Argument: US auto bailout would damage global free trade
Matthew J. Slaughter. "An Auto Bailout Would Be Terrible for Free Trade". Wall Street Journal. 20 Nov. 2008 - Congress is now considering a federal bailout for America's Big Three automobile companies. Many want to grant them at least $25 billion from the $700 billion Troubled Asset Relief Program on top of $25 billion in low-interest loans approved earlier this year.
But these figures represent only a fraction of what the total cost of the bailout could be. In a global economy, a federal bailout of the automotive industry could cost Americans jobs as well as foreign markets to trade in. There are at least three important ways an industry bailout could damage America's engagement in the global economy and hurt U.S. companies, workers and taxpayers.
The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. On Sunday, President-elect Barack Obama asked, "What does a sustainable U.S. auto industry look like?"
Well, it looks a lot like the automotive industry run by "foreign" car companies that insource jobs into the U.S. In 2006 these foreign auto makers (multinational auto or auto-parts companies that are headquartered outside of the U.S.) employed 402,800 Americans. The average annual compensation for these employees was $63,538.
At the head of the line of sustainable auto companies stands Toyota. In its 2008 fiscal year, it earned a remarkable $17.1 billion world-wide and assembled 1.66 million motor vehicles in North America. Toyota has production facilities in seven states and R&D facilities in three others. Honda, another sustainable auto company, operates in five states and earned $6 billion in net income in 2008. In contrast, General Motors lost $38.7 billion last year.
Across all industries in 2006, insourcing companies registered $2.8 trillion in U.S. sales while employing 5.3 million Americans and paying them $364 billion in compensation. But as the world has grown smaller, today the U.S. faces increasingly stiff competition to attract and retain insourcing companies. Indeed, the U.S. share of global FDI inflows has already fallen. From 2003-2005 the U.S. received 16% of global FDI. That's down from 31.5% it received in 1988-1990.
Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors?
The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.
The bailout's second global cost could hit U.S.-headquartered companies that run multinational businesses. In total, these companies employ more than 22 million Americans and account for a remarkable 75.8% of all private-sector R&D in the U.S. Their success depends on their ability to access foreign customers. They do this two ways. They export goods from their U.S. parent companies. And they sell goods locally through foreign affiliates. These foreign affiliates are built by direct investment of American companies in other countries. In 2006, U.S. parent companies exported $495.1 billion to foreign markets. That same year their majority-owned affiliates earned over $4.1 trillion in sales -- $8.33 for every $1 in exports.
This access to foreign markets has been good for America. But it won't necessarily continue. The policy environment abroad is growing more protectionist. Multilateral efforts to liberalize trade in the Doha Development Round died in July with no prospects for restarting. Even more worrisome are rising FDI barriers. In 2005 and 2006, the United Nations reported a record number of new FDI restrictions around the world -- even in major recipient countries such as China, Germany and Japan.
Will a U.S.-government bailout go ignored by policy makers abroad?
No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies' U.S. employment, R&D and related activities. That would be bad for America.