Trade: As the financial crisis spreads to the automotive industry, a $50 billion taxpayer-funded bailout is likely. Its message: a big reward for failure. But if this happens, the rest of us are owed new models on labor and trade.
The credit crunch hit sales of big-ticket items such as cars almost as hard as housing. For a normal industry, that's cyclical, but for the enfeebled U.S. auto industry, accounting for 4% of GDP, it might be a death knell.
Ford reportedly is bleeding cash so badly it might not make it beyond April. General Motors warns it might not get through to Inauguration Day, and Chrysler has largely the same story. This could have bad effects all through the economy, with 40% of it affected.
Automotive chiefs are meeting with House Speaker Nancy Pelosi with their hands out. At issue: vast pension obligations to 780,000 retired workers that already add $2,300 to the cost of every new car sold. Credit-strapped consumers want value, not pension-inflated price tags. So, the bailout is in the works.
Bankruptcy is a better solution, but if a bailout can't be stopped, taxpayers are owed a reckoning about how this industry got into a situation that a downturn could knock it over. This ought to be a condition for the bailout.
Unions are at the center of every problem affecting industry competitiveness. It's not only the United Auto Workers' lavish pensions, generous health care and leaden bureaucracies, it's unions' reflexive hostility to free trade.Yet if profits matter, new markets can return automotive companies to profitability — and rid the industry of the dead weight of those pensions.
On this front, the automakers are way behind. Compared to Germany, the U.S. is an underexporter, notes Doug Goudy, director of international trade policy at the National Association of Manufacturers. In a good year, about 12 million cars are cranked out. But in 2007, only 1.6 million were exported. Yet exports are the last bright spot of the economy, accounting for nearly all the growth seen in the downturn. Because they are destinations for exports, free-trade countries offer the highest prospects for new growth.
Typically, an efficient plant makes 190,000 cars and is located in the U.S. From there, exports are delivered to niche markets such as Colombia that don't have enough of a market to host a plant.
With 14.5% tariffs, U.S. automakers managed to export just 3,823 vehicles to Colombia in 2007. If the tariff weren't so pricey, they could export many more to a country of 44 million whose per capita GDP recently hit the $7,000 mark, which puts its consumers in a position to buy.
Unions claim trade brings deficits, and that's true in non-free- trade countries such as China. But the U.S. has trade surpluses among the 14 free-trade partners — signalling that exports — and U.S. jobs, not outsourcing, are the basis for the trade.
How can the industry recover so that a financial crackup never happens again? By changing its orientation to increase markets, profits and productivity. Free trade does this, and should be a condition in any bailout.