Thursday, March 09, 2006

Should governments intervene in their auto industries?

It's a question that recently faced Great Britain with MG-Rover, the last mass market British automaker, and the US faces with General Motors and Ford. Should a government support and foster its automakers or allow them to compete freely in the market? George Bush has stated rather unequivocally that he has no intention of giving federal monies to either GM or Ford.

But the fact is that the US government gives money to its automakers every day. Much of that money comes from tax breaks to lure them to build or continue building cars in various regions in the country. Not only are there tax breaks, there are outright giveaways that come in the form of legislation that allows automakers to save money in a multitude of areas. Every time legislation is passed at the state or federal level that in some small way reduces or destroys a regulation, it usually means millions saved for the companies. GM and Ford want that to continue, but they also want an outright loan if things get really bad. At this time, the US government seems unwilling to go that far.

And why should it? Automakers already get enormous handouts. What about the free market, where companies rise and fall because of their own innate strengths or weaknesses.

I conclude that there is no real free market. At least not in the auto world. In many foreign markets US cars must be assembled there and in that country's brand. A Chevrolet could never sell in Japan, because Japan would slap tariffs on it making it too expensive to buy. However GM can sell a Suzuki in Japan, but it must be built there as well to avoid any expensive tariffs. The reverse is not true at all in America. Foreign cars may sell for comparable prices in America to domestic vehicles because they do not have high tariffs placed on them. This hurts the domestic manufacturers considerably.

Some might argue that there have been few repercussions in Great Britain where we have seen a lack of government support for MG-Rover which allowed for that company's liquidation. But there was hardly any economic repercussions. The situation with GM and Ford is different. Both companies employ many more workers, and their cars are much more popular in America than MG-Rover's cars were in Britain. There will undoubtedly be localised economic impact, MG-Rover's disappearance hurt the rural Midlands area. GM and Ford's loss would destroy Michigan, and other parts of the Midwest. That would be a greater harm.

The idea of free trade and a total free market never really existed anyway. Capitalist markets everywhere with developed industries always end up having them dominated by a lucky few, who employ a great many people. If only Washington realized that enough to help out those who need it. Namely GM and Ford.

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