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.Given the strength of auto sales, one would think that US auto manufac-turers, auto suppliers, and their workers would be celebrating.But weare not.Despite the strong sales, auto manufacturers and suppliers arestruggling to turn a profit, and many autoworkers have been laid off orare threatened with layoffs.Credit ratings for US auto manufacturershave been downgraded, and many suppliers are faced with bankruptcy.While there are many reasons for the current challenges facing American-owned auto manufacturers, the strong dollar and the artificially weakJapanese yen stand out among the primary causes.Before I address why the strong dollar is depressing profits for domesticauto manufacturers and their suppliers, let me briefly discuss the recentperformance of the US auto industry.G.Mustafa Mohatarem has been chief economist at General Motors Corporation since 1995.He wasthe lead contact for General Motors with the United States and other governments during theUruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations, as well as thenegotiations for the Canada-US Free Trade Agreement and the North American Free Trade Agreement.135Copyright 2003 Institute for International Economics | http://www.iie.com Figure 6.1 Vehicle sales around business cycle peaks (businesscycle peak 100 percent)Source: General Motors.Immediately after the terrorist attacks of September 11, 2001, consumerconfidence fell by roughly 10 points.Historically, falling consumer confi-dence has led to sharp reductions in vehicle sales: When the economycatches a cold, the auto industry catches pneumonia. It looked like itwould be no different this time.In the days immediately after September11, vehicle sales fell by more than 35 percent.Customer traffic in ourshowrooms evaporated, suggesting that sales would remain depressed.We recognized that without some bold measures, the industry couldbe headed for a deep downturn.At GM, we responded with our KeepAmerica Rolling program, which offered consumers zero-interest financ-ing on all GM products.The response to this and similar programs bymany of our competitors exceeded all expectations.Vehicle sales surgedto a record 21.5 million annual rate in October 2001 and remained a strong18.2 million in November.The industry ended the year having sold over17.4 million vehicles in 2001, the third best year ever.Figure 6.1 illustrates the impact of early incentives on vehicle sales bycontrasting auto sales in this recession and the recessions of 1990-91 and1979-80.As the figure shows, in a typical recession, auto sales can dropoff 15 to 25 percent from their trend level.In this downturn, auto salesmaintained their very strong pace.Alan Blinder noted in an op-ed piece(Washington Post, December 11, 2001) that the sales stimulus provided by Keep America Rolling and similar programs drove auto sales to record136 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com Figure 6.2 Unit sales, vehicles (cars and light trucks), 1990-2002Source: Bureau of Economic Analysis.highs while other categories of consumer spending were slumping.The zero percent financing programs thus amounted to a kind of privat-ized stimulus policy wonderfully timed, well-targeted, and effective.Would that Congress have done so well? GM estimates that for the industry as a whole, the zero percent interestprograms generated roughly 500,000 additional sales.This is a very con-servative estimate, as it assumes that the US economy would have stabi-lized after the September 11 attacks even without our incentive programs.In any case, using Bureau of Labor Statistics (BLS) methods, the 500,000additional vehicle sales an addition of more than $10 billion to the USGDP translate into 115,000 avoided layoffs in auto and related supplierindustries during the lowest point of the recession.Of course, the auto manufacturers can t take all the credit for thestrength of vehicle sales in the period since the attacks.Aggressive easingof interest rates by the Fed certainly lowered the cost for automakersoffering zero or low interest rates.In addition, the Bush tax cut added todisposable income.But as Blinder pointed out in his op-ed piece, Waitingfor Congress to pass the much-needed economic stimulus bill is beginningto look like waiting for Godot.Fortunately for the US economy, two largeprivate industries automobiles and homebuilding have stepped up toprovide the stimulus that the government has thus far failed to deliver. From a slightly longer-term perspective, auto sales have been exception-ally strong since the mid-1990s (figure 6.2).The 1990s started on a sourIMPACT OF THE STRONG DOLLAR ON THE U.S.AUTO INDUSTRY 137Copyright 2003 Institute for International Economics | http://www.iie.com note for the US auto industry.With the economy in a recession, auto salesfell precipitously.While sales recovered as the economy emerged fromrecession, the sales recovery was muted.Many analysts who follow theindustry argued that auto sales would remain weak for an extendedperiod because customers were more interested in computers, boats, andhome improvements.Fortunately, the pessimists were proved wrong asindustry sales improved steadily through the 1990s.Auto sales exceededthe 15 million mark which was considered the benchmark for a strongsales year for an unprecedented five consecutive years before jumpingabove 17 million for three years.The 1990s also marked the revival of the US auto industry and Ameri-can-owned auto manufacturers.In the 1980s and early 1990s, it hadbecome conventional wisdom that American auto companies would notsurvive the competitive challenge from Japan.Yet by the end of thedecade, it was the Japanese auto companies that were struggling.What Happened?The first factor was the economy.The US economy thrived in the 1990s,while Japan s economy was stagnant.The strong US economy led tostrong vehicle sales again, more than 15 million each year since 1995.In contrast vehicle sales in Japan trended down steadily and are now atlevels last seen in the early 1980s
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