Monday, June 08, 2009

Bail out bitterness

While GM and Chrysler find themselves rewarded for years of mismanagement, overspending, and generally poor decision making, Ford are the biggest losers in the bail out bonanza.

Ford's Mazda takeover gave them what the other two never had, a strong presence in the small car market. This is a key reason behind Ford's survival. Unfortunately, they are still teetering with debt and other high costs. The difference between Ford and the two bankruptcy protected US automakers is Ford are managing their costs and surviving, or at the very least not bleeding profusely.

So what do they get for their successful business model? Nothing. While GM and Chrysler offload debt via bankruptcy and have a fifteen billion dollar infusion, Ford continues to exist under their heavy burdens because they can.

The problem is, GM and Chrysler now have a competitive advantage.

Look at it this way. Take two identical businesses, relieve the debt of one and give them money while doing nothing for the second.

Flush with cash and not paying off any debts, the first business can cut costs, lower prices, and squeeze the second business out of the market.

Instead of bailout, Canada should have attracted other car manufacturers, (VW, Subaru, Nissan, Fiat, etc) to North America with loan guarantees and fire sale of the factories GM and Chrysler left behind. They would have saved fifteen billion dollars, recovered some of the losses of GM and Chrysler rather than providing bad businesses with a competitive advantage.

Was it pride that made us do it? Pride in North America's long auto manufacturing history? Or was it keeping up with the Jones'? The US gave em cash, we should too.

Moving onto US protectionism measures, buy American, and subsidizing.

Economics 101 says protectionism bad, open market good. In fact, isn't protectionism a small step toward Communism? Government intervention, etc, etc...

Whether its Obama or the pressure he's receiving I don't know, but protectionism fails in the long run. I think in many ways he's a model president, particularly for the international healing, but his economic policies have been lukewarm at best.

Protectionism can have an upside, but only if other countries are too daft to catch on and prevent getting dumped on by subsidized goods.

For instance, the US is subsidizing the pulp and paper industry. For every $500 the industry takes in in revenue, the US government gives them about $200.

In the long run, this could ruin other countries business models while dumping cheap lumber internationally. Once we're addicted, and the US has total control over the industry, then they can change from subsidizing lumber to taxing it heavily and raking in the money.

So what could Canada, and other countries do to ease the pain?

We could offer similar subsidies. That would keep our industry going, although at a heavy cost to the taxpayer.

The better option would be to form an international agreement with all other countries to charges tarrifs that double the subsidized amount from the offending country, not only on the raw materials, but on any and all products related to the pulp and paper industry.

Such an act would kick off a trade war and everyone would lose in the short term. But, losing in the short term is better than getting your ass kicked in the long term by the US. The longer term goal being to strong arm the US back into non-subsidizing behaviour.

Some say that in the 1920s, when the recession hit and the stock market nosedived, that a protectionist response led into the great depression. Are we on the same road once again?

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