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Auto sector poker game is back – and highest bidder wins

Once again, a major global car maker is warning Canada that it will take its tools and set up shop somewhere else unless it gets the financial aid, cost-saving labour concessions and other incentives it's demanding in exchange for a huge new investment in production. And it better happen soon.

Chrysler Group LLC chief Sergio Marchionne told reporters at the Detroit Auto Show that his company is ready to invest more than $1-billion (U.S.) to revamp its Windsor, Ont., minivan operations, but needs a decision within weeks on its requested federal and provincial assistance. And if Chrysler doesn't get enough to cover a hefty portion of the cost, eager U.S. states are waiting in the wings to grab the deal.

"We have to resolve the issue about the competitiveness of this investment in Windsor," Mr. Marchionne said. "So I have to make sure the environment and the conditions that support the investment are adequate to ensure a proper return on our capital. That means labour costs, that means everything."

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Canadians have seen this game before. The goalposts may move, and occasionally some of the rules get changed. But the end result is usually the same. The auto maker gets a deal it can live with, the two levels of government get to tout the job-preserving benefits, and taxpayers take it on the chin.

Critics of these corporate handouts, on both the right and the left, argue that Canada should avoid getting caught in escalating subsidy wars where multinational heavyweights pit governments against each other to squeeze out the maximum benefits. I would add that the Canadian and Ontario governments had no trouble staying out of the way when tech giant Nortel collapsed and the domestic steel industry all but disappeared.

But the fact is that the big auto makers have considerable political leverage stemming from their huge, long-term investments, large work forces and the wide spinoff effects that reverberate through the regional economy. That's why no pragmatic government is going to remind Mr. Marchionne that Chrysler has already benefited plenty from public largesse over the years or that its Windsor and Brampton, Ont., plants are among its most efficient and produce some of its highest-quality vehicles.

"Internationally, the industry plays this way," says Leslie Shiell, an assistant professor of economics at the University of Ottawa and co-author of a study of the 2009 auto bailouts. "They know that there are jurisdictions that will throw money at them. It's a poker game, and you see who will throw the most money at you."

If Chrysler has another potential contender for the investment, then the game becomes serious, Mr. Shiell says. "It's just another source of revenue [for the car makers]. Why not try and extort money out of governments, if they can?"

What Mr. Shiell learned from the bailout study is that public subsidies could be considerably lower if labour costs in the Canadian industry were more competitive with those at U.S. plants. The Canadian auto workers' union, Unifor, insists that they are. But in any case, neither Chrysler nor the union are going to be opening the four-year contract signed in 2012 before it expires.

In the meantime, Canada's best option is to hold its nose and make a deal, provided there is a firm limit on the amount and a large chunk of the money can be steered into infrastructure, training and other programs that would also benefit other industries.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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