U.S. Auto Bailout Forces Canada's Hand

Sources:

Financial Times - Detroit Bailout Casts Shadow on Canada's Plants

New York Times - Canada Agrees to Its Own Auto Bailout

Financial Times - Canada Unveils Auto Bailout Plan

Canada has agreed to a C$4 billion bailout of its auto industry, demonstrating the radiating consequences of the U.S.-origin crisis but also of the U.S. government's response to the crisis. Although Prime Minister Stephen Harper had previously resisted such a bailout, passage of an auto bailout plan in December in the U.S. seems to have forced Harper's hand.

Auto manufacturing, especially for the U.S. "Big Three" of General Motors, Chrysler, and Ford, is the biggest sector of Canada's manufacturing sector and a substantial portion of its overall economy. In fact, the Canadian auto industry makes up a larger portion of Canada's economy than the auto industry does in the U.S. In recent years, the Canadian province of Ontario has overtaken Michigan as the largest auto industry in North America.

When U.S. policymakers agreed to a $17.4 billion deal for the U.S. auto industry in December, there were indications that the Big Three would downsize operations in Canada and move to the U.S. unless a similar emergency loan program was enacted by the Canadian government. Auto jobs, including manufacturers and suppliers, number 400,000 in Ontario alone, and the Canadian government agreed on its own bailout plan shortly after the U.S. plan was finalized.

The Canadian package, in response to U.S. action, illustrates the collateral consequences of even domestic rescue packages. In the fallout of the global financial crisis, large government bailouts may force other nations to act in order to retain their industry's comparative advantage. 

The Canadian auto industry, of which 90 percent is destined for export, has also seen its healthcare comparative advantage erode in the past several years. The transfer of the U.S. automakers' healthcare programs to a joint trust run by the United Auto Workers (UAW) union last year had already weakened Canada's advantage of nationalized healthcare.

The Canadian auto bailout, which will come from the federal government and the province of Ontario, will stipulate that Canada retain its 20% share of overall North American production. In the case of GM, the bailout loans will be made in exchange for company stock, and Chrysler will put up its Canadian assets as collateral for the loans.

Discussion:

1. Is it sustainable for countries to match or exceed the bailout programs of other countries in order to retain a competitive environment?

2. What will be the long-term effect of the auto bailout on the U.S. industry?