In the 1950s, the post-colonial government of India pursued nationalist policies to promote domestic manufacturing and agricultural production. Prime Minister Nehru’s government passed legislation to foster an indigenous automobile industry, providing massive subsidies and imposing very high tariffs on auto imports. The biggest beneficiary was Hindustan Motors, which produced the Hindustan Ambassador for almost 50 years. While the brand became a source of national pride, it lacked competitiveness on nearly every front.
At the same time, France was implementing postwar nationalist policies under the Monnet Plan, offering extensive protections to support the reconstruction and modernization of industry, with special priority given to the auto sector. Companies such as Citroën, Peugeot, and Renault were major beneficiaries and produced substandard automobiles for decades without facing serious competition.
A more recent U.S. example was the Chrysler K-car program of the early 1980s. In the late 1970s, Chrysler was on the verge of collapse, and the U.S. government intervened with federally guaranteed loans (effectively a massive subsidy) in exchange for a restructuring plan. K-cars met market demand for affordable, practical vehicles and helped save the company, but the success was largely artificial: without government backing, Chrysler likely could not have developed them. The program showed how politically favored firms can be shielded from market discipline while contributing little to global competition or productivity-enhancing research and development.
This week’s announcement from Ford, a $2 billion investment in a Kentucky auto plant to retool for producing lower-cost, lower-quality electric vehicles, is a perfect example of the same pattern. Just six or seven years ago, when Chinese manufacturers were introducing their electric vehicles into the U.S., such a plan would have been unthinkable. This is a textbook case of what economists call deadweight economic activity: production that occurs only as a result of protectionism.
Following tariffs implemented during the first Trump administration, reinforced during the Biden administration, and now expanded in the second Trump administration, the U.S. market has been closed to all Chinese EV imports, among the highest-quality and most advanced in the world. With competition eliminated, domestic producers have been handed a protected market.
No blame rests with Ford. The company is doing what any rational business would do in such conditions: producing cheaper, lower-quality automobiles that often yield the highest profit margins. From a business strategy perspective, Ford’s move is logical.
From an economic standpoint, however, this remains a deadweight loss for the country. Depriving consumers of some of the most advanced automobiles available globally, while leaving them to settle for lower-quality products at roughly the same price, may boost short-term activity. But in the long run, the result will be a loss of competitiveness and lower living standards.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist