HAWKINS: To rebuild the auto industry

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By William Hawkins

COMMENTARY:

President-elect Barack Obama pushed for speedy aid to the troubled U.S. auto industry when he met with President Bush on Nov. 10. Then Democratic congressional leaders said they would seek to use $25 billion of the $700 billion financial sector bailout to help the automakers, but have since backed away from the plan following criticism from Republicans.

At least four individual banks (Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup) have already received aid of $25 billion or more. The bailout plan for the insurance firm AIG has reached $150 billion. So providing loans to the auto industry, a central pillar of the real economy with links to 1 in 10 jobs in the country, is a very modest step.

Before the election, Congress approved $25 billion in loans for America's three largest car makers to retool old plants so they can produce more fuel-efficient vehicles. But these funds are not immediately available. The industry needs bridge loans to help cover operating costs during the recession. Additional measures will be needed to address the legacy costs of health care and pensions without betraying retirees who earned these deferred payments.

The plight of the automakers is fundamentally different from that of the financial sector. Wall Street created its own disaster by concocting a house of cards based on "innovative products" that leveraged the world of high finance into a black hole. The lavish spending, reckless decisions, and arrogant behavior of bankers and brokers have enraged the public. Even those who understand that the financial system must be saved if the economy is to recover, have had to hold their noses.

The auto industry, in contrast, is the symbol of Main Street, with its skilled workers, shirt-sleeve management, and practical engineering. Henry Ford's decision to pay his employees a wage sufficient to buy the cars they were building steered America toward its great achievement of lifting the working class into the middle class - something putative conservatives forget at their peril.

When the "greatest generation" was liberating Europe and Asia, it was the expertise of the auto industry that created the "arsenal of democracy" on the home front. America won the shooting war, but in recent times has been losing the trade war to foreign rivals who take the kind of aid being discussed now in Washington for granted. A wide variety of subsidies, formal and informal import barriers, tax breaks, and fiat currency policies have given foreign automakers large competitive advantages against their American rivals.

In 2007, the United States imported $257 billion worth of cars, trucks and auto parts, but only exported $121 billion worth of goods in these categories. Foreign-owned automakers now hold half the U.S. market.

The global recession will only intensify competition to control markets at home and abroad to sustain jobs and production in the face of falling demand. The Doha Round of World Trade Organization talks collapsed over the summer because the major developing countries would not give up their right to protect key sectors from rival imports. India, South Africa, Brazil and China made continued support for their rising auto industries a top priority.

South Korea did the same in its negotiation of a "free trade agreement" with the United States last year. The agreement fails to open the Korean market to American exports. South Korea shipped about 700,000 automobiles to the United States last year while importing only 5,000 from the United States. As a practical matter, no stack of paper will open Korea to large-scale auto imports. Informal barriers from a nationalistic culture backed by government suasion, plus state support for domestic industry, will guarantee that Korean firms will dominate their home market. The same will remain true in China, Japan and Europe as well.

Peter Morici, a former chief economist at the U.S. International Trade Commission and now a professor at the University of Maryland, has analyzed the massive U.S. trade deficit - more than $700 billion in each of the last three years, in terms of three problem areas: oil, China and autos.

Nearly everyone understands the folly of having become so dependent on foreign oil imports. The need to "drill, drill, drill" in America has become a popular cry, especially among conservatives. Most people also understand the folly of providing China with money, technology and production capacity, given that Beijing is a geopolitical rival of Washington in every overseas trouble spot.

Political leaders, especially conservative Republicans, need to address the harmful impact of losing the trade competition in autos as well. Funding programs for import substitution will have to go beyond just energy if the real American economy is to recover and embark on the road to stable growth. It is time to "build, build, build" in America.

William R. Hawkins is a consultant specializing in defense and trade issues.