Foreign Auto Makers Won Billions in Government Subsidies
Tuesday, December 16, 2008 at 8:54 am
To hear Southern Republicans tell the story, the financial burdens facing Detroit’s automakers are self-made troubles to be settled by the laws of Adam-Smith capitalism.
“We don’t think it is the role of government to intervene,” Sen. Jim DeMint (R-S.C.) told the Fox Business Network last week. “We need to let the market and the laws work the way they are already in place.”
Yet this argument — that the government has no business interfering in free markets — ignores an increasingly frequent tradition among Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants. Those incentives, arriving in the form of tax breaks, training for new employees and even land, have enticed BMW to South Carolina, Mercedes to Alabama and Nissan to Tennessee. The result of the government subsidies has been the steady emergence of the South as an auto-manufacturing powerhouse. Some are dubbing it the “New Detroit” – a region where real estate is cheap and the labor’s not unionized.
Not coincidentally, these Southern states are represented by the same coalition of GOP senators who led the fight against the recent Detroit bailout proposal. That legislation would have provided $14 billion in emergency bridge loans to General Motors and Chrysler, both of which say they lack the finances to survive the month. Rallying behind the animated opposition of GOP Sens. Bob Corker (Tenn.), Richard Shelby (Ala.), Mitch McConnell (Ky.) and South Carolina’s DeMint, Senate Republicans killed the legislation.
The White House has since stepped in to offer assistance from the $700 billion pot allocated earlier in the year for the Wall Street bailout so that the companies don’t go bankrupt during its tenure.
On Friday, the day following the Senate vote, Shelby told CNBC that if the Big Three had only managed their business operations as well as the foreign companies, known as transplants, they wouldn’t be scrambling now for a taxpayer-funded bailout.
“You look at the South,” Shelby said. “You take — not just Mercedes in my hometown — but BMW, Honda and all of them. These companies are flourishing with American workers made in America.”
But that flourishing didn’t come without significant taxpayer help. Shelby’s Alabama, for example, secured construction of a Mercedes-Benz plant in 1993 by offering $253 million in state and local tax breaks, worker training and land improvement. For Honda, the state’s sweetener surrounding a 1999 deal to build a mini-van plant was $158 million in similar perks, adding $90 million in enticements when the company expanded the plant three years later. A 2001 deal with Toyota left the company with $29 million in taxpayer gifts.
Alabama is hardly alone. Corker’s Tennessee recently lured Volkswagen to build a manufacturing plant in Chattanooga, offering the German automaker tax breaks, training and land preparation that could total $577 million. In 2005, the state inspired Nissan to relocate its headquarters from southern California by offering $197 million in incentives, including $20 million in utility savings.
In 1992, South Carolina snagged a BMW plant for $150 million in giveaways. In Mississippi in 2003, Nissan was lured with $363 million. In Georgia, a still-under-construction Kia plant received breaks estimated to be $415 million. The list goes on.
Supporters of these deals contend that the economic activity spurred by the arrival of the automakers is worth the up-front costs. Yet some experts say that, considering the ever-growing size of the incentive packages, there’s little evidence to support that claim.
“It’s exceedingly difficult to determine whether the returns warrant the original incentives,” said Matthew N. Murray, executive director of the University of Tennessee’s Center for Business and Economic Research. “It’s just hard to show that it’s going to produce enough tax revenue.”
Others wonder if the incentive packages don’t go too far to divert taxpayer dollars from vital state services. When Tennessee courted Nissan in 2005, for example, its $197 million gift came about the same time the state was cutting 170,000 low-income adults from its Medicaid rolls. A 1998 Time magazine report found that an Alabama elementary school adjacent to the Mercedes plant was home to 540 kids in a building designed to hold 290.
“The Mercedes-Benz plant illustrates a fundamental principle of corporate welfare,” the article read. “Everyone else pays for economic incentives — either with higher taxes, fewer services or both.”
Then there’s the question of whether there’s even a difference between using taxpayer dollars to bring a company to town (as many Southern states have done) and using taxpayer dollars to keep a company around (as the Detroit bailout aimed to do). Rep. Lynn Westmoreland (R), who represents the Georgia district soon to house the Kia plant, told The Atlanta Journal-Constitution last month that there is a distinction.
“I don’t think we were doing that because of bad business decisions Kia was making,” said Westmoreland, who voted against the Detroit bailout. “We did that to get them in here, to create the jobs, to create the taxes, to put economic development into the area.”
A great deal of focus has been placed on the United Auto Workers role in the financial troubles of the Big Three, but there are complicating factors that extend far beyond the union-versus-non-union debate. Much of the labor costs paid out by the Big Three, for example, go to cover health and retirement expenses — a tab that’s largely picked up by the governments of the foreign transplants.
“They [foreign governments] use taxpayer dollars to subsidize our competition,” Ron Gettelfinger, president of the United Auto Workers, said Friday after the Senate killed the Detroit bailout proposal. “It doesn’t help our industry.”
The age of the companies also plays an enormous role. General Motors, for example, has four times as many retirees as it does workers, placing a disproportionate burden on the company to meet its health and pension promises. “It’s much easier for the transplants because they’re much younger companies,” said Gary N. Chaison, a labor professor at Clark University in Worcester, Mass.
Not that the automakers don’t bear much of the blame for their current troubles. For years, the Big Three fought higher mileage standards while focusing production on gas-guzzling trucks and sport utility vehicles — models that fell from public favor when gas prices leapt over the summer.
“None of us want to see them go down,” McConnell, the Senate Minority Leader, said last week, “but very few of us had anything to do with the dilemma that they’ve created for themselves.”
Still, there’s plenty of blame to go around. Consumers purchased those large vehicles, thus creating the demand. And contrary to McConnell’s statement, many observers argue that Congress had a responsibility to nudge the industry toward better fuel economy years ago. A 1990 vote to increase mileage standards to 40 miles-per-gallon came three votes shy of Senate passage.
McConnell voted against it. Shelby, a Democrat at the time, did too.
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