Foreign Built American Cars vs American Built Foreign Cars

Ask an Economist
Question: 

Which is better for/has a more positive impact on the American economy:

Purchasing a vehicle from an American car company that is mostly manufactured overseas with foreign parts (list for reference: https://www.motorbiscuit.com/3-american-cars-that-are-barely-made-in-ame...)

Or,

Purchasing a vehicle from a foreign car company that is mostly manufactured in the US with US made parts (list for reference: https://www.usatoday.com/story/money/cars/2018/06/22/american-cars/72472...)

Answer: 

This question addresses an important debate in the current economic climate in which global production network and offshoring are prevalent. Economic research on this topic from both theoretical and empirical aspects is vast and is still ongoing. We can approach the question from three different directions.

First, American jobs would be displaced in the short-run when an American automaker offshores its production process. In the long-run, however, we may observe that American workers are increasingly employed in jobs that require high and complex skills. On the other hand, a foreign automaker manufacturing in the U.S. would create American jobs both directly and indirectly through spillovers. This is why the federal, state, and local governments provide business incentives to manufacturers to locate plants in their jurisdictions.

Second, shareholders of the American automaker that offshores abroad would benefit from lower productions costs and higher profits. On the other hand, shareholders of the foreign automaker that produces in the U.S. would likely benefit from lower trade and transportation costs and higher profits. How these increased shareholder earnings impact the American economy is unclear and depends on who the shareholders are. 

Third, American consumers of both American and foreign brands would likely benefit from lower prices when automakers face lower production/trade costs. On the other hand, consumers with strong preference for American brands produced domestically would be worse off. 

Answered by:
Dr. Donghyuk Kim
Assistant Professor
Last updated on August 29, 2019