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The Truth About Incentives for Foreign Automakers



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The UAW is pushing a talking point that you will probably hear repeated over the next few days, so it’s worth smacking down right away. From Paul Ingrassia’s analysis in today’s WSJ:

And here are [UAW president Ron] Gettelfinger’s remarks last Friday on PBS’s “NewsHour”: “The men and women of the UAW are the only ones that have been at the bargaining table making concessions,” the UAW chief said. “The other stakeholders have not been to the bargaining table yet . . . For all of the foreign brands that are operating here, the actual money that was put in is over $3 billion to come to our country and compete against our industry.” He was referring to tax breaks and other incentives that states used to lure foreign car companies. [emp. added]

A few years ago the Center for Automotive Research published a very useful study titled “The Auto Industry Moving South: An Examination of Trends” [PDF]. The study’s authors looked at a variety of factors influencing this trend, including the role of incentive packages that states offer to car companies.

What they found is that, contrary to Gettelfinger’s assertion, foreign auto companies are not lured to build factories in the U.S. — or even in particular regions of the U.S. — because of incentive packages. Rather, states use incentive packages to compete with their next-door neighbors once a particular region of the U.S. has already been chosen:

As mentioned earlier, a number of factors come into play in a company’s site selection decision.  Assessing each of these factors can help a company reduce its possibly lengthy list of potential sites down to a manageable handful that can meet the needs of the proposed facility.  Then, from the remaining handful of choices, all but two, possibly three, sites are eliminated.  It is at this point in the selection process when companies look to incentives to help differentiate one site from the others.  Up until this time, the company’s focus was on sites that were physically desirable.  Now, however, having decided on two or three acceptable sites, the company will choose the site which makes the most sense financially.  At this stage in the process, incentives—especially those that address the company’s cost of doing business—can have an enormous influence on the site decision.

By the time an incentive package is offered, the foreign auto company has already decided to build a factory in the U.S., and it has usually narrowed the location down to two or three sites in the same region.

What’s more, the Detroit three get these incentive packages all the time. According to the study, “… the State of Michigan and the City of Flat Rock awarded Ford Motor Company a combined $125 million in tax breaks in 2003 to be used to offset the $644 million the company will invest to upgrade the Flat Rock facility to begin building Mustangs.”

The purpose of Gettelfinger’s talking point is to deceive people into believing that the foreign auto companies receive a huge unfair subsidy to come to the U.S. and compete against the Detroit three. But the foreign auto companies do not build factories in the U.S. because states offer them incentive packages, and the Detroit three receive the same kinds of incentive packages when they build factories in the U.S.



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