The WTO Subsidies Rules and “Cash for Clunkers”

by Roger Alford

The government’s new “cash for clunkers” program has been wildly successful. Under the program, consumers may receive up to $4,500 towards the purchase of a new, more fuel-efficient vehicle. What is surprising is the impact this it is having on consumer spending patterns regarding domestic vs. imported vehicles. According to press reports, more than 70% of the clunkers that were traded-in were domestic. Moreover, as reported here, consumers are showing a preference for imported cars when they purchase under the program, with Toyota (17%) and Honda (14%) leading the way. The top ten sellers under the program are Ford Focus, Honda Civic, Toyota Corolla, Toyota Prius, Ford Escape, Toyota Camry, Dodge Caliber, Hyundai Elantra, Honda Fit, and Chevy Cobalt. In other words, six of the top ten sellers are foreign cars (although the Camry is built at home and abroad).

Cash for Clunkers is one of the few government subsidy programs that I am aware of that clearly has the de facto effect of promoting imported over domestic goods. The program doesn’t advertise that “we will pay you $4,500 if you trade in your domestic gas-guzzler and buy a fuel-efficient foreign one.” But in practice that appears to be the result.

Is there any problem with that under the WTO rules? Nope. You can favor imports, but not disfavor them. Under the WTO rules a subsidy is “actionable” if it “[1] One country’s subsidies can hurt a domestic industry in an importing country; [2] They can hurt rival exporters from another country when the two compete in third markets; [3] And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing country’s domestic market.” Only the third appears relevant here, and foreign car manufacturers are faring fine in the U.S. market. (Although further information would be needed to determine the impact on foreign gas guzzlers).

Now if the effect were exactly the opposite–if consumers rushed to buy domestic cars instead of imported ones–then it might be problematic. But because consumer behavior appears to be favoring imports under the Cash for Clunkers program, there is no basis for WTO action.

12 Responses

  1. Roger, that’s an angle I hadn’t seen anyone discuss at all!  What am I going to do with my 1992 Honda Civic, which gets unbelievable gas mileage but has no airbags, sort of falling apart, but because I live a couple of blocks from school, has 60k miles, 30k put on since we bought it used?  Can’t it be a clunker too?

  2. I am not familiar with the specific rules governing this programme, but is it really a matter of favoring imported goods or is it simply a case the US consumers are preferring these imported cars over domestically produced ones? Or is it a case that you have to buy a particularly efficient car and that the only/majority of cars that meet these criteria happen to be imported ones?

  3. Annabel,

    Yes you are correct that there is no de jure discrimination, but WTO rules also prohibit de facto discrimination, if it occurs.  

    Roger Alford

  4. That is not my point though. My question is about the underlying rules: these seem more relevant to me than simply the effects to determine whether there is de facto discrimination.  Simply put: do the rules say “if your car is a clunker we’ll give you a subsidy towards buying a new car of your choice” or “if your car is a clunker we’ll give you a subsidy towards buying a new car that meets X,Y,Z requirements”?

  5. the percent of toyota and honda are about their market share in America.  Pg B2 WSJ 8/4/09

  6. Sucks to be GM.

  7. Honda Civic is also made in Indiana.  Toyota Corolla in California,

  8. Roger,

    I respectfully disagree that “de facto” discrimination is per se actionable by the WTO.  This is reminiscent of the “discriminatory impact” vs. “discriminatory intent” body of law that has grown up in employment discrimination.  Plenty of laws have the EFFECT of favoring domestic industry but were not intended to do so.  Such laws are typically not actionable under the WTO.  An example might be a particular safety regulation, or “cultural protection laws” like those in France, etc.  Interestingly, even some laws like country-of-origin labelling requirements appear to be ok under WTO rules, which is a little surprising given the actual reason (though not usually the stated reason) behind those labelling rules.

  9. Maybe buyers aren’t buying domestic because they don’t want to add to the UAW’s coffers.   Those parasites already got enough of our hard-earned dollars.

  10. @Jason Brobards: Isn’t the tuna/dolphins case an example of discriminatory impact but not intent? There seemed to be no problem going after that…

  11. There aren’t enough American cars that meet the mpg requirements on the lot for people to buy.

  12. There’s a potential slight discriminatory bias in favor of American vehicles in that the fuel economy requirements for the new vehicle are looser for trucks/SUVs/crossovers (which US nameplates have historically done better in) than for passenger cars.  New SUVs only have to beat 18mpg, and qualify for $3500 if they get as little as 2mpg better than the vehicle being traded in, $4500 if they’re 5mpg better.  Cars have to beat 22mpg, and improve mileage by 4mpg for $3500, 10mpg for $4500.

    (So someone trading in a 14mpg Explorer, for example, could get $4500 for a 19mpg crossover, but nothing for a 21mpg car.)

    I doubt it’s sufficiently discriminatory in practice to spark WTO action– other countries’ nameplates have plenty of models that meet the Class 1 truck definition (Toyota Highlander, Venza, RAV4, and Matrix, Nissan Murano and Rogue, etc.)  But the intent to give a little boost to Detroit is the only reason I can see for the difference in treatment.

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