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The Rebirth of Industrial Policy

President Bush's decision to offer federal aid to troubled Detroit automakers (FT) has reopened an old debate about the wisdom or even the ability of the government to choose winners and losers in the American economy. Opposition in the U.S. Senate that killed a bill (WSJ) to do just that on December 11 shows strong doubts remain, though many say that is a bridge already crossed--the government made the decision in October to allow Lehman Brothers to fail while protecting firms like Morgan Stanley, AIG, and later Citigroup from collapse--many argue there is a difference between financial firms and U.S. industrial giants like Detroit's Big Three automakers.

Count Germany, Japan, South Korea, France, and other auto-producing nations among those making such a distinction. The World Trade Organization, fashioned in large part by the United States to guard against unfair trade practices, almost certainly will hear complaints about the bailout. The scope of the intervention in Detroit has the potential, according to Joe Guinan, a policy analyst at the German-Marshall Fund, "to be the torch that lights the fuse of a general resort to protectionism among America's trading partners and the beginning of a downward spiral that undermines the world trading system."

The European Union has threatened to prepare a WTO complaint (Bloomberg) if the terms of the U.S. auto bailout violate trade rules. European financial papers are filled with reminders of 2004, when the United States filed such a complaint on behalf of Boeing against European aircraft maker Airbus, which received generous subsidies from France. China and Japan, frequently accused of "dumping" below-cost products on the U.S. market to undercut American competitors, could take similar steps. This 2007 Council Special Report looks at the...

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