The United Auto Workers, Ford, and General Motors officially kicked off labor contract negotiations yesterday with a friendly handshaking ceremony and a commitment from both sides to reach new labor deals. But don’t be fooled: yesterday’s event was nothing more than a photo opportunity.

The reality is that a somber mood surrounds these latest talks and the prospect of deep cuts and possible strikes already are being discussed. Many labor and auto analysts think that these negotiations could turn out to be the most important ever for the industry.

It’s obvious that the next few months could be a very painful time for the American auto manufacturers, labor union, and workers themselves. However, some pain and soul searching might be what the companies and the labor union need in order to make American car companies competitive again.

There is no denying that the big three American car manufacturers — GM, Ford, and Chrysler — are in the economic doldrums. Despite a booming economy and soaring stock market, the companies lost a combined $15 billion in 2006. Ford alone lost another $282 million and saw sales plummet by more than 11% in the first quarter of this year. The other two companies are somewhat better off, but face significant economic challenges going forward.

To be fair, the companies themselves deserve some of the blame for this mess. They were not always as innovative as their foreign competitors when it came to new car design and marketing.

But make no mistake about it: The central problem facing the American auto industry is labor costs. Detroit automakers pay about $25 more an hour than their Asian competitors in America when pensions and retiree health care are taken into account. This allows Japanese automakers to make around $2,000 more a car in profits.

The disparity in labor costs is not because of cash wages. In the southern states where most Japanese car factories are located, hourly workers make between $20 and $30 an hour, a more than adequate wage in areas with a low cost of living.

Rather, the gulf between the companies is because of health care costs. Years ago, Detroit agreed to provide generous health care and retiree benefits, with little or no expected contribution from employees. As health care costs have exploded, the car companies have suffered the consequences. In contrast, Japanese automakers provide health insurance, but expect employees to help cover the costs, which is commonplace for most private sector jobs.

The good news is that the labor contracts commenced yesterday offer both sides a chance to solve this health care crisis, at least in the automotive industry. One imaginative idea that has already been floated around involves establishing a health care trust fund for employees. The fund — technically called a Voluntary Employee Beneficiary Association — would allow the car companies to take health care costs off their books, which would lead to stronger credit ratings and a better overall financial picture.

In turn, the companies would help fund the trust by making a significant financial contribution. The trust itself would be managed primarily by the union, which would be responsible for investing the money wisely and making sure that health care costs for retirees are covered. Similar trusts have already been established at other manufacturing companies, including auto suppliers like Dana Corporation and Goodyear Tire.

The trust is an innovative idea that would allow the car companies to meet their financial commitments, improve their prospects on Wall Street, and work cooperatively with the UAW to achieve an important goal. Heading into the talks, the car manufacturers seem to support the trust concept, while the UAW still remains cool to the idea.

Unfortunately, there is also a chance that the trust and other productive ideas could go by the wayside in contentious negotiations, especially if the UAW insists on maintaining the status quo. If that happens, strikes, plant closures, and even a complete bankruptcy from one — or all — of the big three could occur. It’s entirely possible that some of the more aggressive wings of the UAW would rather cripple the car companies than give up some of their benefits, which are practically unheard of for any other industry.

In this respect, the labor talks are a critical crossroad for the American automobile industry. While there is plenty of room for both sides to negotiate, the basic choice is clear. The big three and the UAW need to come together to find a creative solution for their long-term economic problems. If they do not take that route, Ford, GM, and Chrysler might join the ranks of Bethlehem Steel, National Steel, LTV Steel, and other failed unionized companies that did not adapt to the new global economy and whose unions simply ignored economic reality.

One would hope that the companies and the UAW can avoid that fate, but, as negotiations begin, there are no guarantees that economic rationality will prevail.

Mr. O’Keefe is a labor and higher education policy analyst in Washington, D.C.