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Driving Toward a Trade War

Thursday, February 19, 2009

Politicians are ignoring the trade implications of the auto bailout, even for the car companies themselves.

What a tangled web we weave
When first we offer a financial reprieve...

So Sir Walter Scott didn’t exactly write that, but he might today if he were an auto industry analyst. In December, the Bush administration offered the first reprieve of $17.4 billion to GM and Chrysler. A poet’s sense of irony and tragedy will prove useful as the Obama administration considers this week’s inevitable request for additional subsidies (sorry, “loans”) with the auto companies’ return to Washington.

Anyone familiar with the law of unintended consequences should be concerned. Among the likely consequences, politicians are ignoring the international trade implications, even for the auto companies themselves. This is a serious blunder that will come back to haunt U.S. firms and workers competing in the global marketplace.

U.S. trade officials from both parties have been consistent and vocal critics of other nations’ use of subsidies and industrial policy to promote or save national champions. These complaints have focused on subsidies to French steel companies, Korean semiconductor firms, and Chinese apparel companies, to name just a few.

Not only has the United States objected in principle, we have broken new ground in using trade remedies to block the imports of firms receiving subsidies. U.S. officials have argued that subsidies offered years, even decades ago, should be subject to special import restrictions. We would be naïve in the extreme to believe that other countries would not turn our own arguments against us as Washington sends billions to aid the auto industry.

American officials have argued that subsidies offered years, even decades ago, should be subject to special import restrictions. We would be naïve in the extreme to believe that other countries would not turn our own arguments against us.

The casual observer might argue that the United States mainly imports automobiles, so that threats to Big Three auto exports are the least of our worries. But this is dangerously complacent for a number of reasons.

First, U.S. auto firms have made important strides in recent years to focus more on export markets. American exports of automobiles and light-duty motor vehicles more than doubled, from $21 billion in 2002 to $44 billion in 2007. Michigan exports to China of transportation equipment (which is primarily in the auto industry) rose sevenfold from $80 million in 2003 to $586 million in 2008.

These exports all could potentially be subject to retaliation from nations under WTO rules that the United States has long championed. These “countervailing” duties would be set to offset any competitive advantages that the Big Three exports might have received. This would be no empty threat as many countries could be quite aggressive in defending their own auto industries and would find it all too tempting to use permissible procedures, especially those that have previously blocked them from the American market. Other countries that primarily export cars to the United States could challenge the new subsidies at the WTO by arguing that their car companies had unfairly lost sales in America as a consequence of U.S. government intervention. If the United States were to lose these cases, then retaliation against other American export industries would result.

The long-term international implications of the U.S. auto subsidies might be even more problematic. President Obama and former Vice President Gore have argued that the U.S. manufacturers should turn to “green” technologies that could ultimately lead to large-scale exports, thereby creating millions of new jobs. But if alternative-fuel and highly efficient automobiles are developed using significant public money, then we should expect that countervailing duty procedures are used to keep U.S. “green” cars out of important markets.

If alternative-fuel and highly efficient automobiles are developed using significant public money, then we should expect that procedures are used to keep U.S. ‘green’ cars out of important markets.

Higher duties on U.S. auto exports could also have unintended consequences for Big Three decisions about where to start new plants. Congress and President Obama should not forget what helped prompt Japanese investment in new auto plants in the United States. The trade barriers of the early 1980s against Japanese cars led directly to new “tariff jumping” facilities in America instead of Japan. U.S. automakers already find production abroad more profitable than at home. Might they expand future production facilities abroad rather than in Michigan so as to escape trade retaliation?

Large U.S. auto subsidies would also open the door to other countries helping their favorite sectors. A renewed push for a U.S. industrial policy supporting the auto industry virtually guarantees extensive help from other nations in their manufacturing industries, likely to the detriment of competitive U.S. exporters.

The United States need not turn its back on the Big Three. The companies that need to should use the bankruptcy laws to seek protection while they reorganize. We need look only at recent experience in the airline and steel industries to see what bankruptcy can do to put an industry back on track. Massive subsidies, on the other hand, will not ensure the domestic auto firms’ long-term well-being and will harm America’s most successful industries.

Philip I. Levy is a resident scholar the American Enterprise Institute. Michael Moore is the director of the George Washington University’s Institute for International Economic Policy. Both served as senior economist for international trade in President Bush’s Council of Economic Advisers.

Image by Darren Wamboldt/The Bergman Group.

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