Protectionism Prevails Worldwide

By George A. Pieler and Jens F. Laurson
June 24, 2009

But some opposition to state-run industry brews in Germany.

The global move toward state-run industries is running into a bit of friction in Germany. Opposition from Economic Minister Karl-Theodor zu Guttenberg sharpened the conditions for government aid for GM’s European unit, Adam Opel, and that seems to have bolstered Chancellor Angela Merkel’s resolve to resist demands for more of the same. For one, she refused to bail out Arcandor, the huge, now-bankrupt German retail chain.

In the U.S., politicians complain about the GM and Chrysler bailouts–but no one’s moving to prevent more of the same. Perhaps Merkel and zu Guttenberg feel strengthened by center-right success in this month’s European Union parliamentary elections.

While Canadian auto parts maker Magna International Inc. and Russian lender Sberbank, supported by German loans and credits, won first shot at making a deal with Opel, zu Guttenberg makes clear that better offers (like Fiat) are welcome. GM agrees, and Opel is still opening its books to all comers.

While Merkel elsewhere distances herself from the idea of state aid for big, flailing businesses, her election rival, Frank-Walter Steinmeier, lauds the Magna-Opel deal on and supports aid for Arcandor too.

The state support awarded so far is supposed to get Magna-Opel off the ground, but no one knows if or when taxpayers will be reimbursed for their auto-investment. Often cited is the pressing need to keep Opel’s workers employed and safe from the fallout from GM’s bankruptcy. This common thread between GM’s U.S. and European divisions is a protection racket: insulate the companies from market forces and protect existing employees from job loss.

That same protectionist stance underlies the market-divvying arrangements that characterize the Opel spinoff. Magna, which manufactures car parts, will work with Russian automaker Gaz to build cars in Russia and Eastern Europe, creating what Merkel calls "a European company under the umbrella of Adam Opel."

Meanwhile the new GM, under Barack Obama, is barred from importing cars from abroad (including Opel’s), and the new Opel won’t be able to sell its vehicles in China. That’s too bad, since Opel has some of the best engineering and design of all the parts of GM–just what’s needed to help retool the company. Instead of taking advantage of that strength, we’re settling for a nice, old-fashioned, market-mercantilist deal.

Will the E.U.-Russia market support Opel’s expanded production? If GM and Opel were undergoing genuine (not government-structured) bankruptcies, that question would be answered as Opel’s assets were sold off. But instead, both divisions of GM are being politically reinvented to minimize job cuts as well as to advance "green" objectives by retooling cars for lower carbon emissions.

In such a highly charged environment, zu Guttenberg’s hard line on state aid runs against the political logic of an election year. It’s also a refreshing, rational approach when conventional wisdom is telling us the state should take over just about everything. As he told German newspaper Welt am Sonntag, "[T]he state can be blackmailed if it is overly generous with help even once."

Is anyone else listening? GM’s forced bankruptcy gives the Obama administration over 60% control, and Germany’s financial backing gives it power over the new Opel–no matter who actually takes it over. And GM’s U.S. arm retains 35% of Opel. Whether these new combinations will prove economically viable seems beside the point.

Fiat wants a broad, transatlantic manufacturing platform, and the Obama administration, based on the Fiat-Chrysler deal, seems sympathetic. If the new Opel fails, 1.5 billion euros in loans from Germany’s federal and state governments are gone. The results won’t come in until after this fall’s elections, and the impulse to save jobs now is understandable.

Less comprehensible is the casual assumption gripping Western policymakers that major industries in trouble are the custody of the state and can or should be sliced-and-diced at will. In this post-economic world, free markets themselves are at stake.

At Davos this winter, Angela Merkel told the World Economic Forum: "We must not allow market forces to be completely distorted … I am very wary of seeing subsidies injected into the U.S. auto industry. That could lead to distortion and protectionism."

Now Merkel is saying autos are a special case and draws the line elsewhere. We shall see. It seems Barack Obama is running car companies, but he denies that he is doing it. Watch what these leaders do, not just what they say.

George A. Pieler is former deputy counsel to Senate Majority Leader Bob Dole. Jens F. Laurson is editor-in-chief of the International Affairs Forum.

Leave a Reply