Protectionism: How to Bankrupt An Industry

The bankruptcy of Chrysler and especially General Motors (GM) represent a watershed moment in America’s history. These companies and the car industry had such an influence on America’s culture that they became protected by the U.S. government. Unfortunately by protecting its car industry America’s politicians hindered its ability to become efficient and innovative and thus made it vulnerable to nimbler foreign competitors. To be clear the industry’s collapse has nothing to do with the current financial crisis, but started in the 1970s when the car industry rather than compete with incoming Japanese products by making cheaper and better, they hid behind politicians. Rules on fuel economy distorted the market facilitating production of light trucks and SUVs while the government restricted the import of small, efficient Japanese cars. While managers and politicians failed on a grand scale, leveraging their political muscles, the unions contributed quite a bit to this failure fighting against innovation and demanding costly benefits that the industry could not afford. If Detroit had spent less time lobbying for protectionism and more time on improving its products it might have prospered. The great lesson from this failure is that even major industries can become vulnerable when protected from the pressures of competitions and politicians trying to protect them with trade restrictions will do them much more harm than good adding up to a major ripoff for both consumers and taxpayer.