Sean O'Grady: Why governments care so much about saving their car firms

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The Independent Online

What's so special about the car companies? Why save them?

Second only to the banks, the world's car firms have received an embarrassment of state aid from governments caught in the motor industry's headlights. Hence the loan guarantees, subsidies, "cash for clunkers" schemes and other state aids, often in blatant defiance of fair trade and competition rules. All this would be an embarrassment were we not so accustomed to taxpayers' money being automatically offered whenever a factory that happens to be making cars – rather than say fridges or computer chips or potato chips – faces closure.

When Woolworths went bust during the credit crunch, no one suggested that the Government intervene massively to secure those jobs. Yet Vauxhall, and others, are treated as if they were, well, banks, which are at least systemically important to the economy as a whole. But if Vauxhall stops making cars we can simply buy Toyotas instead. So what?

Well, it isn't just national pride. There's a reason why governments have always prized a healthy motor industry. It is "strategic". First, it is a powerful engine for economic growth, as Henry Ford showed at the beginning of the last century. It isn't just about engineering – there are spin offs in steel, tyres, glass, upholstery, plastics, you name it. Then there are the other jobs in finance, advertising, design and marketing. Plus yet more in the supply chain and the servicing and dealer networks. The "value added" in car making is unusually high – and that means higher-skilled, higher-paid jobs, and well-paid manual labour too.

Second, there are pragmatic macroeconomic benefits: the car industry is the biggest in the world and nations that become good at it tend to run trade surpluses – Germany, Japan and China. It is a powerful engine of growth and nations such as South Korea and Malaysia clearly want to emulate the export-led growth pursued by Japan from the 1960s to the 1980s.

Third, state help is nothing new. The Japanese were just the most notorious for their tariffs and other barriers – but everyone did it. The Italians kept Japanese cars out in return for not sending their scooters to Japan. Not just our own ill-fated British Leyland ended up nationalised; the likes of Renault and Volkswagen have been supported by governments and rescued from near death experiences.

In fact, recently the British have grown unusually careless about their car industry by international standards. Maybe for that reason the Vauxhall factories in the UK actually deserve to survive because of their competitive strengths. We shall see.