Beware The Trojan Horse

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In an effort to head off these losses, Democratic Congressman John LaFalce of New York has proposed domestic content legislation that, for trade purposes, would treat cars assembled in the United States as imports unless they included a certain percentage of domestically manufactured components. But the Japanese have anticipated such a defense. In a classic follow-the-flag maneuver, they have begun opening their own parts companies here as well. In the past two years, they have more than tripled in number, from 50 to 150. By 1990, the U.S. Commerce Department expects the number to reach 300.

"A lot of American suppliers aren't even conscious of this because most of these Japanese companies haven't come on-line yet," says Donald Conover, an industry consultant. "And by the time they are felt in the marketplace, it will be too late to do much about it."

One company that will not be caught unawares is the Denver-based Gates Corp., a manufacturer of, among other things, automotive belts and hoses. Gates has two plants and a distribution center in Illinois, and while business has been good, it still has unused capacity. So imagine its interest when it learned that Illinois Governor James Thompson had handed Mitsuboshi Belting Ltd. a $2-million interest-free loan and $500,000 in training funds to set up shop in the state -- all that on top of the free land and road donated by the city of Ottawa. And imagine its shock when, after the deal was all signed, it discovered that Mitsuboshi already had a long-standing contract to supply belts to Mitsubishi Motors Corp., and will be supplying Mitsubishi's Diamond-Star operation in Illinois.

"Our own employees' taxes were handed to a foreign company to set up a plant in direct competition with them -- and this at a time when we needed business," gripes Gates spokesman Lewis Keim. Keim says it would not be so grating if Gates could turn around and build a plant in Japan to compete for business there. It tried once, but given Japan's infamous protectionist policies, it failed.

Many auto suppliers are afraid to speak out against the subsidies to foreign-owned manufacturing facilities lest they miss out on a contract from one of these new plants. But so infuriated was Gates that it took its case to the Illinois state capital. In a private meeting, the governor told company officials that he had offered the subsidy because if he hadn't, another state would have -- an otherwise accurate statement that missed the essential point. A more receptive audience was found in the Illinois legislature, which unanimously passed a bill calling for studies of the economic impact on existing jobs. Thompson, however, vetoed the bill in September, and the next day took off on a trip to Europe to offer more subsidies for still more foreign transplants.

At a U.S. Senate hearing on industrial policies earlier this year, auto industry executives said the issues raised by Japanese transplants went well beyond the question of protecting "uncompetitive" American companies. Among those testifying was William Thornton of Stant Inc., which last year sold $50 million in radiator and fuel caps from its plants in Indiana and Arkansas, none of them to Japanese manufacturers. "While we . . . do not fear competition," Thornton said, ". . . the specter of Japanese suppliers with brand-new facilities, operating in free trade zones, funded by overeager state and local governments, and guaranteed business by their Japanese parent company, is not our concept of fair competition."

Moreover, it would be a mistake to think that it would be only parts suppliers who would be shut out if the Japanese are able to gain control of a substantial portion of U.S. auto production. That, anyway, was the considered view of Julian Morris, president of Automotive Parts & Accessories Association Inc. (APAA), who testified last summer to the House Small Business Committee. "Japanese bankers will finance the new plants and Japanese construction contractors will build them," Morris warned. "Japanese capital goods will equip them. And a good deal of Japanese steel will be used to build and equip the factories. Japanese investment, like trade, means keeping the money in the family."

In the face of this challenge, the Reagan Administration stands silent and inactive. Ideologically wedded to states' rights, it has done nothing to try to curb the war among the states in offering incentives to the Japanese transplants. "Our unsolicited advice to the states on curbing the use of incentives has been disregarded," was about all that a Treasury Department official could offer up to the inquiring House committee. And ideologically wedded to free trade, the Administration has also opposed any initiatives that would restrict Japanese investment or require any level of domestic content in U.S.-made cars.

These are nice-sounding concepts, states' rights and free trade, but they are terms of an earlier era. They lose their meaning in a world in which individual states can buy the rights to set national and international economic policy for an entire nation. And they lose their moral and political appeal when the countries we compete with don't honor them at all.

"We are being played for suckers," complains Lee Kadrich of the APAA. And history may record that the biggest sucker of all was a tough-talking President named Ronald Reagan.

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