Protecting the Big Three


Amidst the current financial turmoil, at least one of the Big Three could be on the brink of extinction. Their cries for help have registered in Washington. Yesterday the Bush administration confirmed a deal to provide $17.4bn (£11.6bn) in loans to GM, Chrysler and Ford. This will exacerbate a problem that has deeper roots.

Time and again, the U.S government has sought to provide help to U.S. industries, but this has proven to be at their expense. In 1981, Reagan made it clear to Japanese officials that they should accept ‘voluntary’ import quotas or face having harsher restrictions imposed on them by the U.S. Senate. As the Heritage Foundation argued back in 1985, protectionism allowed the car makers to raise prices without losing business to foreign competitors. It is estimated that the excess cost to the U.S. consumer as a result of this protectionist policy was $3.2 billion in 1984.

The results of such policies can now be clearly seen. Protectionism has jeopardized the industry’s very survival. To overcome the trade barriers, Japanese carmakers began opening production plants in the U.S. and hiring highly skilled U.S. workers. Their focus continued to be on market forces, wages and benefits and innovation as they invested heavily in developing and sustaining the production of fuel-efficient vehicles. At the same time U.S. automakers put innovation on hold, as they required a constant flow of cash to meet their high operating costs. The cloak of protectionism essentially hindered these companies from making the difficult decisions that would have allowed them to remain competitive. The current financial situation has merely acted to bring their ineptitude to the forefront.

What governments have failed to realize is that the economic system exists to serve the needs of the consumer. By propping up failure through various policies, governments fail to understand that consumers are at the very heart of this economic system. Government actions are essentially seeking to limit the choices consumers can make.