Shadow Government

The global problems with the GM boondoggle

By Phil Levy

What does $50 billion dollars buy these days? A major new non-tariff barrier and decades of disputes.

The Obama administration's role in the General Motors bankruptcy can be criticized on any number of grounds. Free marketeers like Ralph Nader have argued that it represents an inappropriate exercise of executive branch power without appropriate legislative backing. Richard Posner, a supporter of emergency funds for GM and Chrysler in December, has argued that the government has gone too far and should now have no role in owning and operating a major industrial firm. The Wall Street Journal opines that the disproportionate rewards granted to the United Auto Workers reek of political favoritism.

Almost lost among the momentous events of the GM denouement are the international trade implications. GM, of course, is a multinational company. In 2008, according to GM's annual 10-K report, GM made almost half of its $148 billion in revenue outside of the United States. GM summarized:

In 2008, we continued to perform well in emerging markets around the globe. We achieved record sales performances in our Asia Pacific and (Latin America/Africa/Mid-East) regions, and sold more than 2 million vehicles in Europe for the third consecutive year.

This helped offset a shrinking North American market for GM cars. One might think that a salvage plan for the auto giant would place a heavy emphasis on lowering costs and preserving access to these growing markets abroad. In particular, as the dollar weakens and the U.S. tries to rein in its consumption, the prospect of overseas profits would seem to be one of the few rays of hope available to the suffering automaker.

Actually, no. GM had recently informed Congress that it planned to produce roughly 50,000 subcompacts per year in China to sell in the U.S market in the near future. However, on Thursday, UAW President Ron Gettelfinger said that GM had agreed not to import the cars from China and to produce them in the United States instead as part of its deal with the UAW.

This change opens up an enormous set of problems for the United States that will stretch well beyond the automotive sector. The United States has commitments under the World Trade Organization for its tariffs on cars; it's supposed to avoid quantitative restrictions altogether. This latest policy switch looks very much like a government-mandated reduction in auto imports from China. A particularly sophistic trade lawyer might try to argue that this is just part of a labor deal, not an explicit U.S. government policy. But the UAW is currently receiving only what the Treasury Department decides it should get. Further, under current plans, the U.S. government will soon be a majority owner of GM. That will make it difficult for the government to dissociate itself from GM policies.

From the perspective of the U.S. taxpayer, this calls into question the likelihood of recouping the enormous infusion of funds into GM. That was going to be a problem in any case. In 2004, GM earned a net $2.7 billion. That was the only year of the last five in which they made profits. Even if the new GM were entirely devoted to repaying U.S. taxpayers, if every year is as good as 2004, and if the government charged GM a concessional interest rate, it would still take the new GM more than 25 years to repay.

But that all happened when GM was trying to make a profit. Now, GM will be trying to satisfy political demands for domestic employment, alongside demands for meeting environmental goals. It's more difficult to make money when you're not even allowed to try. 

Nor will GM be the only automaker affected. The principle criticism levied by opponents of the Korea-United States Free Trade Agreement has been that South Korea maintains non-tariff barriers that block imports of U.S. cars. Will the United States still make these arguments while it blatantly uses its financial leverage to block foreign auto exports into the United States?

And even if the Obama administration sees the auto sector as a special case, there's no particular reason to think the rest of the world will. Virtually every country in the world has politically-connected, import-competing industries with significant employment. It is hard to imagine they will show restraint when the U.S. fails to, particularly since the economic downturn has been even sharper for a number of major trading partners.

It could be argued that GM's profitability is not really the point. We don't want to save a U.S. automaker because they can make money producing cars around the world. We want an automaker that will build cars and employ auto workers here in the United States.

Fair enough, but then the administration's auto policy has been deeply misguided. Whenever the president has spoken of the importance of maintaining a U.S. auto industry, he has made clear that he is referring to GM, Chrysler, and Ford. If what we really care about is domestic employment in the automobile sector, the president should also care about plants owned by the likes of BMW and Toyota. According to a 2005 study by the Center for Automotive Research, almost 1 million jobs were linked to the "international automotive sector," and it has been the fastest-growing segment of the U.S. market for decades. If a failed U.S. auto firm were to be liquidated, these would likely be the buyers, along with U.S.-owned survivors like Ford. When inefficient firms are propped up, it is these healthier firms that suffer from the government-subsidized competition.

It is not entirely clear where the administration is driving with its bailout of GM, but it is crashing through some of the pillars of the global trading system along the way. $50 billion seems to be buying us a world of trouble.

Shadow Government

5 reasons why this North Korean crisis is no groundhog's day

By Dan Twining

North Korea’s missile and nuclear tests, new threats of war against its declared enemies, and the predictable results of these developments -– expressions of concern at the UN Security Council, U.S. offers of more unconditional talks, China’s ambivalent response –- suggest that we remain in the “Groundhog Day” cycle of crisis and response that has characterized U.S. policy towards Pyongyang since 1994. In fact, new dynamics on the peninsula and in the region, and the fresh opportunity provided by what can now clearly be judged to be years of failed policy on denuclearization and disarmament, present an opportunity for a creative rethink about U.S. policy options. To clarify a way forward, it’s worth considering how the playing field has shifted (I see five ways that it has), and how this may create a different set of possibilities for the United States and our allies vis-à-vis the North Korean regime -– one that breaks decisively from the past and offers real hope for change.

1. Regime transition in North Korea

The current crisis cycle with North Korea dates to the leadership transition from Kim Il-sung to Kim Jong-il in 1993-4, when the U.S. embraced a set of policies centered around bilateral negotiations and fuel supply to induce North Korean cooperation on our disarmament objectives. With the exception of the “axis of evil” period from 2001-03, the Bush administration largely continued these policies within the framework of the Six-Party Talks. Following Kim Jong-il’s apparent stroke last year, we are now in the midst of the second leadership transition in North Korean history, that from the Dear Leader to his youngest son, Kim Jong-un (demonstrating that dynastic politics trumps communist ideology). 

This transition creates serious risks, including the empowerment of the North Korean military as a political constituency that the leadership in Pyongyang must appease (for instance, by testing nuclear bombs and ballistic missiles). But it also raises the possibility of a new cycle in Washington’s relations with North Korea, one that could include exploiting newly apparent fissures in its regime and creating a different incentive structure for the emerging leadership’s decision-making on ongoing nuclear and missile programs.  

2. Political realignment in South Korea

Since the election of Kim Dae-jung in 1997 and the administration of his successor Roh Moo-hyun, the Achilles’ heel of U.S. efforts to wield sticks as well as carrots towards North Korea has been South Korea’s opposition to tough measures in favor of a “sunshine policy” of unconditional engagement. For a decade, Seoul effectively elevated inter-Korean comity over its U.S. alliance relationship, reducing any leverage the United States and partners like Japan sought to bring to bear on the North. In turn, fundamental differences in style and strategy between Washington and Seoul enabled Pyongyang to drive a wedge between the allies and isolate Japan. The United States turned to China as its key partner on North Korea, with questionable results.

The election in South Korea of conservative president Lee Myung-bak in 2008 changed the equation. Lee has spoken out forcefully about the abuses of Korean people’s rights under Pyongyang’s totalitarian rule and ended the provision of unconditional food aid, which independent monitors judge to have mainly benefited the North’s ruling elite. Washington now has a like-minded partner in Seoul committed to greater realism and toughness in containing the insecurity emanating from Pyongyang, again creating new possibilities for North Korea policy going forward.

3. A new security environment in Northeast Asia

Pyongyang has now declared that it will no longer observe the 1953 armistice that ended the Korean War and has threatened South Korea with military attack. Though Pyongyang has a history of shrill and alarmist declarations, it would be a mistake to assume that an unstable regime in the midst of a leadership transition and now possessing nuclear weapons will never act on its own discourse. These moves create a new security environment on the Korean peninsula –- one that requires the United States to demonstrate its commitment to the defense of core allies Japan and South Korea, including through heightened readiness and deployment of offensive weaponry as well as enhanced missile defenses. 

Pyongyang is testing our new president, and he would do well to surprise it on the upside -– just as President Clinton surprised Beijing during the 1996 Taiwan Strait crisis by deploying multiple aircraft carrier battle groups to the region, leading China to stand down after bracketing Taiwan with missiles. Indeed, President Obama could consider the advice of Clinton Defense Secretary William Perry and senior Pentagon official Ash Carter to signal a willingness to “strike and destroy” North Korean missile launch sites to deter -- or preempt -- further North Korean mischief. As Philip Zelikow points out, such a move could also strengthen the president’s diplomatic hand on Iran.

Signaling to allies is as important as signaling to adversaries, and Japan and South Korea will be watching the U.S. response carefully. Japan is also debating a more robust military role in light of the North Korean tests: the ruling Liberal Democratic Party is debating the adoption of what former Defense Minister Nakatani calls “active missile defense,” or preemptive strikes against North Korean missile launch sites. A Japanese doctrinal and political decision to deploy offensive ballistic missiles against North Korea would transform the East Asian strategic environment and enhance American deterrence and compellence capabilities vis-à-vis Pyongyang.

4. New possibilities for quarantining North Korea

This week, South Korea joined the Proliferation Security Initiative -– a decisive move that will make it a key partner rather than the missing link in a strategy to quarantine North Korean proliferation. Meanwhile, the UN Security Council is considering the imposition of additional multilateral sanctions, including targeted sanctions against North Korean leaders and companies that have proven effective in the past. Indeed, U.S. sanctions against Banco Delta Asia proved so effective in squeezing the regime’s supply of hard currency that Pyongyang made the release of a mere $25 million a condition for the resumption of Six-Party negotiations during the Bush administration.

In reality, the U.S. debate over what mix of carrots and sticks to employ against North Korea misses a key point: America and its allies have never pursued a genuine quarantine strategy against North Korea. Such a strategy would interdict North Korean air and maritime traffic to disrupt its global trade in missile and nuclear components (a trade which continued lucratively throughout the Six-Party negotiations); end provision of food and fuel assistance to the North; and limit Pyongyang’s access to international finance through multilateral banking, corporate, and leadership sanctions. Its purpose would be to squeeze the regime in ways that would create fissures within it, coercing a change in external behavior and perhaps the rise of new leadership less committed to confrontation.

5. China’s diminishing influence –- or interest –- in North Korean compliance

In building the Six-Party Talks around a Sino-American axis, the Bush administration made a bet that China was more likely to be part of any solution on North Korean denuclearization than part of the problem. Two nuclear weapons tests, multiple ballistic missile tests, and a shredded war armistice later, it appears that Beijing is either unable or unwilling to coerce better behavior from what Chinese analysts admit is an uncontrollable client state. At the same time, the Sino-American axis within the Six-Party talks may no longer be dominant: South Korea has again become a like-minded partner, Bush administration officials’ disregard for the legitimate concerns of our Japanese ally is a historical relic, and Russia, eager to preserve the sanctity of the UN Security Council as a vehicle for its own international leadership as a declining power, has called for a robust international response to North Korea’s latest weapons tests. 

Beyond securing our people and our allies against blackmail or attack, America’s long term goal must be positioning our country to be a decisive player in a unified Korea governed from Seoul and aligned with Japan and the United States in East Asia. Both North Korean leaders -- who have in the past sought a special relationship with the United States to balance Chinese influence -- and South Korean leaders identify a Chinese design to enjoy privileged influence on the Korean peninsula, in part for defensive reasons related to competition with Japan and the United States. If our Korean friends, whose sense of danger derives from centuries of living in a neighborhood of giant, predatory powers, believe that China and the United States are engaged in a fundamentally competitive rather than cooperative relationship on the peninsula, Washington may wish to move beyond reliance on Beijing to deliver Pyongyang on denuclearization in favor of an allies-first strategy to induce strategic change on the Korean peninsula.