Cash for Clunkers?

posted by
on March 23, 2009

Rep. Betty Sutton, a Democrat from economically depressed Northeast Ohio, has an idea that could help jump start the U.S. economy in an environmentally friendly manner. On March 17, the second-term congresswoman introduced legislation that would give consumers tax incentives ranging from $3,000 to $5,000 if they traded in their old gas guzzlers to buy new, more fuel-efficient cars. Sutton’s proposal is formally called the Consumer Assistance to Recycle and Save Act, but the lawmaker has a catchy acronym for it. “The CARS Act will achieve many goals: consumers will finally get a break to purchase more fuel-efficient vehicles; we will all benefit from a reduction of CO2; and the auto industry will get a jump start to spur sales,” Sutton said when she rolled out her proposal. Others call the idea, Cash for Clunkers.

With U.S. auto sales currently at a quarter century low, the idea of cash-for-clunkers has some important political supporters. Speaker of the House Nancy Pelosi likes the idea. Ford, Chrysler, and General Motors are backing it. GM’s chairman and CEO, Rick Wagoner, has said that Sutton’s idea could have a “huge impact.” Wagoner points to Germany, which has a similar program that is credited with helping boost auto sales there by some 15% to 25% last month (depending upon whose calculations one wishes to accept). The United Autoworkers union is also strongly behind Sutton. Sutton’s idea also seems to be generally well-received in the White House. While the Obama administration has not specifically endorsed the bill, Steven Rattner, who heads the president’s auto task force, has expressed interested in “working with Congress on a piece of legislation that would help incentivize buyers,” Michigan Republican Rep. Candice Miller has told reporters.

But there is one small problem Well, perhaps not so small. The cash-for-clunkers proposal is restricted to cars that are assembled in North America. Foreign-made imports are specifically excluded. Considering the current international political environment, where perceptions of rising U.S. protectionism are increasing, the well-intended cash-for-clunkers bill could be heading into an international legal- and economic firestorm.

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U.S. trading partners are still fuming about the Buy American provisions in President Barack Obama’s economic stimulus package that will give American steel manufacturers a 25% price advantage over foreign steel in major highway- and port construction projects. Those Buy American stipulations, although exempt from legal challenges under World Trade Organization rules, still created a firestorm of criticism directed at the new occupant of the White House. Rep. Sutton’s proposal could re-ignite the flames, because it appears to violate U.S. obligations as a member of the WTO.

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The legal issue is simply explained. By specifically aiming to give domestic automakers a significant price advantage over foreign competitors, Sutton’s Buy American proposal appears to run counter to U.S. legal obligations not to discriminate against its trading partners. Indeed, the core principle of the WTO — established with the unwavering support of the U.S. — is the so-called “national treatment” stipulation. The national treatment bedrock principle was first established in the post-World War II era, when the U.S. played a leading role in creating the WTO’s predecessor international trade rules-making organization, the General Agreement on Tariffs and Trade.

By discriminating against foreign automakers, Cash for Clunkers appears clearly to be vulnerable to a challenge before the WTO’s dispute resolution legal process. Two senior members of Washington, D.C.’s international trade bar who have read the Sutton measure asked not to be quoted by name in this article, as they had not yet had time to complete a thorough legal analysis. But one said that his first impression was that “it would clearly violate WTO obligations, as non-U.S. vehicles are treated worse than U.S. vehicles.” The second lawyer said, “It would be a prohibited import substitution subsidy.”

Rep. Sutton, a former labor lawyer, was first elected in 2006 after expressing strong opposition to every proposed and pending U.S. “free trade” deal in recent history — against Nafta, against the U.S. bilateral trade deals with Panama, Peru, Korea, and Colombia, and against the WTO’s Doha Round. These accords, she contended, were all unfair to American workers. Her withering criticisms of U.S. trade-liberalization policies and her skills at advocacy made Sutton an immediate stand-out in her freshman class of “fair-trade” lawmakers.

Asked specifically about the concerns that her Cash-for-Clunkers bill would be vulnerable to a challenge at the WTO, Sutton declined to comment.

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Of course, not every member of the U.S. Congress pays much attention to U.S. legal obligations pursuant to the WTO anyway. If Rep. Sutton’s measure would be enacted into law, it would hardly be the first time that lawmakers understood that their handiwork could be overturned in a WTO challenge — figuring that it would take years for the injured foreigners to prevail in litigation. But in the present international economic environment, the Sutton proposal raises an immediate policy problem that could be damaging to U.S. prestige — not to mention the economy. Furious U.S. trading partners — some of whom are also facing rising domestic economic nationalist sentiments stemming from the global recession — would be likely to retaliate against American-manufactured exports. For President Obama, the last thing he needs right now is another congressional reminder of the 1930’s Smoot-Hawley era of tit-for-tat trade retaliation sparked by American protectionist laws.

Indeed, it didn’t take long after Rep. Sutton introduced her bill on March 17 before prominent foreign officials expressed serious concerns about it.

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Catherine Ashton, the European Union’s trade commissioner, met with newly sworn-in U.S. Trade Representative Ron Kirk on March 19. When she and Kirk met briefly with reporters after the meeting, Ashton pointed out that Germany’s stimulus program aimed at promoting new car purchases did not discriminate against foreigners. “We are very clear in the European Union that the way in which the German model works is a good one, because it allows for trade and allows for open markets,” Ashton said. “I would be looking at the American model to hope that we would also see that.”

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Sutton’s measure — at least the discriminatory parts — does not enjoy unqualified domestic support, even from people in the auto industry who would love to sell a lot more cars. The goal of getting gas-guzzlers off the road by helping stimulate new car purchases would be “a step in the right direction,” said David Regan, the National Association of Auto Dealers’ vice president for legislative affairs in a statement. “We would like to see the proposal expanded to include all makes of vehicles, which would provide even greater economic and environmental benefits.”

And last month, the influential Association of International Auto Dealers, whose politically connected members are located in key congressional districts across the nation, helped shoot down a similar Cash-for-Clunkers measure that Sen. Tom Harkin, an Iowa Democrat, and Michigan Democrat Debbie Stabenow sought to add to the Obama economic stimulus package. “We should not take away the consumer’s right to free choice,” said AIADA President Cody Lusk in a Feb. 5 letter that was circulated on Capitol Hill. “Any relief for consumers during these economic times should apply to all new vehicles for sale in the U.S. — not just those assembled here.”

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For the United Autoworkers, the idea of giving Americans an economic incentive to buy new cars doesn’t seem to be as attractive, if some of those new cars would be built overseas. The Detroit Free Press reported on March 20 that the UAW has expressed “concerns” about any federal program that would subsidize “purchases of foreign-made autos.”

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To be sure, the autoworkers’ reasoning has a certain irony. If there is one thing that UAW officials have complained about for many years, it’s foreign countries that make life tough for American automobile exports. Nine years ago, for instance, the UAW strongly opposed legislation designed to bring China into the WTO, in part because of fears that the Chinese would discriminate against U.S.-made cars. “In particular, we are distressed that the accession agreement does not effectively eliminate China’s discriminatory automotive and aerospace policies that are threatening the jobs of UAW members and the other American workers,” Alan Reuther, the union’s legislative director, told the House Ways and Means Committee. “Despite reductions in tariffs and liberalization of quotas, China’s market will remain effectively closed, limiting the increase in U.S. exports of vehicles and parts to that market.”

For decades, the UAW has protested that South Korea does not welcome foreign automobiles. On Sept. 24, 2008, for instance, UAW President Ron Gettelfinger complained strongly about the Koreans in testimony before a U.S. Senate Commerce panel with trade jurisdiction. “Historically, Korea has kept its market almost completely closed to U.S. built automotive products, as well as products from other nations,” Gettelfinger protested. “Indeed, Korea’s market has the lowest level of import penetration of any major automobile-producing economy in the world.” The UAW opposes ratification of the pending U.S.-Korea bilateral trade deal on grounds it does not go far enough by way of further opening Korea’s automobile market to American exports.

On Feb. 26, Rep. Sutton was one of 54 House members who signed a letter to President Obama that outlined the congressional trade agenda they hoped the new president would support — including a call for the White House to renegotiate the U.S.-Korea accord.
The congresswoman did not respond to an inquiry asking about the apparent contradiction in pressing legislation designed to keep Korean autos out of the U.S. market, while at the same time complaining that the Koreans discriminate against American automobile exports.