On October 4th I wrote in Smoot-Hawley By Subsidies:
Bad times often lead to economic fights across borders. Smoot-Hawley used tariffs with the intend to block out imports. Another method of preference of domestic producers is to feed them with subsidies.
Last weekend Congress passed a bill that will give the U.S. auto industry access to $25 billion of subsidized federal loans. Additionally the Paulson bailout is worded in a way that allows the Treasury to buy up bad performing car loans the big three have made to sell their products. If the Treasury pays more than the market value for such ‘assets’, the result is a direct capital injection by the government into the Detroit companies. (Only without any upside for the taxpayer.)
As a consequence of U.S. subsidies to its carmakers, European carmakers also asked their government for money. As the FT reports today, their wish will be fullfilled:
German and French carmakers, which have asked the European Commission for €40bn ($53bn) in cheap loans, are eligible to tap their governments’ banking rescue plans, according to government officials.
Both the German and French finance ministries said on Monday that the financing arms of carmakers could use the state guarantees for new lending of up to €400bn and €320bn respectively.
This is protectionism by subsidies. Protectionism by ramping up custom duties made the 1920s/30s depression great.
Trade wars via subsidies have the same consequences though they might cost the taxpayers more than tariff schemes. The propping up of overcapacities eventually leads to state bankruptcy.
The money for the subsidies should better be used to help dismantle some overcapacity and to prop up new industries in alternative energies.
It seems like the politicians are trying their best to repeat the errors made 80 years ago.