Industrial policy puts global cooperation at risk

“How to rebuild the global financial architecture?” is a multibillion-dollar question that will keep the world busy for years to come. So far, everybody agrees that effective international cooperation is key, and the international financial summit scheduled this weekend in Washington takes a step in the right direction.

Yet domestic industrial policy could easily put any cooperative efforts into jeopardy. By now, the financial crisis is hitting the real economy in the US, Europe and elsewhere. Against this backdrop, economic patriotism becomes increasingly popular, with governments once again called upon to help domestic industries through times of economic turmoil.

What looks like necessary help to ailing industries at the domestic level may quickly translate into unfair competition from other countries’ perspectives. Resorting to activist industrial policy, for instance, could easily trigger subsidy races and fuel protectionism.

Unfortunately, retaliation and playing tit-for-tat bode ill for any common international effort to reform the global governance of financial markets. Cooperation on financial issues will not materialise when countries annoy potential partners by erecting trade barriers.

US carmakers were among the first to ask for support, hoping to receive money from the bailout plan originally designated for banks. They were promised soft loans worth $25 billion by the Bush administration to encourage the development of new models as customers increasingly favor smaller and more fuel-efficient vehicles.

On the other side of the Atlantic, responses were quick and the European automotive industry turned to the European Commission for assistance. “The Commission has been told to come up with proposals by the end of December so that the European automobile industry does not lose out in terms of competition” said Luxemburg’s Prime Minister Jean-Claude Juncker.

US carmakers now argue that given their truly dire state, the support promised a few weeks ago is just nowhere near enough. This week, President-elect Barack Obama urged the Bush administration to support emergency aid for automakers.

In blatant contradiction, European manufacturers often warn against distorting competition, while introducing a “junkyard bonus” to encourage consumers to get rid of their old cars and buy new ones instead.

Certainly, carmakers suffer from decreasing demand as consumers increasingly worry about fuel costs and their own financial situation. Yet some of the problems that automobile producers claim, are not so recent. In fact, it was apparent before the financial crisis that concentrating on big gas-guzzling models offered a less promising business concept.

German carmakers, which have concentrated on premium cars, are also hit by the crisis as consumers favor more modest models in times of economic slowdown. BMW, Daimler and Volkswagen have announced cutbacks in production, temporary shutdowns of plants or extended holiday breaks.

National governments in Europe and the US carefully weigh demands by the car industry. They must consider potential job losses not only at car-production plants but also in supplying industries. It’s hard to explain why bankers get help while blue-collar workers must cope with troubles on their own.

Moreover, cars are goods that spur emotions. Even people who do not work in the automotive sector have strong feelings about its products. Which politician wants to be accused of abandoning industrial icons? Still, it’s debatable whether state subsidies are the right cure because funds would merely ward off market competitive pressure and postpone necessary restructuring.