Sergio Marchionne is asking for more taxpayer dollars to support Chrysler’s operations in Canada and says that he remains optimistic that a renewed partnership with Ottawa will generate billions in economic activity. Considering the extent to which the federal government and the Province of Ontario have buoyed North American automakers, however, elected officials should refuse to provide more support. Instead, they should allow competitive forces to govern the market.
There is currently no consensus on whether the post-crisis automotive bailout program was successful. Yet, recent requests for additional government funding made by Chrysler’s CEO indicate some recipients are not yet willing to stand on their own and their appetite for government assistance may be insatiable. Most importantly, they reveal how corporate welfare can have disastrous consequences.
Automakers are exceptionally confident that they can secure government assistance for the simple reason that they have done so many times in the past. Historical ties to the Big Three complicate things further and industry typically employs emotional appeals to support its demands. However, the government’s implicit guarantee to the automotive sector of more assistance whenever it is “needed” creates a moral hazard and those who suffer are taxpayers, who bear the cost of each handout.
Following discussions with Prime Minister Harper and Ontario Premier Kathleen Wynne about securing additional government funding to incentivize new Canadian investments, Marchionne remarked, “I think we’ve got all the makings of a potentially successful transaction.” He added that, when negotiating these deals, “You need to let the parties work diligently at carving out what is best suited for the Canadian government, the Province of Ontario, and Fiat-Chrysler.” Notice, Marchionne did not mention taxpayers, from whom the government levied billions to support his company after entering bankruptcy protection in 2009.
Chrysler and General Motors received $14 billion from the federal government and the Province of Ontario to rescue their Canadian operations. They also benefited from $1.5 billion in project-based subsidies provided jointly by Ottawa and Ontario since 2004 to support new investments and bolster research and development initiatives. In addition, the United States government invested significantly in the Big Three, purchasing shares in Chrysler and General Motors and injecting billions into the automotive industry.
Yet, despite billions in direct assistance, loan support, and tax relief, Canada’s automotive industry has been declining steadily in the last decade.
Between 2001 and 2012, vehicle manufacturers shed 33 per cent of their Canadian labour force–roughly 1,450 jobs annually–and Canada’s automotive industry lost nearly 55,000 jobs. According to the Centre for Automotive Research, of the $42 billion invested in North American in recent years, Canada received only 5.5 per cent. Furthermore, compared to the 17 plants built in the United States since 1990, there has been only one built here. Considering these statistics, it is unsurprising that Canada’s share of global automotive production halved since it peaked at 5.4 per cent in the 1990s, placing it 11th in terms of global market share.
Past bailouts have not created a thriving, self-sufficient automotive industry in Canada or the United States. Instead, they have generated fresh demands for more government assistance. Recent developments illustrate this phenomenon.
Although the federal government announced last week it would contribute an additional $500 million into the Automotive Innovation Fund, Marchionne requested $700 million from Ottawa and Ontario to help finance Chrysler’s operations in the province, in addition to buttressing planned investments in Windsor and Brampton. He asserted there were attractive opportunities in Brazil and Mexico, the former offering to cover upwards of 85 per cent of Chrysler’s expenses.
Marchionne stated Chrysler does not “expect” Canada to provide the “same level of support” as competing countries. This statement clearly implies, however, that Chrysler does assume some level of government subsidy, illustrating a disastrous trend. Each time Chrysler, Ford, or General Motors threaten to exit and receive taxpayer dollars to stay, the government reinforces the expectation that it will commit to future requests for assistance. Subsidies have not stopped the decline of Canada’s automotive industry and neither will billions more–corporate welfare will not produce a self-sufficient automotive industry. Furthermore, protracted government support is fiscally unsustainable, not to mention irresponsible.
The Big three will operate, and should operate, wherever is most profitable. Political intervention, however, tends to undermine economic stability by rewarding inefficient businesses and creating barriers to entry for new companies. Instead of allocating taxpayer dollars and providing handouts to prop-up North American carmakers, the government should eliminate corporate subsidies and use the savings to reduce taxes on businesses, which will foster a healthier climate for all firms. Investing in education and skills training to prepare Canadians for opportunities in emerging industries is also a better use of scarce resources. In the meantime, corporate welfare needs to end.
Shaun Fantauzzo is a policy analyst at the Atlantic Institute for Market Studies
*This piece appeared in the 28 February 2014 opinion section of the Waterloo Record