Trade risks in auto bailouts Terence Corcoran, Financial Post Published: Tuesday, January 06, 2009

On the subject of the U. S. auto bailout, Murray Ross of Pleasant Hill, Calif., wrote the following letter to the Wall Street Journal:

"I must have dozed off and skipped a page. Our new policy [in the United States] is to sell government bonds to raise cash to give to private equity firms to lend to non-creditworthy borrowers so they can drive new Chevy Suburbans down our crumbling roads and bridges, converting Middle East oil into greenhouse gases at the highest possible rate? Unbelievable."

Indeed it is, but there is likely more incredible policy to come in the North American auto sector. So far there are no signs Canadian policymakers have plans to duplicate the U. S. scheme to get government-backed cheap car loans to car buyers. Oops, wait a minute. I must have dozed off over the holidays too, because I seem to have missed the car loan gimmick tucked in behind Ottawa’s auto bailout announcement. In addition to $4-billion in loans to GM and Chrysler Canada through the federal government’s slush fund facility at Export Development Corp., Ottawa is working on a car loan package. According to the Prime Minister’s Office, the government "will create a new facility to support access to credit for consumers with particular attention paid to improve the accessibility of car loans and dealer financing."

We don’t know whether car loans were on the agenda yesterday when Finance Minister Jim Flaherty met with the CEOs of the major banks, or whether the banks would be strong-armed into participating in the "new lending facility" announced before Christmas by the Prime Minister.

What we do know, however, is that GM and Chrysler Canada received $1.2-billion from Ottawa on Dec. 28, the first instalment on the $4-billion lending plan. The interest rate, set at 300 points over the London Interbank (Libor) 3-month rate, works out to 4.4%. Not bad for a high-risk industry on the brink of insolvency. By way of comparison, TD Bank Financial Group announced a preferred share issue yesterday and it had to pay 6.25% over 5 years. To raise 5-year money from depositors, the bank has to pay 3.5%.

While there were no details on the car loan plan, it’s hard to know what the fuss is all about. Through decades of auto industry competition, getting a car loan or a cheap lease has never before been seen as much of a barrier to car ownership. For years, in fact, credit watchdogs and the media have been hounding lenders for allowing people to overload on credit-card and car loan debt. For as low as $90 a month, anybody with a minimal credit rating and a driver’s license could get a lease on a set of wheels. Now the government is apparently going to make it even easier to run up a tab at banks and finance companies.

Easy credit, however, is the least of the issues surrounding the North American auto sector. As the governments of both countries get deeper into the auto business, assuming ownership roles and telling the auto companies how to run their businesses, there’s a growing risk that the auto companies will become the new tools of national industrial policy --and fodder for a global trade war. President-elect Barack Obama has made it clear that the auto industry is to become the standard bearer for a new green economy. Car makers are already scrambling to accommodate the emerging policies, promising to put an armada of hybrids and electric cars on the roads of North America within a few years. Whether they can do all this and still make money is doubtful, which is one reason they need government help.

As the U. S. companies grapple with their problems, with bureaucrats in eye shades looking over their shoulders and toting up cash flows, foreign automakers are not going to be standing still. All of the major global auto players --from Japan, Korea, Germany, China and elsewhere--are going to be rushing to fill the holes in the U. S. auto market. This is where the mix of government and industry creates a potentially toxic trade threat.

Will Washington and Ottawa, their fingers deep in the auto business and with potentially hundreds of billions of dollars invested and billions more in subsidies for new technology, be able to resist a return to the old industry tradition of auto protectionism? It’s not as if the former Big Three firms are above pushing for tariff and non-tariff barriers; they’ve been at if for years, and only recently got used to the idea of free trade in automobiles and parts.

The Obama economic team, moreover, has flirted with "Buy America" policies. The U. S. steel industry has recently begun lobbying for federal programs that would promote the use of U. S. steel in infrastructure projects. While it is hard to image an Obama administration would risk a global trade war over autos and steel, the mood in America -- and Canada, it seems -- is to go all out to protect local jobs.

Prime Minister Stephen Harper, in announcing his initial auto bailout package just before Christmas, said he was willing to take "whatever measures are necessary" to protect and maintain Canada’s industry. Let’s hope he doesn’t mean that literally.