Ever since bailout measures for the auto industry were first mooted, free market detractors whispered “WTO.” Nobody took it seriously. True, according to the World Trade Organization’s rules, direct subsidies are not allowed. But it’s equally important to note that the 153-member quango has never put a single issue to a vote since its birth in 1995. Consensus governance means that as long as nobody complains, and especially, as long as everybody plays the same game, the WTO hangs fire on principle. Auto industry loans? They’re all doing it. Still, there is a line a WTO member mustn’t cross. And America almost crossed it.
Recent amendments to Uncle Sugar’s near-as-dammit trillion dollar economic stimulus package would require US firms to use local steel and other components in state-funded projects. The provision kicked sand in the face of the WTO’s raison d’être: the most favored nation (MFN) rule.
Under the terms of the MFN rule, a WTO member must apply the same conditions on all trade with other WTO members. The provision also applies to trade within and without a given nation. “Imported and locally-produced goods should be treated equally (at least after the foreign goods have entered the market).” To do otherwise constitutes blatant protectionism.
Similar buy local protectionist measures have been adopted or considered in Argentina, China, Indonesia, Ecuador, India, Russia (re: imported used cars) and Vietnam. All seven WTO member nations have landed on a WTO surveillance list.
The Guardian writes that the European Union (EU) is pissed with the “buy American” bailout provision. They’ve threatened legal action and retaliatory measures against the US if the Obama administration enshrines this clause in its multibillion-dollar economic stimulus package. Brussels said it could take the US to the World Trade Organization for breaching treaty rules.
The warning came just a day after Joaquín Almunia, EU economic and monetary affairs commissioner, pointed to “clearly protectionist measures” emanating from Washington. The EU ambassador to Washington has expressed similar concerns. A spokesman for Lady Ashton, EU trade commissioner, said: “If the provisions that are finally passed by the US Senate and approved by President Obama infringe the provisions of the GPA [general procurement agreement], to which the US is a signatory, then this is something we will have to consider taking them to the WTO over.”
Compared to previous hints and “concerns,” this amounts to a barrage of warning shots. Amid fears that the US and other countries could trigger a disastrous 1930s-style “Great Depression” trade war through protectionist blocks on trade, the European commission highlighted similar moves in Europe.
A French €10b aid program requires firms to source components solely from France, keep only the French plants open and scrap plans to “de-localize” jobs to elsewhere in the EU. Neelie Kroes, EU competition commissioner, will warn French ministers in talks in Brussels that state aid must not only comply with competition rules but also with EU laws on freedom of movement and capital. “They have to realize that once they start down that protectionist path it’s a descent into chaos,” her aides said.
On Tuesday, U.S. President Barack Obama signaled fear that Buy American provisions—supported by Democrats in steel-producing and economically distressed states—would trigger a trade war at a time when the global economy is in dire straits.
On Wednesday, lawmakers voted to soften the controversial “Buy American” provisions in the proposed U.S. economic stimulus package. The amendment, approved by the Senate, requires the Buy American provisions be “applied in a manner consistent with U.S. obligations under international agreements.” Which is like saying you can burgle a house as long as you don’t break the law.
The bottom line for carmakers: even if America’s avoided a trade war (for now), they can’t win.
If the feds restrict the bailout buffet to The Big 2.8 and domestic production, they run the risk of retaliatory measures from neighbors—and markets—around the globe.
And don’t forget it’s a small world after all. In the run-up to the meltdown, Motown’s automaker practically demanded that its suppliers outsource abroad. By now, keeping the suppliers’ share of the domestics’ business within U.S. borders will be more about spin than compliance. Especially if those suppliers receive their requested $20.5b bailout.
On the other hand, if the feds don’t limit their largess to domestic producers, they run the very real risk of alienating whatever voter and/or union support exists for the pork barrel parade. A billion dollars of TARP money for Brazil? Esqueça-se.
On a practical basis, a truly “fair” bailout would put the domestics at a disadvantage.
Think of it this way: the existing Chrysler loans are equivalent to a current subsidy of $10k per vehicle sold. If, instead, you offered American car buyers $10k off a car, they wouldn’t buy a Chrysler. Clearly, you couldn’t offer the discount certificate just to Chrysler buyers. What kind of country would that be? Welcome to Bailout Nation.