An Auto Bailout Would Be Terrible for Free Trade

Congress is now considering a federal bailout for America's Big Three automobile companies. Many want to grant them at least $25 billion on top of $25 billion in low-interest loans approved earlier this year.

But these figures represent only a fraction of what the total cost of the bailout could be. In a global economy, a federal bailout of the automotive industry could cost Americans jobs as well as foreign markets to trade in. There are at least three important ways an industry bailout could damage America's engagement in the global economy and hurt U.S. companies, workers and taxpayers.

1. The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors? The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.

2. The bailout's second global cost could hit U.S.-headquartered companies that run multinational businesses. This access to foreign markets has been good for America. But it won't necessarily continue.

Will a U.S.-government bailout go ignored by policy makers abroad? No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies' U.S. employment, R&D and related activities. That would be bad for America, and rising trade barriers would also hurt the Big Three, all of which are multinational corporations that depend on foreign markets.

3. The bailout's third global cost could fall on the U.S. dollar. A critical foundation of foreign-investor confidence in U.S. assets has been transparent competition in our product markets -- competition that spurs economic growth and rising average standards of living. To keep that up, it is important to address concerns related to allowing foreign companies to compete on U.S. soil, not by bailing out struggling companies but by taking care of workers who are dislocated in the give-and-take of a competitive market.

Will a federal bailout that politicizes American markets bolster foreign-investor demand for U.S. assets? Not likely. Instead, America runs the risk of creating the kind of "political-risk premium" that investors have long placed on other countries -- and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.

Conclusion: This week Congress is weighing the cost of the bailout. Let us hope that lawmakers realize that the true cost of such a bailout is far larger than any check the U.S. Treasury will have to write in the coming months.

~Matthew Slaughter, associate dean and professor at Dartmouth's Tuck School of Business, writing in today's WSJ