It Begins in Detroit: The Auto Industry Bailout and Global Trade Protectionism
The multi-billion dollar bailout package working its way toward passage in the U.S. Congress may yet come to assume a significance far beyond the precincts of the Detroit auto industry it is designed to rescue. If the same U.S. Congress maintains its hard line against efforts to reach a timely conclusion to the Doha Round of multilateral trade negotiations at the World Trade Organization, the bailout could turn out to be the torch that lights the fuse of a general resort to protectionism among America's trading partners and the beginning of a downward spiral that undermines the world trading system and impacts across the global economy, deepening recession into depression.
A recent study by Antoine Bouet and David Laborde of the International Food Policy Research Institute quantified the risks - in manufacturing and agricultural products - of tariff water, the gap between bound and applied tariff rates, around the world. They found that more than $1 trillion in global trade is potentially living on borrowed time, the result of unilateral liberalization over the past decade that has not subsequently been locked in by any binding commitments at the WTO and is therefore reversible at any moment and without any recourse by those whose trade is impacted. Concluding the Doha Round trade talks along the lines of the package already on the table in Geneva would eliminate much of this risk, thereby providing a global insurance policy against any protectionist backlash emerging from the slump in the world economy. But political leaders and business groups in the United States are resisting such a conclusion, apparently holding out for a pie-in-the-sky scenario in which the 153 members of the WTO suddenly see the light and embrace the more ambitious Doha deal that has eluded them over seven long years of negotiations.
Director General Pascal Lamy, as part of his efforts to pick up the pieces after the collapse of the WTO Ministerial this past July (chronicled in gripping detail by Paul Blustein of the Brookings Institution), convened a meeting in the so-called "Green Room" in Geneva several weeks ago at which he apparently held up portraits of Representative Willis C. Hawley and Senator Reed Smoot as a stark reminder of the perils of trade protectionism in hard economic times. Smoot and Hawley were the authors of the infamous Smoot-Hawley Tariff Act of 1930, which touched off a trade war among the major economic powers of the 1930s, broadening and deepening the Great Depression and helping pitch the world into war. More sanguine observers may scoff at Lamy's tactics as empty scaremongering, but an additional piece of new research by a team of economists under the supervision of Patrick Messerlin at the Groupe d'Economie Mondiale at Sciences Po in Paris underscores the risk and identifies a plausible path to trade protectionism in our own times.
Based on Messerlin's earlier work, and as a complement to the IFPRI modeling analysis, the GEM researchers have made a close study of the nature of tariff water in key economies around the world. While very little exists in Messerlin's eight €˜certain' WTO members - Canada, China, the European Union, Hong Kong, Macao, Taiwan, and the United States - all of which largely apply their tariffs at bound levels, significant tariff water is present in a host of other large economies, not confined to emerging markets but including OECD countries like Australia. Examination of the nature of this tariff water shows that it is highly concentrated in a €˜hit parade' of products - in particular automotive, electrical, and electronic products. As the authors note, the automobile industry is:
facing its greatest crisis of the post-World War II era, with U.S. firms asking for massive rescue packages, with European carmakers not faring much better, and with the first signs of problems spreading to Asia (for instance GM-Daewoo). The automotive sector benefits from a positive image in public opinion. It has always been good at lobbying, and has very often benefitted from high protection at the borders when facing difficulties.
One question that has scarcely received any scrutiny in the auto industry bailout debates on Capitol Hill is whether such interventions could constitute actionable subsidies under WTO rules. European Commission President Jose Manuel Barroso has already warned the United States that, "if [the bailout] is illegal state aid, we will act at a WTO level." The Europeans are preparing their own rescue for car companies, but other countries without recourse to large treasuries may look to border measures to protect their struggling domestic industries. The option of swingeing tariff increases is there for the taking. And the automotive sector - as the GEM study points out - is "large and sensitive enough to trigger further protectionist reactions."
If the ghosts of Smoot and Hawley walk again on Capitol Hill, they will not announce themselves in their full protectionist garb. They may even pay lip service to more liberal trade, looking much like Senators Baucus and Grassley, or Representatives Rangel and McCrery. But, by sanctioning domestic industry bailouts while blocking progress on a global trade deal, the Congress may be setting its foot on a road that leads we know not where. If it begins, it begins in Detroit.
The views expressed in GMF publications and commentary are the views of the author alone.