The New Republic

June 22, 1992

HEADLINE: Miniban: Detroit's victory over Mazda; Minivan price gouging cases

BYLINE: Bovard, James

BODY: The U.S. government is on the verge of adding thousands of dollars to the price of new minivans, a decision that could lead to price gouging on almost all automobile sales. Last year Commerce Department officials urged the Big Three automakers to formally accuse Japanese companies of dumping minivans in the United States. On May 19 Commerce pronounced Toyota and Mazda guilty. The U.S. International Trade Commission will rule on June 24 whether American makers have been injured by the dumping.

The U.S. dumping law prohibits foreign companies from selling products in the United States for less than their foreign price or their cost of production. Commerce has rigged this case by manipulating the numbers to boost Mazda's and Toyota's apparent production costs--and to lower their foreign cost/U.S. price gap that it cited as proof of unfair trade.

This is a bizarre case. Domestic companies account for more than 90 percent of the minivan market, and Japanese minivans tend to be significantly higher priced (and higher quality) than U.S. ones. Yet, according to the Big Three's complaints, a trickle of high-priced imports are devastating the U.S. auto industry.

Although the Commerce Department convicts 97 percent of the foreign companies it investigates, it attacked the minivan case with a rare vengeance. At one point it had four verification teams in Japan rummaging through the confidential records of Toyota and its suppliers. Commerce made eleven sweeping demands for information from Toyota; Toyota responded to one with thirteen boxes of computer printouts. The department apparently spent so much money going after Toyota and Mazda that it has almost exhausted its annual budget for import-related computer work and is postponing work on many other dumping cases.

Toyota's and Mazda's primary crime was failing to make large profits. U.S. dumping law, inspired by medieval scholastics, requires foreign companies to earn at least an 8 percent profit on their U.S. sales (the average U.S. corporate profit in a good year is 5 percent to 6 percent). Toyota's "dumping" margin was 6.75 percent and Mazda's was 12.7 percent. If not for the 8 percent rule, Toyota would be innocent and most of Mazda's margin would have evaporated. Toyota is also being penalized because some of its operations are not sufficiently bureaucratic; U.S. law declares that foreign companies are cheating unless they spend at least 10 percent of their cost of production on administrative overhead.

Based largely on allegations by Ford engineers, Commerce investigators asserted that Toyota was not paying enough for parts from some of its related companies. Commerce also claimed that Toyota's current prices did not account for future minivan research and development--a novelty in the annals of cost accounting. Mazda was convicted partly because, in many cases, Commerce compared the cost of building new MPVs in Japan with the sale price of used MPVs in the United States. Mazda was also skewered because Commerce chose an abnormally long period--October 1990 through May 1991, instead of the usual six months--to compare U.S. prices and Japanese costs, and made no adjustments for gyrations in exchange rates during the Gulf war. Deputy Assistant Commerce Secretary Francis Sailer admitted in an August 12, 1991, internal memo that dollar/yen exchange rate fluctuations by themselves would add 1.9 percent to Mazda's dumping margin.

The case is now before the International Trade Commission, where a peculiar concept of trade law comes in. A foreign company can be convicted of injuring an American company if the latter's prices would have been higher without foreign competition. So Japanese producers can be found guilty if their minivan sales resulted in "price suppression"--i.e., preventing the Big Three from charging more. This may be the most anti-consumer regulation in the federal statute book.

The U.S. minivan industry has probably been hurt more by Consumer Reports than by imports. Last year the magazine headlined a story on the faulty automatic transmissions used in most Chrysler minivans: "It's a Lemon--Steer Clear." It noted that Ford's Aerostar suffered from "slow and clumsy routine handling; even more sluggish in accident-avoidance maneuvers . . . harsh, bounding ride . . . haphazard controls." General Motors has foundered partly because of the weird design of its APV minivan; one GM manager told The New York Times that it "looks like a dustbuster."

Chrysler has dominated the minivan market since 1983, and, according to Chrysler counsel John Greenwald, "We rely on the minivan business for a disproportionate share of our profits." Ward's Auto World estimated in 1990 that Chrysler made $ 5,000 gross profit on each minivan it sold. That is a profit ratio of up to 30 percent--which is now being threatened by competition from imports. Chrysler Vice President for Washington affairs Robert Perkins moaned to the ITC on May 21, "I can unequivocally tell you that stiff competition from the new Japanese imports was a very key factor in our decision to [offer consumer rebates] on these vehicles . . . Profits really fell off."

Perhaps the most creative argument advanced in this case is that Japanese minivan imports somehow destroyed Chrysler's credit rating. Perkins complained that minivan imports were the key to Standard and Poor's downgrading Chrysler's credit rating in 1990: "The loss of our investment grade credit rating has cost us millions, tens, hundreds of millions of dollars in added interest costs." Greenwald told the ITC, "The impact of competition in the minivan sector on Chrysler's debt rating dwarfs everything else . . . in terms of palpable injury." Actually, Chrysler is declining toward a junk bond rating because it has foisted so many lemons on the American public.

There are other twists. More than half the minivans Chrysler sells in the United States are made in Canada. Thus it is arguing the U.S. government should force American consumers to pay higher prices in part because its Canadian operations have lost business to Japanese competition. Though Ford has spent
a small fortune prosecuting this case, it owns 25 percent of Mazda's stock--and will soon begin selling a new minivan jointly developed with Nissan.

Unfortunately for the Japanese, the ITC is stacked. There are six commissioners and, in tie votes, foreigners are found guilty. This may be the only judicial institution in the government where a deadlock among the judges results in penalties on the accused.

If the ITC finds injury, Mazda will be forced to raise its minivan prices by up to $ 2,700 and Toyota by up to $ 1,700; the Big Three's prices will assuredly also rise. The Japanese companies' prices will also be put under the perennial supervision of Commerce bureaucrats devoted to protecting the domestic auto industry. And that's not all. Red Poling, CEO of Ford, indicated to the Detroit News last month that the Big Three may soon file an anti-dumping suit against luxury car imports. Dumping cases on sports utility vehicles may soon follow. The lesson: buy now. JAMES BOVARD is the author of The Fair Trade Fraud (St. Martin's Press).