General Motors And Subsidies

Just one year after investing $51 billion and acquiring a majority (61 percent) stake in General Motors, the Obama Administration, through the company’s Securities and Exchange Commission (“SEC”) filing on August 18, announced plans to begin selling the government’s stock and return the company to private control and ownership. The announcement was a cause for celebration on many fronts: the investment appears to have paid off, saving the company and its workers from bankruptcy and unemployment; returning capital to the American taxpayer ($6.7 billion having already been repaid); avoiding the multiplying effects of a failed corporation with thousands of suppliers themselves employing tens of thousands of workers all over the United States.

Some of the celebration was muted. There were doubts whether the stock sale would recoup all of the taxpayers’ money. The sale of shares will be gradual and the government will continue as a major (but not majority) shareholder. There remained no guarantees that General Motors would ever fully recover from its near-death experience. New General Motors leadership, although coming from the top ranks of major companies (the new CFO was CFO at Microsoft, for example), has no automotive experience.

The most serious concerns are that General Motors’ future depends, above all, on sales in China and Brazil, while its principal innovation, the all-electric Chevrolet Volt, is due to be introduced at a high price and with boundless uncertainty this year. The SEC filing acknowledges that the Volt depends on a battery technology “that has not yet proven to be commercially viable.”

Both the celebration and the concerns resonate with the trade law. They also present new political and diplomatic challenges for the Obama Administration. U.S. trade law and policy, dating back to the 1988 Omnibus Trade and Competitiveness Act, treat government equity infusions into private enterprises as subsidies.

In the highly publicized infusions of capital into General Motors, the United States was rescuing a company that the United States said would have gone bankrupt. The free market premises of the trade law dictate that a company that would go bankrupt without government help produces nothing but subsidized products thereafter. The subsidies could be extinguished only through market transactions eliminating all of the government equity, and even then an argument remains that no new merchandise would have been produced but for the government intervention. For the last year, GM has been unmistakably a state-owned enterprise, and the American interpretation of the WTO’s Subsidies and Countervailing Measures Agreement may permanently handicap GM’s international sales.

An American State-Owned Enterprise In China

The challenge for GM is acute in China, which has become GM’s leading market and the focus of its projected growth. The Obama Administration on August 26 proposed fourteen regulatory changes in the Department of Commerce’s Import Administration, including seven aimed directly at non-market economies and one that would make the products of state-owned enterprises almost automatically subject to allegations of unfair subsidies. Most of China’s automotive production is state-owned, and GM’s largest effort in China is in a joint venture with a state-owned enterprise. GM has been for the last year, unmistakably, a state-owned enterprise itself.

Were China and the United States developing and producing automobiles and parts only for their own markets, they might each choose to ignore the implications of state ownership and equity infusions. They might be subject to WTO complaints from the private makers of cars in other countries trying to compete in China and the United States because, as third country competitors, they would be disadvantaged, but such complaints are rare and difficult. China and the United States, however, are not circumscribing their own ambitions. Both are trying to claim green high ground, developing automobiles and components that will be more environmentally friendly. They are competing with one another to this end, but also cooperating. Both, separately and together, want to market their products around the world. The rest of the world could reasonably treat these products as unfairly subsidized.

The thirteen-year-old joint venture between GM and state-owned S.A.I.C. Motor Corp. of China (the former Shanghai Automotive Industry Corp.) is planning to develop small, fuel-efficient automobile engines and advanced transmissions. The joint venture for engines and transmissions, part of GM’s strategic plan to become greener, is aimed expressly at the Chinese market, but the joint venture is also planning to manufacture small cars together in India, and to market the engines and transmissions around the world.

Using Green To Buy Green

However worthy the green cause may be, and however dependent its success may be on government help, the products of the GM-SAIC joint venture are subsidized and probably in violation of WTO agreements. Nor is the problem limited to engines and transmissions, or even whole cars. On September 12, U.S. Energy Secretary Steven Chu traveled to Livonia, Michigan to tout the success of government financial support for A123 Systems, a manufacturer of lithium ion batteries destined for electric cars. At least $550 million of the government’s $789 billion stimulus program has gone to plants making such batteries, the leading edge of $2.4 billion committed to electric car development. The CEO of the company in Livonia volunteered, “This money was instrumental in the decision to put manufacturing in North America. We think that without this, it’s very unlikely that plants of this size and nature would have been happening in the U.S.” He might just as well have hung a sign around his neck with an arrow to the plant reading, “This way to our subsidized products.”

China committed in 2010 to a program of “indigenous innovation” that features attracting new technologies from other countries. It welcomes the innovations from GM in its joint venture, but also wants to convert American ingenuity into Chinese ownership. GM, now selling subsidized vehicles vulnerable to WTO challenge, may have no choice but to transfer technology to China in order to remain prosperous in the Chinese market.

China’s fourth largest automobile manufacturer began as a producer of batteries. BYD believes that its battery-driven electric vehicles will claim first place in the world market because of its leadership in developing batteries. BYD is not likely to welcome the Chevrolet Volt, GM’s highly subsidized battery-driven car, nor GM-SAIC products incorporating American batteries, into the Chinese market. Yet, BYD may be a beneficiary of the joint China-U.S. program for the development of electric cars, launched during President Obama’s visit to Beijing in November 2009. That program began with more than $150 million from the two governments.

Solving The Subsidies Problem

We warned in December 2008 that massive U.S. government bailouts of banks beginning in September 2008 demanded a change in thinking about countervailable subsidies.  Practically every major American bank had been deemed uncreditworthy and was lending money borrowed from or granted by the federal government. All such loans arguably were subsidies countervailable on goods an American producer borrowing from those banks might sell abroad.

The bailout of the U.S. automobile industry was an even more direct subsidy, financial contributions committed to the very survival of companies. And in looking forward, subsidies were targeted as much as possible on green technologies, on innovation, on reducing carbon footprints. There was no bigger target, because of the environmental damage it does, the jobs it provides, and the financial difficulty it was in, than the automobile industry. And within the automobile industry there was nothing more promising than electric cars.

When Premier Hu and President Obama met in September 2009 in Beijing, one of their few achievements was to create a joint foundation, jointly funded, for the development and promotion of electric vehicles.  Since that time, however, there is no indication that either country has put up its share of the money, or agreed on where the foundation should be located, exactly what it should do, and who should lead it. Like the temporarily calming effect of another cooperative agreement between China and the U.S., the electric car agreement may have muted the Chinese subsidies investigation into U.S. cars, but appears a year later to have done nothing to advance the agreement’s public and official objectives.

Contradictions now litter the trade battlefield, particularly over subsidies and green technologies. While the Obama Administration applauds achievements through subsidies to the automobile and battery industries, especially celebrating the implications for the development of green technologies in Michigan, House Ways and Means Committee Chair Sander Levin (D-Mich) is pressuring the Administration to launch a WTO case, upon a petition from the United Steelworkers, alleging Chinese subsidies to green technologies.

Japan seems to have beaten Levin, indirectly, to the punch. In mid-September, Japan challenged the Province of Ontario’s Green Energy Act at the WTO, alleging unfair subsidies for the development of solar and wind power. It is a direct challenge to national policies favoring local companies in their quest for a reduction in greenhouse gas emissions, what the Steelworkers are asking the United States to challenge in China, and what China could surely then challenge in the United States, particularly in the cash infusions in Levin’s own Michigan.

China and the United States might want to reach an accommodation, a mutual recognition of subsidies for automobiles, especially electric cars and their components, but also for other green technologies. Without such accommodation, GM faces a potential threat of effective banishment from the Chinese market, and potential loss of its joint venture once its technology has been transferred. Accommodation on the trade law, however, requires political and strategic accommodations, which may not be forthcoming.

China denies any correlation between state ownership and subsidies, and the United States insists that the temporary infusion of equity, whether into banks or GM, was a limited, temporary market transaction in which corporate management remained private. Both China and the United States insist that their automobile manufacturers operate independent of state direction, on market principles. An accommodation accounting for WTO rules would require each to admit that state ownership and equity infusion probably have violated the SCM. Otherwise, no accommodation would be necessary. Neither is likely to contemplate such an admission, however, and so both must continue to live under threats, the United States menacing state-owned Chinese enterprises and Chinese policies and practices enhancing exports, the Chinese launching investigations into U.S. subsidies while advancing an industrial policy of “indigenous innovation” promoting joint ventures as long as they deliver to China new advantages in technological change.

Either cooperation to reduce greenhouse emissions, or Japan’s initiative against Canada, will define the future. Either state intervention will be condoned in a financial crisis, or will be punished under world trade rules. There is an urgent need to address these questions before, one by one, technological innovations and world trade initiatives are derailed by the very international trade agreements intended to encourage both.