less and less important.

Those companies—I don't think they themselves emphasize as to where they are from. I think they basically emphasize the brand image of their company in order to differentiate their products from other competitors' products.

DAN BOBKOFF: Do you see a day in the future when we won't see stamped on these products "Made in China" or "Made in USA," but instead, maybe something a little more complex?

YUQING XING: Yes. WTO actually created this so-called "Made in the World" initiative. As we gradually realize that most of the products we buy or use are actually made by many companies located in many countries, people may pay less attention to where the products are made. The reason products should be labeled as made where is simply because in the trade rules, there is the so-called origin of the products. That's just part of the requirement. In the future, as we discuss more and more about this global value chain, I think maybe we have to change this rule of origin.

DAN BOBKOFF: I was just in Japan a few weeks ago. It was my first time there. I was struck by how, even more than in the States, Japanese car buyers seem to really buy their home products. You see lots of Toyotas and Hondas, no American cars there. You see some German cars, but no American cars.

I wonder if there is still sort of national pride in most countries that are industrial for their home products and whether this value-added approach might come up against this when there is branding involved?

YUQING XING: Frankly speaking, I have been living in Japan about 16 years. I have bought many made-in-Japan products. Those products carry a high premium price—much more expensive than products made in China, Taiwan, or Malaysia.

I think if American companies really want to emphasize "in the U.S.," they should try to create some kind of image: What is the uniqueness and what are the strengths of the made-in-the-U.S. products?

I know Tiffany has very famous jewelry that is completely made in the U.S. I hope Tiffany will not outsource this to other countries and will carry on this tradition.

DAN BOBKOFF: Yuqing Xing is an economist at the Asian Bank Institute in Tokyo. I reached him in China via Skype.

That’s all for this edition of Just Business. I’m Dan Bobkoff. We got production help from Terence Hurley, Madeleine Lynn, and Jennifer Otterson. Thanks to Tony Higgins for our music.

Check us out on iTunes and the Stitcher Smart Radio app for more episodes of Just Business. For all the great programming and events from Carnegie Council, go to carnegiecouncil.org.

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