Monday, September 17, 2012

Chutzpah Alert: Huge Fan of Auto Subsidies Attacks Chinese Auto Subsides

I'm traveling right now and don't have much time to get in the weeds regarding President Obama's announcement today that the US has filed a WTO dispute against China for the latter's subsidization of its domestic automobile and auto parts producers.  Fortunately, the audacity of such a move is presciently covered in my forthcoming Cato paper on the failures of US subsidy and anti-subsidy policy.  Given ample news reports on rampant Chinese subsidization, the U.S. might just have a good legal case against China here, but its political case is abysmal for at least two reasons.

First, we just so happen to subsidize the heck out of our own auto industry - something that President "GM/Chrysler Shareholder" Obama certainly knows.  From the paper:
The United States also has a long, bipartisan history of subsidizing the domestic auto industry. Most notably, the 2008–09 bailouts of General Motors and Chrysler are projected to cost U.S. taxpayers over $25 billion in direct losses (at current stock prices), another $20-plus billion in indirect losses (e.g., preferential tax treatment for carryforward of next operating losses), and many experts predict that GM is once again headed for bankruptcy. The bailouts, however, are only the latest example federal support for Detroit. For example, the Clinton administration in 1993 provided U.S. automakers with $1.2 billion over eight years to develop hybrid cars as part of its Partnership for a New Generation of Vehicles. The Bush administration’s follow-up initiative, FreedomCar, focused on hydrogen-powered cars and cost taxpayers about $2 billion.

The federal government has also doled out extensive consumer subsidies for the purchase of certain vehicles. For example, the 2009 “Cash for Clunkers” program provided government rebates of up to $4,500 for car buyers who traded in their current vehicles for new, more fuel-efficient upgrades, at a total program cost of about $2.8 billion. The Energy Policy Act of 2005 (P.L. 109-58) established tax credits for the purchase of new alternative fuel and advanced technology vehicles. Tax credits under this program, expanded by the Emergency Economic Stabilization Act (EESA, P.L. 110-343), are as high as $7,500 for light-duty vehicles and $15,000 for heavy-duty vehicles. GM’s Chevy Volt qualifies for the maximum $7,500 tax credit—which the Congressional Research Service has said is “critical to GM marketing plans for the Volt,” given the car’s high selling price. The Joint Committee on Taxation estimates that these vehicle subsidies cost $500 million between 2004 and 2008, $1.3 billion from 2009 to 2013 (est.) and another $1 billion in 2014–2015. Many other state programs provide similar consumer subsidies. 
Second, US auto subsidies - and the bailouts in particular - have actually exposed US exports to anti-subsidy (countervailing) duties in... wait for it... China.  Back to the paper:
In December 2011, the Chinese government imposed anti-dumping and countervailing duties on U.S. automobile imports. CVDs on imports of Chrysler and GM cars and SUVs were set at 6.2% and 12.9%, respectively, while all other investigated U.S. automakers received 0.0%. Among the U.S. subsidy programs alleged in the CVD petition were various elements of the 2009 auto bailouts (including the Automotive Industry Financing Program), the Advanced Technology Vehicles Manufacturing Loan Program, the Cash for Clunkers program, and several federal and Michigan state tax incentives for U.S. automobile manufacturers and consumers. China’s final determination found that Chrysler and GM—but not U.S.-based competitors like Ford, Honda, BMW and Mercedes—had received countervailable subsidies in the form of the auto bailouts (via grants, loans, and capital injections). Of particular note was China’s determination that the two companies were uncreditworthy at the time of receiving U.S. government loans at already-low rates. On July 5, the United States announced a WTO challenge to various procedural and methodological aspects of China AD/CVD determinations on U.S. automobile imports. However, the United States has not disputed the basis for the Chinese CVD measures—that is, China’s assessment that the auto bailout constitutes a countervailable subsidy.

In 2011, American automobile producers exported more than $3 billion of the targeted cars and SUVs to China, but U.S. exports of Chrysler and GM automobiles will remain at a significant price disadvantage until these countervailing duties are removed. Although both companies can avoid the duties by selling cars in China that are produced outside of the United States, these duties—imposed due to the auto bailouts—have ensured that their American-based workforce will not reap the benefits of exporting to the largest car market in the world. Such exports also remain vulnerable to similar CVD actions in other key markets.
Now President Obama wants to complain about Chinese automobile subsidies?  Really?

Like I said, chutzpah.

Meanwhile, China announced today its third WTO challenge to US application of its own anti-subsidy (countervailing duty) law.  The details of the new dispute aren't out yet, but I'll be sure to come back to them in a few days.

Regardless, today's events are further proof that, while global subsidy reform is an absolute necessity these days, the United States - and the Obama administration in particular - is in no place to lead the charge.

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