Of Protectionism and Hypocrisy

Wednesday, March 4th, 2009

I’ve had this editorial in the Frankfurter Rundschau by Mario Müller (title: “Every man for himself”) held off to the side for a couple days until I could find the chance to address it adequately, because it reminds us of a simple but bald fact that we would all do well to remember: state aid to help the auto industry survive, or even an individual auto company, is precisely protectionism, plain and simple. So many of the heads of government circulating around the world today piously declaring “Protectionism! No indeed, we can’t allow that,” if they nonetheless are willing to extend financial support to their countries’ auto interests, are simply the usual sort of political hypocrite that we have all come to know rather too well.

Given that such pronouncements were apparently the main output coming out of the otherwise disappointing special EU summit last Sunday over the economic crisis, we probably need to include under that “hypocrite” rubric President Sarkozy of France. Chancellor Merkel of Germany potentially belongs there, too, depending on what she decides to do about Opel in particular, and decision time is coming very soon now that GM has indicated that that division will run out of money in a month. It probably would also include the leaders of some other EU members who themselves have more recently built up a thriving auto sector – like the Czech Republic and Slovakia – except that those governments simply don’t have the money to spend on any such thing. And sad to say, it could also include Barack Obama – again, depending on what he decides to do about the new requests for mega-money from GM and Chrysler.

They don’t like being hypocrites, of course, but from Obama on down the political impulse to supply some assistance to your national auto manufacturers is usually pretty overwhelming. So let’s follow along with Müller why that’s really not the thing to do. As he points out, blatant and ham-handed instruments of protection, like tariffs assessed at the incoming port or airport, while still prevalent, are no longer so much in vogue. Instead, governments (yes, even those within the EU, where it is supposed to be a completely open market) pursue their protectionism in more subtle ways, such as giving native companies certain tax breaks, or awarding subsidies – which is precisely the aid that the auto-makers from the US to France to Germany are asking for. Quite simply, this provides native firms with an unnatural advantage, enabling them to sell their wares for less and/or to gain a greater profit by doing so even though they probably are not the most-efficient producer. Meanwhile, of course, it’s the taxpayer who is paying for this dubious privilege of shifting production to a less-efficient producer.

Again, all of this will likely butter no parsnips when it comes to the political decisions whether to accede to the auto firms’ calls for help, as economically-distorting as such subsidies can be shown to be. It’s at least refreshing to be able to get such a public reminder of the point in the (on-line) pages of a major newspaper in a country whose economy is dominated by the auto industry to an even greater extent than it is in the US.

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