The Big Three and Globalization

After years of ineffective management, GM and Chrysler are bleeding cash to the point that they might have to declare bankruptcy soon.

See article
http://online.wsj.com/article/SB123483084725295657.html

Instead the naming a “car czar,” the administration opted to step back and let the companies figure out its best alternative. Of course, the administration also has to decide if more financing should be granted which is vital to the companies’

This article touches on many topics. First is the effect of globalization. The benefits from globalization are that resources can be allocated across the globe and the firms can be closer to the customers. The flip side is that the strong companies survive and it is tough to be on the losing end. GM and Chrysler, to some extent Ford, are on the losing end against efficient manufacturers of Toyota and Honda. The two Japanese firms are able to set up offices and factories to enjoy the benefit of being closer to customers, while the big three are being weeded out.

Onto the government side, the benefits are countries specialize in production of goods and services that are produced most efficiently. The con is that the country might lose jobs in a sector that is politically strong, so the government might have to protect that industry. This is exactly what is happening. The big three and their unions wield political power and have exerted this influence for a long time. The government hasn’t strengthened its emission regulation for a long time. The government also had to provide those firms subsidies.

This brings us to an interesting discussion of international trade strategies. The US government supports Boeing with military deal. The Brazilian government supports Embraer with export credit and PROEX. But the government has to factor in the costs and benefits of trade protection. Do the big three really employed enough people that the government has to subsidize their losses?

Former Trade Representative Robert Cassidy wrote in his article that the US government allowed China into the WTO on the false assumption that it would create jobs for the US. However, because of intentional currency devaluation by the Chinese government, all it did was to incentivize US corporations to set up factories in China, to sell the products to Americans, then to load the government the money back by buying US treasuries. It is similar to the big three case because the US government might be under the false assumption that keeping the big three will create jobs. They are so infamous for being too large and inflexible. In order for the firms to break even, laying off workers and setting up factories oversea seem to be the logical solution, which doesn’t really create jobs or protect American interest. “Roger and Me,” however biased, has shown that since the 80s all big three did was shipping jobs elsewhere. Meanwhile, many foreign auto companies are setting up factories in the US. In fact, a Toyota SUV is more “American” than a Jeep, famous for its versatility in WWII. See the irony?

In conclusion, this article touches on cost and benefits of trade, trade protections, and the politics of globalization.