Americans’ ’Hypocrisy’ in Auto Rescue Spurs Me-Too Trading Ire

By Jennifer M. Freedman

Nov. 22 (Bloomberg) -- A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry or just making up for state aid that foreign rivals already enjoy.

As the U.S. considers a lifeline for its auto companies, officials in Europe, Canada and Asia are considering their own aid packages -- even as the European Union threatens to lodge a complaint against any U.S. bailout to protect manufacturers from Renault SA in France to Fiat SpA in Italy.

China also may complain, though the government is considering helping SAIC Motor Corp. and Guangzhou Automobile Group Co.

Any World Trade Organization complaints may open a Pandora’s Box, bringing to a head a long-simmering dispute over policies that U.S.-based General Motors Corp., Ford Motor Co. and Chrysler LLC say unfairly aid rivals, including state-financed health-care and retirement benefits, and currency policies.

“Frankly, it’s stones and glass houses,” said Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. “Everybody has been at this game for their own interests; nobody is pure.”

Neelie Kroes, the European Union’s antitrust chief, weighed in on the debate yesterday, urging the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages.

Greater ‘Temptation’

“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.

“The European economy and European taxpayers will be better off if politicians choose another, more effective, route,” Kroes added. She pointed to EU rules allowing limited aid that doesn’t distort competition, including grants for entrepreneurs, research, education and environmental projects.

The U.S. kicked off the bailout war. Congress is trying to reach a compromise on giving automakers $25 billion the companies say they need to survive the next year, either by speeding up the use of funds already approved to develop more fuel-saving technologies and models or by providing a new source of funds. President-elect Barack Obama, who complained during the campaign that South Korea created disadvantages for American carmakers, supports helping the industry.

A U.S. bailout would be “hypocrisy at the economic level and the political level,” said David Littmann, economist for the Mackinac Center for Public Policy in Michigan. “We tell others to open up their markets and reduce barriers, and we are doing the opposite.”

U.S. Grumbling

The U.S. long has grumbled about foreign governments, including China and Europe, subsidizing various industries.

“Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an ‘infant’ industry,” then-U.S. Trade Representative Robert Zoellick said in 2004, announcing a WTO complaint against the Toulouse, France- based maker of commercial airplanes. “If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing.”

Now similar proposals are proliferating around the globe. “When one of the major powers grants subsidies to a high-profile industry, the other is inevitably led to react by defending its own interests,” said Pierre Kirch, a trade lawyer at Paul Hastings in Paris.

Lobbying for Loans

In Europe, where car sales fell almost 15 percent in October, the sixth consecutive monthly drop, auto companies are lobbying the EU for 40 billion euros ($50 billion) in loans. Society of Motor Manufacturers and Traders chief Paul Everitt responded to Kroes’s comments by calling for either “collective action” or individual country bailouts.

“If the U.S. gives aid to carmakers, it’s fair to have them in Europe as well,” said Gian Primo Quagliano, head of research at Bologna, Italy-based research firm Promotor.

EU officials are drafting a plan to provide loans through the European Investment Bank to promote clean-car technology. The bank plans to increase overall financing levels by as much as 15 billion euros next year, President Philippe Maystadt said Nov. 14; a portion would go to the auto industry.


German Chancellor Angela Merkel said her government will decide on an aid request from GM’s Opel unit by Christmas. Opel asked for “somewhat more than” 1 billion euros in credit guarantees, said Carl-Peter Forster, GM’s Europe chief. The state government in Hesse, where Opel employs 15,000 people, agreed to give the company and regional parts suppliers loan guarantees of as much as 500 million euros.

Tax Cuts, Funding

Carmakers in the U.K., where sales slid 23 percent in October, have asked for tax cuts and permission for their finance companies to access funding available to British banks. French Finance Minister Christine Lagarde called for national and European “actions” to “support” the industry on Nov. 17.

Canadian Prime Minister Stephen Harper said Nov. 15 that his government may follow any U.S. effort with an aid package for his country’s manufacturers and parts suppliers, including Magna International Inc. and Linamar Corp.

Chinese car companies also want aid. Slowing demand and rising competition have caused SAIC, the nation’s biggest domestic automaker, to tumble 78 percent this year in Shanghai trading.

Chen Jianguo, an official with China’s National Development and Reform Commission, has said the government is considering lowering sales taxes on alternative-energy vehicles. The government’s 4 trillion-yuan ($586 billion) stimulus package may also help, said Winfried Vahland, head of Chinese operations for German automaker Volkswagen AG.

‘Really Severe’

“The situation is really severe,” said Zeng Qinghong, general manager of Guangzhou, a partner of Japanese companies Toyota Motor Corp. and Honda Motor Co., on Nov. 18. “We hope the government can introduce policies to stimulate demand.”

Japanese Finance Minister Shoichi Nakagawa told Bloomberg Television his government probably won’t object to the U.S. helping GM because its collapse “would be huge, not just for America, but for Europe and Japan as well.”

That doesn’t mean Japanese carmakers won’t also put their hands out.

“If the money is given because bankruptcy would cause a lot of problems, this may be unfair,” said Takeshi Miyao, a Tokyo- based analyst at automotive consulting company CSM Worldwide. “The question of why the Japanese government isn’t helping the Japanese carmakers will definitely arise.”

Payments to Exporters

Any American package will be scrutinized by other countries to see if it runs afoul of WTO rules, which allow certain kinds of subsidies -- such as those that protect the environment -- but bar others, including payments to exporters.

The EU threatened to lodge a complaint against any U.S. auto package on Nov. 14, when European Commission President Jose Barroso said the bloc was examining the rescue proposal and would “certainly act at the WTO” if it contravenes trade rules.

Korean President Lee Myung-bak told CNN on Nov. 17 that he supports a U.S. bailout but warned that it must “give more serious consideration to the method” because it “could run counter to WTO rules and set a bad precedent. Then, other countries may follow the example of the U.S. to directly subsidize their automakers.”

China “quite possibly” may complain to the WTO if the U.S. bails out its industry, said Kirch, the trade lawyer. “It might also bring a case if Europe does.”

American automakers scoff at the notion that they may be accused of benefiting from unfair subsidies.

‘Strong Relationships’

“We’re the only country in the world that expects its auto industry to exist without some government support,” said Sean McAlinden, chief economist at the Center for Automotive Research, at a conference in Los Angeles. The Ann Arbor, Michigan-based group’s Web site says it “maintains strong relationships with industry” and others in the “international automotive community.”

One of the Americans’ biggest gripes involves Japan’s currency, which they claim is kept artificially cheap against the dollar. The Automotive Trade Policy Council, which represents GM, Ford and Chrysler, said in October 2007 that the weak yen at that time gave Japanese automakers a $4,000-a-car advantage on their imports to the U.S.

“This policy provides a subsidy to exporters, resulting in an unfair competitive advantage over American manufacturers,” said Senator Debbie Stabenow, a Michigan Democrat now helping lead the charge for a U.S. bailout, in a 2007 statement.

Quality, Value

Toyota dismisses that argument. “Our vehicles sell well and are profitable because our operations are efficient, because our vehicles represent quality and value, and because they represent the needs and wants of the public,” Toyota spokesman Bruce C. Ertmann wrote on a company blog in January. “Their profitability has nothing at all to do with some nefarious program of currency manipulation.”

GM Chief Executive Officer Rick Wagoner has repeatedly complained that his company is disadvantaged by pension and retiree-health costs -- benefits that are heavily subsidized in competitor countries including Italy, Germany and France. Italy also helps companies such as Fiat pay unemployment benefits, making temporary production cuts less expensive.

To be sure, taxes in those countries tend to be higher, offsetting the advantage.

Rhys, the automotive economics professor, notes that many European carmakers that were once state-controlled -- such as Renault, Volkswagen and Alfa Romeo -- got loans at preferential rates. Renault, which is still 15 percent-owned by the French government and has enjoyed the most state largesse, would have collapsed without it, Rhys said.

Many Rescues

“Just about every one of the European automakers, apart from Mercedes, have had a rescue of some sort or another,” Rhys said. And Toyota has benefited from Japan’s “incredible low cost of credit,” he added. “It wasn’t technically state aid, but it certainly wasn’t the sort of conditions companies in Europe or North America could borrow at.”

Any complaints that grow out of the current bailout-proposal war will be complicated by the industry’s web of cross-border subsidiaries, said Ed Kim, an analyst at consulting firm AutoPacific Inc. in Tustin, California.

If Ford gets U.S. help, that may indirectly benefit Hiroshima, Japan-based Mazda Motor Corp., because the American company owns 13 percent of it. GM controls GM Daewoo Auto & Technology Co. of Inchon, South Korea, and it acquired the bankrupt Daewoo Motor Co. in 2002. Chrysler is negotiating a partnership with China’s Chery Automobile Co. Chery already has agreed to provide a model for Chrysler to sell in South America.

Back in 1979, when the U.S. bailed out Chrysler, things were “remarkably straightforward” because the company lacked a significant international presence, said Maryann Keller, an independent automotive analyst and consultant in Greenwich, Connecticut.

“Chrysler today would be more complicated,” she said. “Do we subsidize Chrysler so they can work with Chery and create a stronger automotive competitor?”

To contact the reporter on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net