Editorial: Bailout Watch 374: Trade War Looms Large in Bailout Nation
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.
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Buying American is an expensive proposition due to the staggering depreciation on American cars. The last American car I bought was a 1995 Ford Taurus SHO, with a wonderful Yamaha engine searching (in vain) for a worthy chassis. I went to the dealer and paid $25,000 for it, about $7,000 below the $32,000 sticker price. The day I took it home, it was a $17,000 used car. I drove it for five years, put 65,000 miles on it, and sold it for $8600, and only got that much because it had well over $5000 in repairs and modifications to it (custom exhaust, tires clutch, suspension, etc.). I ended up buying a used 1997 BMW convertible to replace it, for $21,000. It cost $4000 less than the Taurus, and I still have it, nearly 9 years later, and it still looks and drives like new and has retained about 1/3 to 1/2 its purchase price. I wonder, if back in 1995, if I had bought a used BMW 3-series instead of the new SHO, I probably would still have the car, and it would still have a lot of life left in it. And I would have saved the $16,000 I lost in depreciation on the SHO in five years. American cars depreciate horribly, which makes them expensive to own. Until Detroit figures this out, sales will continue to stagnate. Japanese cars cost more now, but cost less to own. People are figuring this out. Plus, you can keep them longer. The Big 3 are trying to go after the CHEAP end of the market by gutting content from the cars. Putting a live axle, for example, in the Mustang, relegating it from enthusast car to trailer park cruiser. In the last decade, Americans bought Mercedes, Lexus, BMW, Acura, largely because they could afford it - and GM, FORD and CHRYSLER didn't even offer cars in those price ranges. People waving $100,000 at the BMW or Mercedes dealer, and the guy across the street a the GM dealer saying "Sorry, all I got is CRAP! Want a Lumina?" Expensive foreign cars were more costly to buy, but with lower depreciation, less expensive to own than some domestic makes. Why buy a Taurus, when for the same cost, you can have a BMW? That's the crux of it. And after looking at the dinky brakes on the new Taurus, I can see Ford has learned nothing. Just a refaced Homer Simpson car with the last generation's Camry face slapped on. Can you say "Derivative"? Try as I might, I can't see myself buying an American car. The only two I have left in my fleet (1995 F-150, 1948 Willys) have yet to wear out. I mean I'd like to do my bit. But a Taurus? A Lumina? Mouse-fur interiors? Retrograde suspensions? Pushrod engines? Sorry, I just can't do it.
And then there are that whole ends of the product spectrum that Detroit ignores. Small cars - what I prefer to own and operate. I get cheap but I can't get good at the same time. I'll pay Civic prices but not for a Cobalt. Ford almost had me with the Focus but they killed off the hatchback? Chrysler got close with the PT (even with my fear of their long term quality) but the gas mileage isn't very good for it's size. I will look at the HHR eventually despite the lemon my friend owns which has been in the shop eight times in 10K miles. Under warranty or not my elderly 10 and 12 year old imports aren't having that kind of trouble. Still haven't looked very hard at the gas mileage figures on the HHR. You see I keep a car forever and I figure gasoline in a decade will be EXPENSIVE so I buy efficient vehicles now in anticipation of owning them still then. Would I consider a Cobalt? Not likely. Would I consider a used Neon? I actually like the design but still worry about the longevity. Yes, I know the PT and Neon are direct relations. How about an Aveo? Its a Daewoo. Don't feel any better about them than I do Chrysler. You know - the part where I pass 150K miles and everything is disintegrating that worries me. It keeps coming down to a used Focus or a used Astra if I want to buy "domestic". And yes, I know that the Astra is built in Belgium. So is an Astra more American than a Honda built in Illinois? I know that the compact car market is not a place of large profits for the domestics b/c of the way they operate but I'd like to buy a domestic small car if there was one I felt excited about (just a little) or confident in. Instead they have given it over to the imports just like GM did the minivan market. I guess I need to quit yapping and just go buy a Buick. On the topic of other American goods we'd buy if able I lay blame on the management of the retailers and the consumer alike. We are in a race to the bottom price and that requires a bottom wage for everyone involved except the top level management. Products not produced in low age countries need not apply. Meanwhile the consumer demands the lowest prices too. I figure that is largely related to their addiction to buying more stuff that quickly goes obsolete or breaks and can't be economically repaired. This addiction to stuff must be balanced with the consumer's numerous fixed costs like mortgages near their qualification limits, flat earning potential for some time, and many costly subscription services. Pile that on top of the "need" to have two incomes to buy all of this stuff leading to a rushed lifestyle where folks eat out alot, buy prepackaged foods, and raise children who can't fathom anything else. So people hunt hard for the lowest prices requiring low profit margins for companies where only the people at the top make any real pay. In some cases the people at the top make hundreds of times more than the person at the bottom who barely make ends meet. Also must maintain stock share prices as well. Anyhow it is a circular problem threatening to flush our society down a circular drain. All sorts of potential side effects like kids raised by worn out uninterested parents, kid who care for themselves alot, kids who don't get as much guidance and raising as they should. I also have to wonder if this isn't part of our divorce rates. I heard a suggestion somewhere that if a family wants to live on one income like the 1960s then it is still possible but you have to live like it was still the 1960s without cell phones, and all the little throw away conveniences. You have to cook from scratch, mend and repair stuff, and increase your level of stuff slowly and skip the fads like $1500 flat panel TVs and the constant household technology upgrades. We're aiming down that road more each year. Buying less and enjoying our time together more. Our friends and family don't really get us very well b/c while they are constantly buying stuff we keep the same old stuff but we're happy. We're not much fun to brag to about what they bought or what they are going to buy next.