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An Auto Bailout Would Be Terrible for Free Trade

Author: Matthew J. Slaughter, Adjunct Senior Fellow for Business and Globalization
November 20, 2008
Wall Street Journal

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Congress is now considering a federal bailout for America's Big Three automobile companies. Many want to grant them at least $25 billion from the $700 billion Troubled Asset Relief Program on top of $25 billion in low-interest loans approved earlier this year.

But these figures represent only a fraction of what the total cost of the bailout could be. In a global economy, a federal bailout of the automotive industry could cost Americans jobs as well as foreign markets to trade in. There are at least three important ways an industry bailout could damage America's engagement in the global economy and hurt U.S. companies, workers and taxpayers.

The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. 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.

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