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The possible American bailout of its Big Three automakers is already being described outside the United States as "protectionist" and a violation of commitments made to the G-20 not to contribute to a trade war in the midst of a global economic slump. Whether or not the typical Congressperson would see it that way, an overlooked consideration in the American debate is how the contemplated actions might come into conflict with existing US obligations in the World Trade Organization (WTO). The United States could trip over two WTO rules.
The first is subsidies. Under WTO rules, subsidies—which can include indirect support through financial institutions and fiscal incentives—are classified into one of three categories. Export subsidies are prohibited. Production subsidies designed to displace imported intermediate inputs, which could be relevant if support is extended to automobile parts suppliers (which actually account for more employment than assemblers), are also prohibited.
A second set of subsidies is considered "actionable" if they demonstrably distort trade, and the agreement sets out a specific set of criteria to establish a presumption that the subsidies "seriously prejudice" the interests of another signatory. If these conditions are met, partner countries are authorized to impose offsetting "countervailing duties."
A third category of subsidies is explicitly permitted under the WTO agreement. These include subsidies for research and pre-competitive development, regional development, and the retrofitting of existing facilities to meet environmental requirements. The agreement permits subsidies of up to 75 percent for certain costs and industrial research and up to 50 percent of pre-competitive development activity. In addition, unlimited subsidy is permitted of non-commercially linked research conducted in universities or national laboratories or institutes. The other permitted class of subsidies is for the development of depressed regions, provided that the subsidies are general and the targeted territory meets the income and unemployment criteria for a depressed region specified in the agreement.
The bailout could also run afoul of "national treatment"—the requirement that firms from WTO signatory companies be afforded the same legal rights as domestic firms. The Big Three do not constitute the US auto industry in its entirety, and a bailout program that even implicitly excluded foreign assemblers operating in the US could be open to challenge.
Taken together the exemptions for research and development and regional development subsidies would appear to create fairly large loopholes for a government committed to intervention. Some of the contemplated subsidies could presumably be justified as research, and the US government might claim at least parts of Michigan as an economically depressed region needing targeted assistance. And with respect to national treatment, with the auto sectors of other countries feeling the pinch, foreign governments might choose to emulate US policy rather than try to prosecute it in the WTO.
But in the past, the United States has disputed the assistance practices of other countries, successfully challenging Indonesia on national treatment grounds that its policies had been undertaken to promote its automobile industry. And when in the aftermath of its financial crisis, Korea channeled subsidies through the Korea Development Bank to a semiconductor manufacturer, the United States slapped on countervailing duties and prevailed when Korea appealed to the WTO. So if the bailout goes forward, the United States should not be surprised if some of its partners decide that turnabout is fair play.
