The Custom-House

Trade "red flags" in the auto plan

I'm impressed with the Obama Administration's willingness to face up to the problems posed by GM and Chrysler.  I can see several trade "red flags" in these Wall Street Journal stories: U.S. Threatens Bankruptcy for GM, Chrysler; Detroit's Fate Sealed in West Wing.

Should U.S. taxpayers assist foreign companies:

All the same, the administration's new plan is sure to ignite a battle over the government's role in the economy, what sacrifices will be required of labor unions, and whether it makes sense for U.S. taxpayers to assist a foreign company, Fiat, in an alliance with a U.S. company, Chrysler.

Limits on foreign investment:

As part of their proposed pact, Fiat and Chrysler agreed over the weekend to scale down the Italian auto maker's initial stake in Chrysler to 20% as a condition of the Treasury Department's bailout. Fiat earlier this year struck an agreement to take a 35% stake in Chrysler initially, and up to an additional 20% at a later date.

Although another story (Chrysler Plan Trims Fiat's Stake, Cuts Out Cerberus) explains that this is only a limit on the initial investment:

If Fiat and Chrysler reach a definitive deal within 30 days, the Treasury would be willing to invest $6 billion in Chrysler. Fiat wouldn't be allowed to raise its stake beyond 49% until after the $6 billion is repaid, people with knowledge of the matter said. Originally, Fiat had the option to increase its stake to as much as 55%.

How will these proposed tax benefits treat foreign vehicles:

It also plans to... support a congressional bid to offer large tax incentives for new-car purchases, with money for the program coming out of the $787 billion stimulus package. Mr. Obama also said that the Internal Revenue Service was creating a new tax benefit for car buyers.

Domestic production requires for Fiat/Chrysler:

A much harder decision was what to do with Chrysler. A conclusion that the company wasn't viable could lead to 40,000 workers losing their jobs. To combat that threat, the government is negotiating with Chrysler and Italian car maker Fiat SpA for an agreement that Fiat will continue to make cars in the U.S. if it buys Chrysler, according to an official of the Obama administration.

The general issue of subsidies:

The auto plan came packaged with several new government initiatives whose price tags remain unclear. The government said it would guarantee the warranties for all new GM and Chrysler cars until the two companies return to health. It also plans to speed up government fleet purchases...

What does the future hold?

Former IMF chief economist Simon Johnson sees two plausible scenarios at this point.  This is one of them (The Quiet Coup):

The second scenario begins more bleakly... It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

How does the Geithner plan work?

Over the weekend: Mark Thoma explains the Paulson plan, the Geithner plan, and nationalization: Government Intervention in the Market for Toxic Cars.   Brad Delong is more focused: The Geithner Plan FAQ.  Nemo at Self-Evident works through some simple examples: The “Geithner Put”, part 1; The “Geithner Put”, part 2 (thanks to Tyler Cowen at Marginal Revolution for the tip - one of Cowen's readers explains how to game the system: Gaming the Geithner plan?).

Paul Krugman doesn't like the Geithner plan at all: Financial Policy Despair; More on the bank plan.  

For reporting, Delong recommends the Wall Street Journal's Deborah Solomon  Here are Solomon and Randall reporting this morning: Treasury Plan to Deal With Toxic Assets Banks on Private Cash . Timothy Geithner defends his plan: My Plan for Bad Bank Assets.

"Buy America" and the States

In a broader discussion of the "Buy America" provisions in the stimulus bill, Jay Eizenstadt points to state level consequences that may be worth following: A regrettable step to protectionism:

Less obvious but possibly important is the cost to the states, many of which have previously not seen any reason to prefer domestically produced goods or services in their procurements. The Buy America provision will obligate such states to establish new procurement procedures to comply with the discriminatory requirement, in a legal setting that otherwise bases procurement decisions on common criteria such as the highest quality for the lowest cost. They will do so in order to access the Act’s funds, but the waste associated with developing discrimination mechanisms (and possibly later defending them on appeal) could be substantial.

Protection is Not Healthy for Children and Other Living Things

The Free Trade Petition, which I urge you to sign, emphasizes the connection between free trade and peace.  Don Boudreaux summarized some of the evidence in a Christian Science Monitor column in 2006: Want world peace? Support free trade.  See also the Vox.eu column Globalization promotes peace by Jong-Wha Lee and Ju Hyun Pyun.

Thanks to Jonathan Dingel for the information about the petition: Free Trade petition.  Steven Heller tells the story of the "War is not healthy for children and other living things" poster: War Is Not Healthy: The True Story.

Edit: Modified later in the day to add the Vox column.

Not all the trade policy news is bad:

Some good things are happening.  The stimulus bill expanded the trade adjustment assistance program: Baucus, Rangel, Grassley, Camp Hail Passage of Expanded Trade Adjustment Assistance. That should address some concerns about trade related job losses as we go forward.

Now it looks like congressional Democrats are going to loosen up the restrictions on trade with Cuba: House, Senate Launch Efforts to Change Cuba Trade Policy:

"...U.S. Is Open to Carbon Tariff "

From today's Wall Street Journal: Energy Chief Says U.S. Is Open to Carbon Tariff:

Let the Mexican truckers in

I agree with Emmanuel: Mexico's Tariff Frenzy vs. US Trucking Policies.

How to organize for a trade negotiation

Once a decision has been made to enter a bilateral or regional trade negotiation how do you set about organizing the government for it?

Australian trade consultant Peter Gallagher has a checklist of issues to help think this through.  Parts 1 and 2 are available here: How to Prepare for FTA negotiations.  Part 3 is in preparation now available, and a fourth is in the pipeline.

Don't impose punitive taxes on our multinationals

The Obama Administration proposes to increase the costs of doing business abroad for US multinationals "...finally ending the tax breaks for corporations that ship our jobs overseas."

Do US firms that invest and do business abroad take jobs away from Americans?  Should we tax them harder, or impose other onerous burdens on them to make them produce here?

Mihir Desai and his co-authors say think twice.  In a new article in the new journal Economic Policy ("Domestic Effects of the Foreign Activities of US Multinationals"), they look at actual behavior by U.S. multinational companies between 1982 and 2004.  They find that firms investing more abroad tend to invest more at home, firms that pay foreign employees more tend to pay more at home: