Money for the Auto Industry: Consistent with WTO Rules?

by Claire Brunel, Peterson Institute for International Economics
and Gary Clyde Hufbauer, Peterson Institute for International Economics

February 2009

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Gary Clyde Hufbauer

No industry save financial services has been harder hit by the current recession than the automobile industry. Employment in the US auto industry dropped 9 percent between 2007 and 2008, while auto sales fell 18 percent over the same period. The credit freeze has only added to the distress, since financing is required for most vehicle purchases. These have rippled throughout the economy, jeopardizing jobs at the automakers themselves and in numerous dependent firms, such as parts manufacturers. Similar downturns have hit automakers and their supporting industries around the globe.

In response to these troubles, the major US automakers—General Motors, Ford, and Chrysler—have appealed to the government for financial aid, and they are now seeking an additional $20 billion. A variety of measures to support the auto industry have been debated, including using funds from the Trouble Assets Relief Program to assist the financing arms of the automakers, tax credits for new vehicle purchases, and bailouts of auto-parts firms. Countries in North America, Europe, and Asia with large auto industries have considered similar proposals. Concerns have been raised regarding whether these plans violate World Trade Organization (WTO) rules and what effects they may have on world trade.

Claire Brunel and Gary Clyde Hufbauer consider auto-bailout proposals in the United States and abroad and examine whether these plans are WTO compliant. While a WTO case could be brought under the Agreement on Subsidies and Countervailing Measures, this is unlikely both because of the environmental requirements of the bailouts and because most countries that could potentially bring a case against the United States subsidize their own auto industries. Another possibility is that a US firm could bring a case against a foreign automaker under US countervailing duty laws. A successful case, however, is unlikely to lead to the elimination of the contested subsidy, but would instead establish a duty on exports from the country in question, further fragmenting world trade. This highlights the ultimate danger of auto bailouts and aid: The auto industry, much like shipbuilding and steel, may gradually leave the realm of WTO disciplines, with large-scale subsidies becoming the norm. If an important industry like autos can remove itself from WTO disciplines, a dangerous precedent would be set and the world trading system seriously weakened.

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