Blind Spot: Ripples In The Pond

 

Trouble the waters...

Trouble the waters…

As we approach the 5-year anniversary of President Bush’s decision to extend emergency “bridge” loans to GM and Chrysler, and as the Treasury sells down the last of its GM stock, the great Detroit Auto Rescue remains a topic of looming ambiguity. Though President Obama largely parried his challenger’s clumsy attacks on the subject during the last election, the bailout is also no longer being forwarded as a major contributor to America’s economic revival. With good reason: GM has new pickups to sell to Americans, using country music and “flyover country” scenery to convey themes of strength and self-reliance. Not the moment you want President Obama reminding the truck market that those down-home Chevy ads wouldn’t be there without his bold use of tax dollars.

But this awkward dynamic is hardly unique to the truck market: around the world, America’s auto intervention has caught the attention of rivals and allies alike. Five years on, these global ripples of the auto bailout are unmistakable.

But before you can see the impacts of the U.S. auto rescue abroad, you have to understand how it is perceived abroad.  Whereas Americans look at the auto bailout as a distinct, singular decision, the wider world tends to see the rescue of GM and Chrysler as part of a broader effort. Mark Leonard pithily sums up this broader view of the auto intervention in a recent Foreign Affairs piece on the dangers of US-Chinese convergence:

“the United States is bolstering its manufacturing sector, in part by promoting a cheap dollar through quantitative easing and subsidizing the automotive sector, and encouraging export-led growth through a new generation of trade deals with rich countries, including Japan and the EU states.”

Trade deals aside, the perceived linkage between monetary policy and the auto industry rescue is highly warranted. The effects of quantitative easing on the auto loan sector have been dramatic, fueling cheap loans (including a booming subprime sector) and and investment in auto-loan-backed securities, while making U.S. production more attractive to boot. In fact, it’s hardly a stretch to argue that without Quantitative Easing’s salutary effects on auto demand, the bailout could not have been effective. If President Obama were an honest man rather than a politician, he’d say something like “forget the bailout you keep yammering on about, I saved our auto sector by devaluing the dollar. And because you idiots don’t follow the news and shop monthly payments instead of prices, I get to have my cake and eat it too.”

In China, however, America’s win-win is a lose-lose. To the Chinese, America’s auto bailout is an attempt to protect an industry China has made no bones about wanting to dominate, funded with with a Quantitative Easing program that destroys Chinese investments in the dollar along the way. In response to this obvious threat, China is throwing hundreds of billions at its auto sector in the form of direct support and environmental policy and pushing its domestic manufacturers to consolidate and grow exports. If D.C. wants to tussle for 21st century auto leadership, Beijing won’t back down from the fight.

On the other hand, relations between the US and China are always more complex and interrelated than the apparent rivalry would suggest. General Motors, the Obama Administration’s would-be  “national champion,” perfectly exemplifies this tension by drawing ever closer to China even while being bailed out in the US. Between its technology transfers, its shifting of ever more development duties to Shanghai and its almost reckless overinvestment in Chinese production capacity, its clear GM isn’t simply working off the Obama playbook. If anything, one might be tempted to believe GM is playing both sides of the fence, doing what it can to benefit from insecurities on both sides of the Pacific.

But the real impacts of increased US-China economic competition are felt not by either of the two rivals, but by their allies. In particular, those allies of the US who enjoy small but significant auto industries thanks to a long-time presence by Detroit firms are experiencing intense disruption. This is being most dramatically witnessed in Australia, where Ford has announced that it will cease production in 2016 and the new conservative Coalition government seems unwilling to pay General Motors to keep its Holden division making cars unless it boosts exports.

The US is not in a trade war with Australia, a longtime ally and outpost of America’s Detroit-based auto companies. But by devaluing the dollar and “re-industrializing” to take on China’s challenge, the US is forcing Australia into an arms war that it can’t win. GM has already been promised  AUD $275m in public money to maintain local production through 2022,  but has threatened a pullout after the Coalition won election on a position of reducing industry subsidies. But with a study underway, the latest news from Down Under seems to indicate that the new Coalition government will cave to GM’s threats and rush support to Holden by year’s end. As GM publicly weighs the cost of closing its Australian production facilities, it seems Australians might continue to pay the “bailout tax” that is becoming increasingly necessary to maintain an auto industry outside of the major global markets.

Even Canada, which footed a not-inconsiderable $13.7b of the Detroit bailout bill, is seeing its auto industry swamped by ripples from America’s double-down on the auto industry. Though Canada has held the line thanks to the “Vitality Commitment” it attached to its industry aid, the country’s auto manufacturing footprint is caught in a vicious downturn. And like in Australia, GM is leading the way, threatening to rip out the heart of Canada’s auto industry, its historic Oshawa facility.

Japan has also felt the effects of America’s re-industrialization policy, turning to its own Quantitative Easing program to preserve its currency-beleaguered auto export sector. But unlike China, Japan is simply trying to keep its head above water, not  fuel a cycle of economic and monetary competition. The dream of Japan exporting the world’s cars is over, and automakers like Honda are taking advantage of US policy to make its “transplant” factories export hubs. Still others are flocking to Mexico, possibly the US’s most direct competitor for auto jobs. And for its contributions to the re-industrialization of the US, Japan is accused by captains of industry and politics of “currency manipulation” while the UAW targets its expanding US transplant factories. Rather than a staunch ally and valued trading partner, Japan is now treated with the fear and loathing with which it has long been viewed from Detroit.

Finally, Europe’s internal problems have helped the Euro keep pace with the currency wars, but it finds itself increasingly both trapped and crushed by the legacy of the US auto bailout. In effect, US and Canadian taxpayers have helped keep Europe’s most marginal brands stay afloat, hurting the industry’s entire performance: without the Chrysler rescue there would likely be no Fiat left, and without a GM rescue there would be no Opel and possibly no PSA Peugeot-Citroen. Had any one of these companies gone under, the industry as a whole would have improved measurably as sales flowed to more competitive companies. Now, with the economic downturn dragging on with no end in sight, these marginal automakers are locked into a grim game of chicken, hoping that simply not being the first to go will open enough room in the market for a shot at survival.

All these impacts, from Australia and Canada to Asia and Europe, bear witness to more than just the consequences of the Detroit bailout: they show the changing role of America in the world. Where once US power strengthened our allies and neighbors, now government policy outsources the pain of America’s economic downturn in a flood of loose money, punishing those nations who have built their economies on American consumers. And by publicly placing the auto rescue in the context of economic competition with China during the last election, President Obama has locked the US and China into a rivalry that has already turned one of America’s most vital economic ties to its allies, its auto industry, into an issue of bitter contention.

In the aftermath of the Cold War, the Washington Consensus created a blueprint for barrier-free globalization, with manufacturing jobs flowing abroad and high-value-added design and development jobs building an “information economy” in the US. By turning that model on its head and clawing back at manufacturing jobs for reasons that seem more political than economic, the US is overturning its last great vision of a global economic order. With it, a kind of economic Pax Americana has been broken, heralding a dark age, a global mercantilist free-for-all over an industry whose golden age is already behind it.