Obama and the Big 3

I do not see how any subsidy plan is compliant with the WTO. Does nobody ever ask this question?

Why are the big 3 being allowed to submit plans that include laying off workers? Does that make sense to anyone? Give them money to fire workers and put the cost to the taxpayers?

Jay: Fair enough question, have you seen this story about a possible trade war?
http://www.time.com/time/world/article/0,8599,1862927,00.html

I haven’t looked too much at trade issues since I covered the WTO conference in Doha but I think Bush’s unprecedented bailout of the steel industry in his first term is probably a fair example of what might happen if the government does bailout the Big 3: a lot of griping and an eventual challenge that led to a repeal of the subsidies in 2003. By the time the subsidies were repealed they’d had the desired effect. But how this would play out on an auto bailout is tougher to guess since two of the three companies say they wouldn’t be able to repay the loans until 2011.
JNS

Jay:
Might you possibly provide a link to relevant WTO documentation with respect to such potential compliance issues?

The automakers are going to have to layoff people if there is not as much demand for new cars. I heard last night on CNN that the big 3 US auto makers sold 6 million fewer cars this year than last year. They are only projected to sell 10 million cars this year.

We go from Banana Wars (its been 15 years already) to Car Wars in the WTO. I’m watching the Argentine auto industry right now. Argentina might try bailing out their industry before we get to ours. They’re in desperate shape and just nationalized private pension funds. We’ll see.

JNS, it was steel tariffs, not subsidies in 2003.

It seems odd that there is no desperate rush to fix multiple corporations within our economy at once. Over the summer comes this craze to quick, fix the banks – bail them out or else. Now, quick, fix the cars – bail them out or else. Automakers were suffering over the summer, yes, but making do until….what?…their turn to step up to the plate? How many other corporations are waiting in the wings, for their turn, to allow a frenzy to ensue over them next, and demand a bailout or else? It seems this whirlwind of economic panic has everyone demanding money be thrown all over the place, but my question is, why are you (fill in the blank) in need now, at this exact moment, instead of at another time? It all seems a little too convenient and orchestrated to me.

JNS/Jayackroyd — Is a loan guarantee considered a subsidy? Are the Big3 asking for subsidation or for loan guarantees?

I’m wondering if other countries may be happy to have us bail out the auto industry because they too recognize (or think) that we could spiral downward if the auto industry tanks, and we’re likely to take other economies with us. I expect the rest of the WTO is going to root for us to recover as quickly as possible.

Stuart:
Here’s a link to the WTO’s framework, keep in mind the Doha round failed, so this hasn;t been modernized since the Uruguay round.
http://www.wto.org/english/docs_e/legal_e/legal_e.htm

And here is the framework for subsidies in particular:
http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#kAgreement

I believe an auto bailout would fall under either of the first two categories of subsidies: prohibited and actionable. The European Union, or whomever files the complaint, would have to think carefully what they want to achieve by a ruling: the simple repeal of the subsidy, reparations for losses or punitive fines and disciplinary action? JNS

Kathy,
Many other countries will be thrilled to have us bail out the auto industry. Among our biggest supporters would be Brazil, Mexico and especially Argentina – where the Big 3 are actually driving economic growth. The WTO is a mess and any Car War would take years to settle. And anyway, the WTO has been quite soft on subsidies. It’s tariffs that they view as more harmful (like the Bush steel tariffs).

Kathy, I agree with you on that WTO would turn a blind eye to assistance to the auto industry.
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JNS and commenters, may I respectfully request that we be more explicit about the type of assistance we’re talking about for both the banks and the auto industry.
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“Bailout” and “rescue” are media terms and are polarizing any meaningful discussion about what is going on and what these respective industries are getting from us the taxpayers.
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I am trying to seek understanding, and if we could be more explicit about the financial transactions that are taking place, I might be able to control my ire and frustration (probably not). It would help for more meaningful dialogue, too.

Andy from MA:
Yes, a loan guarantee is a subsidy as it artificially tampers with the natural market in a way that helps American companies. It’s not to the detriment of foreign car makers, but without the help those foreign makers would have a clear shot at market domination — so the loans essentially are what’s standing in the way between a U.S. auto market dominated by foreign makers. JNS

[...] auto industry in purely cynical political terms, allow me to say that Congress would be foolish to provide the automakers with a bridge to allow them to survive until the inauguration, and Barack Obama would be even more foolish to support such a [...]

Andy: What the automakers are asking for are bridge loans similar to those companies would receive in chapter 11 restructuring in order to cover operating costs while they’re parring down their businesses and getting back on their feet. Even if those companies entered chapter 11 those loans are incredibly difficult to come by these days given the credit crunch and it’s more likely that chapter 11 would become chapter 7, liquidation, if they can’t get those loans. So, in this case the government becomes the lender of last resort. And at least one company, Ford, says they wouldn’t actually need a loan unless one of the others goes down — effectively dragging down the entire interlinked system. Now, the GOP wants the money to come from $25 billion modernization fund for the industry in the energy bill earlier this year. The Dems want the money to come from tarp. Theoretically, the car companies must pay the taxpayers back by a certain time, but this is part of the controversy: few have any real faith that all three companies will still be around in 2011, let alone in good enough shape to pay back this much money. I hope this helps. JNS

JNS — Wow that is a real stretch. I would imagine the WTO would come out against Stafford loans because U.S. students who borrow to go to college, are creating an unfair playing field for students in other countries who don’t have government guaranteed loans.
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How would nationalization of the auto industry, i.e., getting an ownership stake in these companies, in return for financial aid, apply to WTO agreements?

JNS – You know, the same things were said about Chrysler in 1979, and they came back and repaid the loans early. I think the money involved is a pittance with respect to what AIG and the banks have received to date.
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I think the auto industry leaders made a big PR gaffe; perhaps their plans will provide a level of confidence that things are changing in Detroit.

And I want to wait and see specifically what’s said during those hearings.
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I don’t want to comment on them before I’ve actually heard and seen what they’re putting forward.
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But I think it’s premature to get into that issue.

Am I the only one who finds it really refreshing that we finally have a President elect who’s willing to say “I don’t know” rather than provide a pat answer that commits him to an unwise courtse of action. Maybe it happens a lot and I’ve never noticed it, but it feels good to me that were soon going to replace the shoot-from-the-hip idiot with someone who’s actually willing to take the time to do things that won’t require undoing.

Might you possibly provide a link to relevant WTO documentation with respect to such potential compliance issues?
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The short answer, stuart, is you’re not allowed to subsidize export industries.
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http://www.wto.org/english/tratop_e/scm_e/subs_e.htm
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In particular, not with cash:
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The concept of “financial contribution” was included in the SCM Agreement only after a protracted negotiation. Some Members argued that there could be no subsidy unless there was a charge on the public account. Other Members considered that forms of government intervention that did not involve an expense to the government nevertheless distorted competition and should thus be considered to be subsidies. The SCM Agreement basically adopted the former approach. The Agreement requires a financial contribution and contains a list of the types of measures that represent a financial contribution, e.g., grants, loans, equity infusions, loan guarantees, fiscal incentives, the provision of goods or services, the purchase of goods.
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In order for a financial contribution to be a subsidy, it must be made by or at the direction of a government or any public body within the territory of a Member. Thus, the SCM Agreement applies not only to measures of national governments, but also to measures of sub-national governments and of such public bodies as state-owned companies.
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A financial contribution by a government is not a subsidy unless it confers a “benefit.” In many cases, as in the case of a cash grant, the existence of a benefit and its valuation will be clear. In some cases, however, the issue of benefit will be more complex. For example, when does a loan, an equity infusion or the purchase by a government of a good confer a benefit? Although the SCM Agreement does not provide complete guidance on these issues, the Appellate Body has ruled (Canada – Aircraft) that the existence of a benefit is to be determined by comparison with the market-place (i.e., on the basis of what the recipient could have received in the market).
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There is no way to construe a bailout as the equivalent of what would be earned in the free market. If the US were to buy a fleet of cars from GM, that would be one thing. But to just give GM is a violation of the subsidy rules.
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JNS-
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Yes, I did read that piece. It seemed to completely skirt the fact that this kind of intervention is expressly forbidden under the WTO rules. It does seem, somehow, worthy of comment that your view is the US would blithely violate WTO rules trying to gain whatever benefit possible before a countervailing ruling. Without US support, the world’s free trade regime, such as it is, is imperiled. A decision to subsidize a major manufacturing industry in violation of the WTO rules would be a major change in US policy regarding support of free trade.
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How would nationalization of the auto industry, i.e., getting an ownership stake in these companies, in return for financial aid, apply to WTO agreements?
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As I read it, they’d have to buy liquidated companies, or buy all the shares at some plausible market price.
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These things are incredibly complicated. As JNS says, what would happen is other countries would lodge a complaint with the WTO. Practically speaking, this would have to pre-negotiated. The fact that we’re not hearing about the WTO issues, at all, makes me suspect that this is all smoke.
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jarais, thanks for reminding JNS that those were tariff impositions, not a bailout. And were also clear violations.

Yes, a loan guarantee is a subsidy as it artificially tampers with the natural market in a way that helps American companies.
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We aren’t talking about “loan guarantees.” We are talking about giving them money or credit lines. (And if you believe Ford is not going to use its credit line, you believe AIG is not going to use all of its loan commitments.)

It’s not to the detriment of foreign car makers, but without the help those foreign makers would have a clear shot at market domination
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Of course it is. If Japan handed Honda 12 billion dollars in “loans,” Detroit would be screaming. Most WTO cases involve “dumping,” the claim that goods are being sold below cost. The ability of a company to sell below cost is evidence of subsidy. It’s the subsidy that’s not permitted. Giving companies money is subsidy.

so the loans essentially are what’s standing in the way between a U.S. auto market dominated by foreign makers.
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You’re writing that as fact. That’s a claim the automakers may be making, but there’s no way to know that’s true. Nor is it necessarily true that the US is dominated by “foreign makers” if the “foreign” plants are here, while the “domestic” manufacturers are largely located elsewhere.
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I kind of think that a trade war isn’t going to happen. There might be a bit of sabre rattling (wallet flapping?) over this, but nobody is going to try to force the US to sink it’s own auto manufacturing sector in order to comply with WTO rules.
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And, if it comes to that, heck, forget WTO.
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Yes, it’s a bit simplistic, but so is the idea of firing maybe 3 billion off to the Big 3 right now, and deal with the rest of it after Obama takes office.
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Then, and only then, will some sanity return and questions about when, where, how, why, if and what do we do to control the flow of the astonomically sized total of funds slated to go through the pipeline to the financial market.
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I mean, come on now, but that tweensy little problem is what, only 284 times larger than this particular tidbit!

Jayack – Don’t you think the head of Ford has shown an incentive to not use the loans? (i.e, he loses 22million if they touch the loans)
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Also, are farm commodities exempt from the prohibition against subsidies?

As for a trade war, I think it was on Zakaria’s show that someone was saying that the “trade war” is going to come in the form of China trying to get its own people to start buying the goods that we’re no longer importing from China because of our downturn. That would make it less likely that China would loan us money.

jayack,

I share your fear that the entire free trade regime is falling apart. WTO reform is desperately needed now, but I doubt it’s on the top of anyone’s agenda. The US has done great harm to WTO negotiations by focusing on bilateral and regional agreements instead. I hope Obama’s new USTR will bring the focus back to the WTO.
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I think the main reason our government will blow off WTO rules is because the WTO has no way to enforce the rules. Countries within the WTO only play a tit-for-tat tariff game, which isn’t enough to dissuade them from breaking the rules in the first place. Also, negotiations within GATT and later the WTO have been quite effective at removing tariffs across the board, but never subsidies. The US and the EU have never been severely punished for agricultural subsidies, so it will continue as the poorest countries suffer. Hypocrisy abounds.
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I’m not saying it’s right, I’m saying it’s easy.

Andy, Jarais, Jay: The Sox signed Pedroia to a 6 year extension with a club option for the 7th. 40 million. A steal. huzzah.

In the wake of the Treasure spending what is has to AIG and the rest of the financial industry, the loan guarantees requested by the auto industry is chump change. I have seen very little reporting about the negative impacts to the supply chain in the media’s discussion here.
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There are hundreds of thousands of jobs at stake in all the parts and services companies the big three have outsourced to, since the 1980s. If you look at the loss of advertising revenue on TV, in news papers, magazines, etc., and it has a catastrophic effect on the ecomomy.
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I don’t understand why there is the knee jerk reaction to the arrogant CEOs. Why aren’t we calling for the heads of Wall Streeters who are behind th financial meltdown.
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At the very least, the guys in Detroit are trying to build something tangible. We would be accelerating the collapse in our ecomonmy if we don’t provide some sort of loan guarantee until the credit market loosens. When it does, get them to refinance through the tradition process.

Kathy,
*terrorist fist bump*

Preview would be my friend if there was preview.

Kathy, great news about Pedroia…if only the Patriots can find some corners who can cover.

- Don’t you think the head of Ford has shown an incentive to not use the loans? (i.e, he loses 22million if they touch the loans)
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I never ever believe a senior corporate executive who says he will not be compensated.
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Also, are farm commodities exempt from the prohibition against subsidies?
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Pretty much, yeah. That’s what broke down the Doha round.
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For anyone interested in this issue, I went over to the go-to place on the Big 3 bailout, emptywheel’s site, and asked. I’ll get skinned alive, it looks like, but they know what they’re talking about.
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http://emptywheel.firedoglake.com/2008/12/03/gm-financed-50-of-car-purchases-last-year-can-only-finance-6-now/

Thanks to Jay Ackroyd and Jay Newton-Small for the links!
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Excellent discussion…

Also, negotiations within GATT and later the WTO have been quite effective at removing tariffs across the board, but never subsidies.
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They have prevented new subsidies. Yes, agricultural subsidies are a great source of shame for the western economies.

http://www.boston.com/sports/baseball/redsox/extras/extra_bases/2008/12/pedroia_signs_e.html
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Here’s the pedroia article. News Conference at 3:00. Could be on NESN, I suppose.

Marcy’s reply is that the foreign makers’ local manufacturing capability is dependent on a supply chain that will be decimated by a big 3 collapse. So the foreign governments will sit on their hands, she says.

What SZ said in post #32.

Jayack #31 – Many thanks for taking one for the team.

Jayack: Another link for you:
http://www.bloomberg.com/apps/news?pid=20601109&sid=awkywZZdATW8&refer=home

JNS: Good article. Thank you for interacting with the commenters.
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A couple of nits to ask your sources as follow-up questions:
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1) “…a move opposed by many Republicans critical of an industry that has long resisted tighter fuel efficiency standards…”
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When, O, When during the period 1994-2006 did the GOP ever propose higher CAFE standards? And with it’s legislative majority, why could such legislation not have passed, with and enviro-friendly Democratic minority? That dog don’t hunt.
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2) Graham: “The idea that you would take three failed car companies, bring [a plan] to 535 members of Congress and let us pass judgment on it doesn’t make a lot of sense to me. I don’t know how to run a car company.”
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Then, what, pray tell, are you doing in Congress, where, presumably, you have to pass judgment on car companies, oil companies, farms, butchers, bakers and LED makers? If you have neither the time nor the business expertise to figure out what to do…GO HOME!…and take the other 41 losers with you!

For those who need to be Talked Down:

@gysgt213 Says:
Wednesday, December 3, 2008 at 12:32 pm
“Why are the big 3 being allowed to submit plans that include laying off workers? Does that make sense to anyone? Give them money to fire workers and put the cost to the taxpayers?”
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Gunny, I see that noone has give you the courtesy of a heads up straight on response. The simple answer is see here: http://money.cnn.com/2008/11/30/news/companies/auto_bubble/index.htm/2008/11/30/news/companies/auto_bubble/index.htm
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Simply put. We are facing an auto bubble. Like a housing bubble, you get the bubble by over production for a given demand of the market place. Unfortunately, the laws of supply and demand in economic theory and actuality will not be muted. Supply and demand must be brought back into balance.
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So what is the current situation?? You have 3 large car manufacturers leveraged [plain language, IN DEBT!] till the hilt (that includes retiree, medical and compensation costs) attempting to sell more cars in a market where there are 9.8 cars for every 10 Americans!! I know. I have a brand new Tundra and a 325i sitting in the garage where I live all by my lonesome. Many of the consumers that want to buy are themselves overleveraged, and others who want to buy can’t get a loan from a bank because the banks themselves are overleveraged. And now we have a federal government [which itself is overleveraged] offering to give a bridge loan for companies which are technically bankrupt provided they can show viability at some point in the future.
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How do you show viability? You must show that the record car sales levels of 17 million moved a year are sustainable (they’re not), or you must demonstrate that costs, jobs, and production can be cut to the degree that your costs do not exceed your income from sales (reall, the only option). Anything else leads to the perverse outcome where the bridge loan provides financing to employ people to make a product which is not selling well utilizing an industry model that is not sustainable. We, the US taxpayer, might as well give out welfare checks, because when the whole system eventually cam crashing down those poor people won’t have the skills to fend for themselves.
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In short, yes, we (the US tax payer) are paying GM to lay off people to do hopefully get trained and perform other jobs which will have a more productive impact on the economy.

from JNS’s article:
or tapping emergency monies similar to the stabilization fund Treasury used in the 1994 Mexico bailout.
Isn’t that money used only used to keep other currencies from crashing? Should the Big 3 start issuing their own currency to get at that cash? Confused.

bryan – that’s a particularly lucid statement of the problem. Thanks.

The CEOs of the Big 3 sleep on the job => they ravel and live in style => and they fire their workers => and ask other America workers to plaster the CEOs (living high on the hog) with hard-earned tax-dollars for a bailout => so that the three wastrels can continue with their incompetent ways as usual.

What is wrong with that picture? Inefficiency. Poor allocation of resources. Propping uncompetitive players in the marketplace. A government interfering with the market forces. Bad! BAD! Didn’t we teach ourselves that communist USSR used to do that kind of thing – which led to its demise?

“First World” countries preach against that kind of thing to those “Third World” dictators and barbarians. Which is our world?

Congresswoman Michelle Bachmann knows these people.
Look closely: Those congressmen even entertaining the phoniness of these CEOs are the un-American ones who need to be scrutinized closely. They pall around with those who think that our country of free markets and less government is so imperfect that they pall around with CEOs who would bomb the very foundation of our prosperity and our way of life as we know it – free markets. [Do you remember that we pander 'freedom' all over the world?]

Perhaps not bailing them out and letting the uncompetitive trash go under – free market style – is the way, the only way, for America to rid itself of these incompetent CEOs, their cursed top cronies and the entities that are likely to be a constant burden to the tax-payer.

Andy from MA @28 has it exactly right.
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I am simply stunned at the petulant, cut-off-the-nose-to-spite-the face attitude of many Democrats in response to the calls for an auto bailout.
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It was the financial institutions of Wall Street (and hedge funds of Greenwich, CT) that created this economic disaster. They deserve to be bankrupt. And many of them literally deserve to be in prison for securities fraud. But when Goldman Sachs says “jump”, Democrats say “how high?”
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Look. Are auto senior executives arrogant and over-paid? Yes. Have they refused to innovate and produce energy efficient vehicles? Sure. Did they recklessly rely on Americans’ pyramid of debt to indefinitely prop up auto sales? Of course.
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But these are minor, run-of-the-mill business errors compared to the outright thievery of the banks and hedge funds.
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The reason that the auto companies need to be bailed out immediately is NOT because of poor business vision by For, Chrysler, and GM. They need a bailout immediately because the economy is in a massive recession bordering on a depression and there is a massive liquidity crisis. But Detroit didn’t create the economic downturn.
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I can’t believe this idiocy. Henry Paulson comes to Congress and demands $700B to — the original plan — literally buy up the worthless assets of his cronies. (Hello? “toxic waste?!?” No, thanks!) Democrats rush to approve the deal with mere fig-leaves of oversight and pre-conditions. No time for hearings! But when America’s last major manufacturing industry, along with the myriad secondary industries that rely on the auto industry, is about to go belly up, Democrats refuse to help unless the CEOs fly coach on the way to D.C.? Am I living in Bizzarroland?
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Does anyone think the auto CEOs will pay the ultimate price if Detroit collapses? Of course not. They will get jobs with BMW and Volkswagen, selling Americans even worse cars (because we won’t be able to (afford better ones) produced by non-union labor. Meanwhile, millions of middle-class workers get the shaft. Way to go, Democrats.

Sorry for the long post.
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Let me state it more succinctly. Why does President-elect Barack Obama care more about saving his buddies at Citigroup, UBS, etc. than saving American manufacturing jobs? Why does he trust the criminals who created the disaster more than the fools who simply failed to anticipate it?