Let the Free Market Work!

Toyota’s recent problems with “unintended acceleration” and faulty brakes could prove to be a valuable lesson for those who believe that protectionism is the answer to all our problems. Earlier this week, Senator Mike Johanns of Nebraska questioned whether the US should impose restrictions on Toyota vehicle imports in response to the safety concerns. He pointed out that Japan had banned imports of US beef in December, 2003, when fears about Mad Cow Disease were widespread. The beef ban remained in place until 2006, causing much harm to the US cattle industry. Up until the ban, Japan had been the industry’s largest export market. Needless to say, Japan’s actions caused much anger and led to calls for retaliatory trade restrictions on Japanese imports. The fears of a trade war were very real.

The implication from Senator Johanns’ comments is obvious: the Japanese have stricter safety standards for their own consumer market than for their export markets. While Johanns has a point, it is also clear that both the beef and auto disputes were safety issues, and not trade issues. Toyota should undoubtedly be subject to the scrutiny of regulatory bodies such as the National Highway Traffic Safety Administration (NHTSA) so that all measures are taken to ensure the safety of their vehicles. In this respect, Toyota should be treated no differently from any other automaker, domestic or foreign, operating in the US market. And if it is found that Toyota had knowingly sold vehicles with faulty accelerators into the US market, heads will obviously roll in the form of lawsuits, fines, and the potential criminal prosecution of management. However, the issues at Toyota are by no means the result of any failed trade policies in the US or Japan.

In the late 1970’s it was learned that Ford continued to produce and sell the Pinto model despite clear “smoking gun” evidence that the vehicle was not safe (ie, had a propensity to explode upon collision). Amazingly by today’s standards, Ford was acquitted of criminal wrongdoing even as the company revealed its cost/benefit analysis showing that it was less costly to pay jury awards to the families of crash victims than it was to make the vehicles safe. However, the damage to Ford’s reputation was immense. The company remained in the penalty box for many, many years for its ethical breach. Customers shunned Ford products, and financial results and shareholders suffered mightily.

Yesterday, Toyota announced that US sales of its vehicles fell for the second straight month due to the safety problems. February sales of Toyota vehicles fell 8.7% compared to February, 2009. By contrast, industry wide US auto sales were up 13% in February. Ford sales were up 43%, General Motors was up 12%, Nissan was up 29%, Honda was up 13%, and Hyundai was up 11%. Year-over-year sales gains at Ford, GM and Chrysler “gave US-based automakers a combined 46.6% market share, more than the 44.8% for Asian competitors, according to Autodata Corp.” (from the Wall Street Journal) Toyota’s US market share fell to 12.8% in February from 15.9% a year ago.

Yesterday’s sales data reveal the free market at work. While Toyota’s dramatic market share gains over the past many years were based on a reputation for quality, reliability, and safety, yesterday’s data reveal the loss of some of that brand equity. Perhaps the company started to cut corners in its quest for ever-higher market share. In any case, consumers are speaking with their wallets, which is the way it should be. Trade restrictions will only invite retaliatory action, but Toyota will pay for its sins regardless.

Hang in there,

Peace,

Michael