The Auto Bailout Bill and the New Protectionism?

Economists believe that the Smoot-Hawley tariff law of 1930 exacerbated the Great Depression. It provoked retaliation by other countries and reduction of international trade at precisely the wrong time—during an economic contraction when demand should have been stoked rather than suppressed. Today, no one proposes an increase in tariffs, though some commentators have mischievously suggested that raising tariffs could be more effective than a fiscal stimulus (provided, I assume, that retaliation does not occur) for restarting the economy. So we have learned from our mistakes, right?

Not if the auto bailout bill is an indication. The bill applies only to “each automobile manufacturer that submitted a plan to the Congress on December 2, 2008”—which just happen to turn out to be GM, Ford, and Chrysler, not Toyota, Honda, or Nissan. The bill is a massive subsidy to American automakers alone; it will thus give them a competitive advantage vis-à-vis foreign carmakers (which, as we know, are more efficient manufacturers than the dinosaurs in Detroit). Other countries are already engaging in similar subsidy schemes, which will put American firms at a disadvantage in their markets. These beggar-thy-neighbor policies have effects similar to those of a tariff war—depending on the degree and pattern of subsidy, driving lower-cost manufacturers out of business and raising costs (in the form of regular taxes rather than tariff-inflated prices) for everyone, and hence suppressing demand.

The new wave of protectionism actually began a few months ago, when it was discovered that saving the credit market meant offering assistance to foreign banks as well as domestic banks. Many members of Congress balked and sought to limit financial assistance to American banks; otherwise, American taxpayers would end up putting money in the pocket of feckless foreign creditors rather than feckless American creditors. Differences were papered over and it remains to be seen whether Treasury doles out goodies on a discriminatory basis. (Hmm.) No doubt foreign governments are watching closely.

One can imagine a fiscal stimulus that was nondiscriminatory. The government would offer cheap loans to foreign automakers as well as domestic automakers, for example. The stimulus would benefit the Japanese and German economies as well as the American economy, but it would not give any advantage to American automakers unless their problem is really one of liquidity rather than economic fundamentals—which seems most doubtful—so the stimulus might buy a little time but eventually the American automakers would go out of business. In theory, the Japanese and German governments would also make available their stimulus packages to American companies. Don’t hold your breath. Put aside the outcry—already heard during the bank debate—against American taxpayers giving money to foreigners. Without reciprocal stimulus packages, giving aid to foreign companies is not a very effective way to help Americans (though it could raise demand for American products). Smoot and Hawley, maybe we were a little hard on you. In bad times, economic nationalism is hard to control.

Despite their perverse effects, international trade law does not ban domestic subsidies. At one time, the United States sought to change this rule. How times have changed.