Detroit Bailout Fueling Trade Tensions with Europe

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Philippe Wojazer / Reuters

France's President Nicolas Sarkozy and Environment and Energy Minister Jean-Louis Borloo, right, visit the Paris Mondial de l'Automobile in October 2008

While Harry Reid, Nancy Pelosi and other congressional Democrats mull an auto-industry bailout plan, it's worth recalling a pair of Republican legislators from the past. One of the most derided pieces of 20th century economic policy was introduced by Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon. Signed into law on June 17, 1930, the notorious Smoot-Hawley Act jacked up U.S. tariffs on more than 20,000 imported goods, sparking a global trade war that deepened the Great Depression at home and spread it abroad.

The current debate in Washington over whether to extend a $25 billion lifeline to Detroit's Big Three carmakers has been framed almost exclusively in terms of domestic economic considerations: avoiding massive job layoffs vs. throwing money at possibly doomed companies. But a bailout would have major reverberations abroad as well. Though a bailout may not be the blatant protectionism of the 1930s tariffs introduced by the Smoot-Hawley Act, Europeans warn that a rescue of Detroit amid a major global slowdown could be the first shot in a new trade war.

Indeed, even before GM, Ford and Chrysler officials submit recovery proposals Tuesday in hopes of persuading Congress to steer aid their way, Europe has started to react. French President Nicolas Sarkozy proposed a four-year, 400 million–euro package to help French automakers build more environmentally friendly cars. Sarkozy also called last week for the loosening of E.U. restrictions on direct state aid to companies, restrictions established to encourage more-competitive markets in Europe. "We can't have the Americans unlocking $25 billion in loans for their three manufacturers while we would be caught up in a state-assistance regime that does not allow us to help our European automakers," Sarkozy said.

Due to plunging consumer demand — new-car sales across Europe dropped 14.5% in October — France's two major automakers, Renault and Peugeot-Citroen, have temporarily shut down production at several plants. Peugeot is expected to present a plan Tuesday to cut 2,700 jobs. In Germany, Chancellor Angela Merkel has been more cautious in response to the crisis, and warned against precipitate state intervention. Still, Berlin is expected to approve up to $1.26 billion in loan guarantees for Opel if parent company GM goes under.

Meanwhile, the European Investment Bank is set to pledge $2.5 billion to help the continent's auto industry develop more environmentally friendly cars, according to Reuters. That support could help struggling companies stay in the race to bring greener vehicles to market during a global economic downturn. Fiat CEO Sergio Marchionne summed up the situation in simple terms: "Either [aid] is for everyone or for no one."

Marchionne, Merkel and Sarkozy are part of a generation of Europeans who have long advocated the weaning of business from government aid as a way of fostering competition and improving companies, in accordance with the free-market model of the U.S. But now the financial twister spiraling from Wall Street across the Atlantic has overturned things, with Europe trying to keep up with gargantuan state intervention by Washington, first in the banking and insurance sectors and now in the automobile industry.

Willem Buiter, a political-economy professor at the London School of Economics, says that although the infusion of capital and soft loans in the financial sector "violates the letter and spirit" of standing E.U. laws on competition, European officials are turning a collective blind eye because of the credit crisis. Still, Buiter counsels Europe against matching any eventual bailout of the Big Three with aid to its own automakers. "If the Americans want to extend the life of the dinosaurs at public expense, they are free to do that," he says. "But if I see someone else jump off the cliff, that doesn't mean I follow."

Buiter says tough economic times inevitably increase the risk of protectionist policies, including state aid to struggling companies. "Anything that smacks of subsidies is protectionist in consequence and often intent, and can raise temperatures," he says.

The E.U.'s competition commissioner, Neelie Kroes, cautioned European lawmakers against propping up domestic companies. "All governments," she said, "have to resist that." As history teaches, when attempts to protect national economic interests lead to a trade war, everybody loses.

Read "As GM and Ford Report Big Losses, Pressure for a New Bailout Grows."

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