Detroit Bailout Bad for Free Trade
Proponents of funneling another twenty-five to fifty billion of taxpayer dollars to the failing U.S. auto industry justify their support by carping about potential job losses that would follow Chapter 11 filings. Thankfully, people like Dartmouth associate dean and professor Matthew Slaughter understand that a short-sighted bailout would be far more harmful to our economy long-term, likely resulting in even greater future job losses. In today’s Wall Street Journal, Mr. Slaughter points out that continued bailouts will result in decreased foreign direct investment (FDI) in the United States:
The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States
Across all industries in 2006, insourcing companies registered $2.8 trillion in U.S. sales while employing 5.3 million Americans and paying them $364 billion in compensation. But as the world has grown smaller, today the U.S. faces increasingly stiff competition to attract and retain insourcing companies. Indeed, the U.S. share of global FDI inflows has already fallen. From 2003-2005 the U.S. received 16% of global FDI. That’s down from 31.5% it received in 1988-1990.
Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors?
The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.
He also gives us some insight into the auto industry:
On Sunday, President-elect Barack Obama asked, “What does a sustainable U.S. auto industry look like?”
Well, it looks a lot like the automotive industry run by “foreign” car companies that insource jobs into the U.S. In 2006 these foreign auto makers (multinational auto or auto-parts companies that are headquartered outside of the U.S.) employed 402,800 Americans. The average annual compensation for these employees was $63,538.
At the head of the line of sustainable auto companies stands Toyota. In its 2008 fiscal year, it earned a remarkable $17.1 billion world-wide and assembled 1.66 million motor vehicles in North America. Toyota has production facilities in seven states and R&D facilities in three others. Honda, another sustainable auto company, operates in five states and earned $6 billion in net income in 2008. In contrast, General Motors lost $38.7 billion last year.
Will Congress listen to Mr. Slaughter or will they listen to Ron Gettelfinger? We’ll get the answer to that $50 billion question soon enough.
