In a recent report to the World Trade Organisation’s (WTO) 153 member states, Pascal Lamy, the club’s director-general, sounded a warning about state aid intended to mitigate the economic crisis. It must not, said Mr. Lamy, break WTO rules or discriminate against foreign companies. Not surprisingly, he is worried that help for banks could distort competition. But he pointed to another industry too: carmaking. Although he chose his words carefully-many measures are still sketchy-Mr. Lamy believes that rich countries’ support for their car industries could discriminate against rivals in developing countries.
He is right about one thing. The list of countries offering or planning relief for their automotive industries is long and growing. The reason is not hard to find. Stricken carmakers do not rank with stricken banks as systemic threats; but restoring them to health is still regarded as vital by almost every big, advanced economy. The industry nurtures skills in design and technology that rub off on other sectors; and its supply chain is so long that in some countries about one job in ten depends on it.
What began in America last autumn has spilled over to almost every other leading car-producing country. European policymakers’ first response to the bail-out considered by Congress for Chrysler, Ford and General Motors (GM) was hostile. In November the president of the European Commission, José Manuel Barroso, said the commission might file a complaint with the WTO if the plan breached the trade body’s rules. Little has been heard from Mr Barroso on the subject since.
His reluctance is partly explained by the similar (if smaller) plans since hatched across the European Union. But it is based too on the knowledge that a collapse of Ford and GM in America would have an incalculable impact on their international operations, many of which are in Europe. Late last year, the fear that GM might enter bankruptcy prompted the German government to start talks with Opel, GM’s continental European subsidiary, to try to shield it from the consequences.
The bail-out for Chrysler and GM (Ford still hopes to struggle through on its own resources) at $17.4 billion (and counting) dwarfs anything elsewhere, but that is mainly because among the world’s volume carmakers GM is still very big and Chrysler uniquely feeble. If anything, other countries have reacted faster than America, and with less political controversy.
One measure that is gaining in popularity is incentives to trade in older cars for new or nearly new ones. France already has such a scheme; Germany has put money aside for a similar one. Both countries are willing to go further. Peer Steinbrück, Germany’s finance minister, has said it would be “fatal” not to support German carmakers when competitors in America were receiving billions of dollars. He was echoing France’s prime minister, François Fillon, who said last month that the industry could expect loans and loan guarantees worth €6 billion ($7.8 billion)-if the money was used to keep French factories open.
The Swedish government, desperate to throw a lifeline to Volvo and Saab (Ford and GM, their respective owners, have put both up for sale) has come up with SKr28 billion ($3.4 billion) in loan guarantees and support for research and development. Some of this will come from a €6 billion pot at the European Investment Bank (EIB) to help carmakers meet environmental targets. Fiat is seeking, and likely to get, similar help from the Italian government.
Britain, where the car industry is almost entirely in foreign hands, is tapping the EIB for a £2.3 billion ($3.3 billion) loan and providing credit guarantees worth a further £1.3 billion. The British government’s main concern is the survival of Jaguar Land Rover, which India’s Tata Motors bought from Ford last year for $2.4 billion.
This is not a game for developed countries alone. The Brazilian government has instructed the state-run Banco do Brasil to make $1.7 billion available to carmakers’ financing units. It is also cutting car-purchase taxes. Russia has slapped heavy duties on imported cars for the next nine months and promised 83 billion roubles ($2.3 billion) in direct help to domestic makers, including assemblers of foreign-branded vehicles. China has halved the sales tax on cars with engines of less than 1.6 litres and offered subsidies for trade-ins of high-emission vehicles for cleaner ones. Both measures are aimed chiefly, but not exclusively, at local firms, which make mainly smaller cars.
Two other big Asian car producers, Japan and South Korea, are not joining in yet. The South Korean government seems to be more intent for now on bailing out its shipping and building industries. Japanese carmakers, which depend heavily on exports, are more concerned with heading off protectionism abroad than with seeking direct help from their government. That said, struggling Mitsubishi has asked for assistance in paying workers on short time, as has Mazda. Nissan will soon follow.
How much of all this should properly be regarded as beggar-thy-neighbour protectionism? The car industry has become so globally integrated that it is extremely difficult for governments to help “domestic” industries in isolation, whatever their intent. Should GM and Ford fail in America, attempts to ring-fence their overseas operations might well not succeed. The fate of parts suppliers from Mexico to China would be just as uncertain. Even the Asian “transplants” with which the Detroit firms compete in North America would suffer if much of their shared supply chain went under.
Similarly, when China or Russia helps its car industry, it is also helping all the foreign makers that have built local factories and supply chains. It makes less and less sense to talk about a car’s nationality. The Jeep Patriot is only 66 percent American; a BMW X5 made in South Carolina is a good deal more American than a Pontiac G8 shipped by GM from Australia. Fiat and VW factories in Brazil produce cars that account for half the country’s market.
That does not mean the car industry merits special help. There is far too much capacity worldwide and a smaller industry may well eventually be a healthier one. Given the scale of the crisis, only America’s bail-out package is of a size to make much difference anyway. Morgan Stanley forecasts that the amount of cash in European makers’ manufacturing operations will decline by €34 billion this year. The car business is so big and so global that it is likely to thwart the intentions of even the most protectionist politician.