Subsidies to US Auto Industry

Over the last decade, the world has been facing economic crises. One major crisis was witnessed in 2008. In necessitated legislation of an act that would enable the government to help struggling industries survives the occasional economic depressions.Advertising We will write a custom essay sample on Subsidies to US Auto Industry specifically for you for only $16.05 $11/page Learn More In the same year, the congress passed into law a bill popularly known as the troubled asset relief programmed (Brunetti 11). This bill did not address a situation in any particular industry. However, it was made with the consideration of the difficulties that some important industries in the US economy were facing at the time. Thus, the government did not immediately move on to assist any industry that was facing problems at the time (Brunetti 13). Automobile manufacturers in the United States of America have always been a critical part of the economy. Collapse of companie s in the automobile manufacturing industry could have dire consequences for the US economy. The sector also employed more than a million people. Furthermore, the number of people employed in the automobile manufacturing sector remained significant despite the decline over the last few years Late in 2008, two automotive manufactures, Chrysler Corporation and General Motors appealed to the congress to approve assistance from the government to help them avoid certain liquidation in the face of financial insolvency (Brunetti 20). While presenting the case, the companies did not argue that they were doing well in the market, but they rather tried to illustrate their efforts towards avoiding financial crises.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Their argument was that the economy would face severe ramifications if one of the major automobile manufacturers were to undergo liquidation. No details of the projected plan were given, but the manufacturers cited substantial financial gains in general. After debate within the congress, senate, and state administration, the government decided to assist the automobile industry to avoid the impending liquidation for several companies (United States Congress, United States Congress 25). The World Trade Organization has anti subsidy rules that were formulated to ensure that there is a competitive international trade. In addition, the rules were established with the view of increasing free trade in the international arena. WTO ensured that its regulations did not cripple individual governments that wished to take corrective measures to salvage an economy that is on the verge of collapse. Thus, anti-subsidy laws are mild, and are meant to deter governments from subsidizing export and import commodities to the extent where the effect of the subsidies affects other countries and companies in the same trade. Otherwise, small subs idies for justifiable reasons are allowed. In addition, to regulate subsidization of products by the government, the WTO has formulated barriers in form of increased tariffs for subsidized products. These barriers are meant to be regulatory measures rather than settle scores among disputing countries. The problem is that the companies could not redeem themselves after the government gave the grants. They eventually had to be liquidated, and more money was used to establish new entities, with a significant amount of capital being contributed by the United States government.Advertising We will write a custom essay sample on Subsidies to US Auto Industry specifically for you for only $16.05 $11/page Learn More It is obvious that the government had acted to save millions of jobs that were at stake. However, through this action, the government was actually subsidizing the American automobile industry beyond what some financial analysts consider acceptable li mits. The situation at Chrysler and General Motors had been partially due to stiff competition. A bailout as substantial as that implemented by the US government seemed like interference with free trade. Most importantly, this action appeared to be a violation of the World Trade Organization’s guidelines on international trade. Other countries could consider bailing out their automobile manufacturing industries to even the scores. Alternating counteractive actions would then lead to hostile tax policies between trading partners, disrupting international trade. Thus, the United States domestic trade policies may be indirect sabotage of international trade (Webel 12). One of the conditions within the subsidies and countervailing measures as outlined by the WTO is that direct transfer of funds must be evident for the bailout to be considered a valid subsidy. In addition, the said subsidy must the directed towards a specific sector of the economy or industry. In that case, the US government’s action qualifies to be classified a subsidy. Furthermore, the US government issued funds directly to a few organizations. WTO requires signatories to its guidelines to avoid directly subsidizing those industries that manufacture goods purposely for export or import trade (Webel 18). That way, the international trade is protected from machinations of any single country. Other regulations within section II of the trade agreements ratified in Uruguay urge countries to desist from subsidizing major industries such that there is a significant effect on trade partners.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More WTO rules also specify that for a bailout to be considered a subsidy, the law of the particular country must isolate the entities being subsidized as the only industries eligible for the particular subsidy. Moreover, WTO considers any benefit of an industry acquired through foregoing of debts owed to the government amounts to a valid subsidy. Since the program was directed by congress in the United States, it qualifies as a valid subsidy to companies that deal in merchandise meant for export. The actions of the United States government contravene almost all guidelines of WTO Uruguay convention regulations (Webel 21). Any member of WTO or automobile manufacturer, which wishes to file a complaint with WTO, may prove several facts to validate its claim. One of the conditions is that the complaining entity may prove that the defendant nation caused a significant setback to the complaining entity’s domestic operations or progress. Secondly, the complaining entity may prove that th e defendant nation hindered the benefit of the complainant by subsidizing a certain industry beyond the acceptable maximum level. Finally, the complaining entity may prove that the defendant nation had prejudice in its action to subsidize a competing rival of the complainant. Several setbacks would face any country or automobile manufacturer that would wish to challenge the United States Bailout program to the WTO as a violation of WTO agreements. For WTO to accept the complaints by any country or automotive manufacturer there must be enough proof to validate the claim (Webel 24). One of the requirements is that the complainant in the case must proof that the United States government subsidized goods meant for export directly. Furthermore, there should be proof that the United States government benefited the companies that were subject to assistance. It is difficult to determine whether there was any benefit for the American automotive manufacturers. The complex procedures and disso lution of the two companies is difficult to analyze, particularly because the old business entities were eventually dissolved and new ones formed. If countermeasures were to be applied by the WTO, the implications of the past subsidies would remain, and the said measures would act just as a deterrent to any future violation of international trade laws. This means that the complainant would not be compensated for any damage caused by the subsidies. For this reason, the complainant may not be motivated to file any complaint against a subsidization that has already occurred. The lack of any financial award by WTO arbitration is a major setback to the international law (Webel 26). As of now, the subsidization of the two American automakers by the government of the United States remains a perceived action rather than a proven fact. Although is it is difficult to proof guilt or take action against the united states of America for the perceived misconduct, there are implications arising fr om reaction of the international market, foreign automotive manufacturers, and other countries that are preparing themselves to take similar action, should multinational companies operating in the country require government assistance. When subsidies are given to an industry with a significant share of international market, a degenerative effect is likely to occur. Competitiveness of companies within the international market becomes impaired by such actions. Apart from the automotive manufacturing industry, other sectors are likely to suffer from changes in trade tariff. Many of the countries involved in substantial trade with the United States may raise tariff so imports from the United States in response to the unfair subsidization of the United States motor industry. However, action by aggrieved parties may also be hampered by the economic power of the corporations that were subsidized. General Motors Corporation and Chrysler are comparatively smaller than the largest automobile manufacturers in the world (Webel 29. However, they operate on a multinational scale and employ citizens of their host countries. Closure of the two companies may make the companies lay off their workers in some of the countries. Thus, any country with interest in either General Motors or Chrysler is not likely to file any complaint against the automobile makes since such an action goes against their interest. Following the support of Chrysler and General Motors by the American government, some of Europe’s automobile manufacturers have been taking similar action though on a smaller scale. It is the difficult for WTO to impose any barrier to such action since no action has been taken against the US government decision to bailout domestic automobile manufacturers. Germany gave one and half billion Euros to Opel, a General Motors corporation subsidiary. On the other hand, France tried to influence Renault by giving the company a loan of about eight billion Euros. Britain also ga ve a loan of three million dollars to domestic automobile manufacturers (Lincicome 9). All these moves by European countries were reactions to the subsidizing of general motors and Chrysler by American government. In turn, the companies that received the said favors, continued to take actions that would indirectly benefit the countries that offered loans and bailouts. Such actions may cause mistrust and therefore fragmentation of global automobile trade. The practice may also spread to other industries, and eventually cause a global depression. It can be argued that the actions of countries that have significant manufacturing industry are a response to the actions of the United States. On the other hand, such actions may be considered efforts by the governments to salvage one of their most important industries from collapse. However, all these subsidies given to the automobile manufacturing industry around the world are a violation of WTO rules in one way or another (Lincicome 14). On careful analysis of the procedures and circumstances, one may choose to consider the actions as a part of a commercial war among the countries that host competing manufacturing industries. Although grants were given to several automotive manufacturing industries around the world, it is important to consider the circumstances of the period within which relief was offered to the manufacturers. The year 2008 had an economic depression that threatened to bog down many industries apart from the automotive manufacturing sector. In the case of United States, it is reasonable to take into account for the size of the automobile industry and its role in the economy. The jobs that Chrysler Corporation and General Motors offered to the public were too many for the government to risk losing. Such a big loss of jobs would have serious political and financial implications for the country. Thus, logic dictates that any government in a similar position would have gone to such a length to rescue t he automotive manufacturing industry. It is also possible that if the United States had sought permission or exemption from WTO or other countries with significant automotive manufacturing sector, it would have taken too long for the bailout programs to be useful to the situation in the industry (Technological innovation and public policy: the automotive industry 45). Similarly, it would have taken too long for United States government to present an amendment proposal to the WTO for consideration to favor its remedy for the automotive industry. Thus, to many observers, the United States did what was in the best interest of the citizens. Furthermore, the United States has other subsidy program for automotive makers other than the plan to bail out Chrysler and General Motors (Chong 45). For example, the United States government has endeavored to provide financial assistance to companies that sell automotive parts to Chrysler and General motors’ in order to maintain smooth trade for the organizations. In turn, manufacturing process at General motors and Chrysler is smooth. Through this mechanism, losses are avoided. However, some of the organizations that benefit from this plan are foreign companies in which the United States government has little direct interest. One can then conclude that the United States bails out companies within the country, but also provides similar assistance to companies outside the country (Chong 53). In such a situation, there is no substantial reason to allege that the United States government had prejudice against some foreign manufacturers. However much the United States government was justified in implementing its contingency plan in the case of automobile manufacturers, there is need to follow trade rules to ensure that there is cooperation in international trade (Lincicome 15). It is important for the country, which is the leading economic power, to show faith in rules and regulations that it has previously championed. The Uruguay concessions were formulated under the patronage of the United States and other leading economic powers. Consequently, it becomes hypocritical for the champion of the said laws to be the first to breach them. Although one cannot conclude that the subsidization of automotive industry in Europe was a reaction to the American case, it could still be a possibility. Thus, whether the government of the United States had a credible reason to bailout its automotive manufacturing industry or not, the fact remains that the US government breached international trade laws. Works Cited Brunetti, Paul. â€Å"United States Economic Policy: US subsidies in the context of World Trade Organisation.† United States Economic Policy 33.5 (2011): 7-24. Print. Chong, Michael D.. Study of the crisis in the automotive sector in Canada report of the Standing Committee on Industry, Science and Technology. Ottawa, Ont.: Canada Parliament House of Commons, 2009. Print. Lincicome, Scot. â€Å"Coun tervailing Calamity How to Stop the Global Subsidies Race.†Policy Analysis 11.7 (2012): 1-36. Print. Technological innovation and public policy: the automotive industry. Basingstoke, UK: Palgrave Macmillan, 2011. Print. United States Congress, United States Congress. Congressional Oversight Panel September oversight report: the use of TARP funds in the support and reorganization of the domestic automotive industry.. Washington: U.S. G.P.O. :, 2009. Print. Webel, Baird. â€Å"Troubled Asset Relief Program (TARP): Implementation and Status.† Congressional Research Service36.5 (2012): 4-33. Print. This essay on Subsidies to US Auto Industry was written and submitted by user Taraji Whitfield to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.