In International Trade Sometimes They Can Hear You Scream

Sergio Marchionne, Chrysler Group Chairman and CEO, and Lech Walesa, former president of Poland. (CC By NC ND Chrysler-Group)

Making a very loud fuss when things don't go your way may be ineffective for small children with stern parents – but it is often a fairly effective strategy when it comes to international trade policy, something that Poland is finding out to its cost.

That lesson is particularly acute at a time when Fiat is starting to lay off a third of the workers at its Tychy factory because there simply isn’t enough work for them to do thanks to steeply falling production at the plant which made more than 600,000 cars in 2009 but now forecasts a production of less than half that in 2013.

The cutbacks in Tychy are not just a result of Fiat’s own problems. The company is saddled with out-of-date models and has been hammered by the economic crisis in Italy, its largest market. Sales there have fallen by more than 20 per cent over the last year.

Looking at European new car registrations for the first 11 months of 2012, Fiat noted a 16 per cent drop, with only France’s troubled Renault posting a worse result among European car makers.

But Tychy’s problems are also directly tied to a decision made by Fiat CEO Sergio Marchionne in 2008, during the first wave of the economic crisis, to shift production of its new Panda model to its Pomigliani plant near Naples, despite the Polish factory being by far the most efficient of all of Fiat’s factories.

“We did it because, within the possible limits and without endangering the position of our company, we believe it is our duty to give precedence to the country where Fiat has its roots,” Marchionne said at the time, not bothering to hide the political context of his decision.

Marchionne’s decision was greeted by silence from Warsaw, as the government did nothing – in public at least – to try to change Fiat’s mind, and did not kick up a fuss with the Italian government or with the European Commission.

That may have been the polite thing to do, but the last few years have show that getting loud and angry can produce dramatic results.

Perhaps the best example comes from the Czech Republic.

When Nicolas Sarkozy, the former French president, warned in 2009 about the “delocalisation” of French car factories in other countries, saying, “If you build a Renault plant in India to sell Renaults to Indians, that’s justified, but if you build a factory, without saying the company’s name, in the Czech Republic to sell cars in France, that’s not justified,” the reaction from Prague was quick and blistering.

It was obvious that Sarkozy was talking about the Toyota Peugeot Citroën Automobile factory in Kolin and, despite being a close political ally of Sarkozy, Czech Prime Minister Mirek Toploanek quickly hit back, accusing France of violating the EU’s free trade fundamentals.

“As the Prime Minister of the Czech Republic I do not understand the argument that it is unjustifiable to manufacture cars for the French market in the Czech Republic,” said a statement from his office, adding that he had “serious doubts about political involvement in the management of commercial companies and breach of the rules of free competition.”

The TCPA factory in Kolin is still working, although it still has not been spared the crisis that has affected Europe’s more inefficient carmakers. The Kolin plant has seen its workforce cut from 3,500 to about 2,500 because of slumping production.

France is also very adept at using the public bullhorn to defend its big industrial companies. Just a couple of months ago the new socialist government blasted steelmaker ArcelorMittal for planning to cut 600 jobs and shut down two blast furnaces. Arnaud Montebourg, the industry minister, threatened to nationalise the ArcelorMittal plant.

Although the outburst was criticised as interference in corporate decision-making, it did end up producing a politically satisfying result; the steel company backed down from its job reduction plans and agreed to keep the blast furnaces in readiness to restart in case the European steel market revives, as well as investing eur180m in the plant.

Similar results can be seen much further afield. Last year, when Brazil worried about a surge of imports from Mexico, including Fiat cars made there, and started to complain, the two countries ended up agreeing to a system of voluntary quotas.

Such measures have global trade authorities worried that the stresses caused by the long-running crisis are undermining the global free trade regime.

“Protectionism is like cholesterol: the slow accumulation of trade restrictive measures since 2008 — now covering almost 3% of world merchandise trade, and almost 4% of G20 trade — can lead to the clogging of trade flows,”  Pascal Lamy, director general of the World Trade Organisation, said in a recent speech.

A regular WTO report on trade measures notes, “Trade restrictions and inward-looking policies will only aggravate global problems and risk generating tit-for-tat reactions. The difficulties generated by the global economic crisis, with its many facets, are fuelling the political and economic pressures put on governments to raise trade barriers. This is not the time to succumb to these pressures.”

In the case of Poland and the Tychy plant, there was no call for tit-for-tat reactions or undermining global free trade rules, instead Warsaw would have been on solid ground protesting that Fiat appeared to be acting on more than commercial grounds when it shifted production from Poland to Italy.

Donald Tusk’s government was blind-sided when Fiat announced the Tychy layoffs in December, but even now the reaction has been lacklustre. Economy minister Janusz Piechociński promised parliament he will meet with car industry representatives to discuss the situation, and hopes to get a new model built in the factory.

This biggest success so far was labour unions negotiating with Fiat to reduce the number of layoffs by 50 to 1,450 –  not something that would likely have satisfied leaders in Prague and Paris.

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