CASE AUTOMOBILE IMPORTS

The beginning of 1991 marked nine years since Japan began its "voluntary" limitation of automobile exports to the United States. Had Japan not voluntarily limited the exports through negotiations with the United States, the United States would certainly have imposed even more restrictive sanctions. Different groups have disagreed whether the Japanese automobile imports should have been limited, whether the agreements have served the objectives for which they were intended, and whether new controls should be placed on the importation of vehicles. How did this situation develop? Between 1979 and 1980, just prior to the first voluntary limitations, the foreign share of the new-car market in the United States increased from 17 percent to 25.3 percent. Clearly, the U.S. automobile firms and their workers were in trouble. By the end of 1980, 193,000 of the 750,000 members of the United Auto Workers (UAW) were unemployed.

There was considerable disagreement as to the exact cause of the automobile import problem and on how best to alter the competitive situation. Managers of the U.S. automobile firms and officials of the UAW spoke out in favor of restricting imports. This was a milestone because the automobile industry and its union had long been supporters of free trade and had in the past publicly opposed import restrictions on such products as steel.

Although imports were rising at the same time that sales by U.S. firms were declining, factors other than imports were contributing to the problems of the U.S. automobile industry. U.S. consumers had historically preferred Detroit's major product—large cars with rear-wheel drive. The dramatic increase in gasoline prices during 1979 and 1980 was unexpected and led to a rapid switch in demand. At the same time, the number of consumers demanding cars at all was decreasing as a general recession and high interest rates reduced car sales drastically.

The U.S. automakers were not holding their own in sales of the small cars that they had been producing for several years. Japanese producers, the primary automobile exporters to the United States, were evidently as surprised as Detroit was by the sudden shift in demand. The Japanese lacked capacity to fill U.S. orders quickly, yet many buyers were willing to wait six months for delivery of a Honda rather than purchase a U.S.-manufactured model. The reasons for the American preference for Japanese automobiles were debatable. Some argued that price differences created by labor-cost differences were the cause. Those who accepted this view largely favored the taxing of imports in order to raise their prices. Yet, on the basis of canvassing 10,000 U.S. households, the Motor and Equipment Manufacturers Association found that imports strongly outranked U.S. small cars in perceived fuel economy, engineering, and durability. People who accepted these results were opposed to limiting imports.

The initial arguments for protecting or aiding the U.S. auto industry were based on two premises: (1) that the costs of unemployment are higher than the increased costs to consumers of limiting imports, and (2) that U.S. production could become fully competitive with imports if actions were taken to help it overcome its temporary problems. The first premise is based on such factors as personal hardship for people displaced in the labor market; diminished purchasing power, which adversely affects demand in other industries; and the high taxes that would be needed to support unemployment insurance and food stamps. A New York Times poll showed that 71 percent of Americans felt that it was more important to protect jobs than to have access to cheaper foreign products. The second premise is based on such factors as the historical competitive capability of the U.S. producers, the possibility of scale economies of U.S. production, and the much higher productivity possible with new plants.

Protectionists have argued that the restraints worked. The U.S. auto industry recovered by 1984 when it announced record profits. In fact, however, the turnaround was also due in part to recovery from the recession. For whatever reason, General Motors (GM), Ford, and Chrysler were able to invest heavily in more automated plants and to trim inventory costs.

Opponents of protection blamed the problems on poor management decisions and maintained that consumers and taxpayers should not be expected to reward the companies by footing the bill to see them through what was a crisis of their own making. According to antiprotectionists, any assistance, even short-term, would result in at least one of the following consequences: higher taxes because of subsidies' to companies, higher prices for foreign cars (which are preferred by many consumers), or the necessity of buying domestic cars (which many perceived as inferior). Some antiprotectionists felt that government assistance in limiting imports would result in foreign retaliation against U.S. industries that are more competitive with foreign production—Japan, for example, might curtail purchases of U.S.-made aircraft.

The antiprotectionists have argued that the industry's recovery was primarily due to an increased U.S. demand for more expensive (and more profitable) cars. Some analysts claimed that this was a natural phenomenon of the market, since gasoline prices went down again. Others alleged that it was an outgrowth of the import restrictions, which gave U.S. consumers little choice except to buy more expensive cars. Because Japanese producers were not able to increase their U.S. profits by selling more cars, they did so instead by selling more luxurious models and raising prices. During the three years of the original export restraints, the price of the average Japa­nese import increased by $2600, and a Wharton Econometrics study attributed $1000 of this to import restraints. In the meantime, the prices of U.S.-made cars increased by 40 percent. These price increases made both U.S. and Japanese producers more profitable.

Although the Japanese have continued their restraint on sales, they have increased their allocation from 1.68 million units of imports in 1982 to 2.3 million units in 1990. Since their imports have been less than their allocations for the last several years, protectionists have argued that the restrictions have become meaningless. The effect on U.S. employment has been minimal as producers have turned to more automated means of production. The high profits increased the bargaining power of U.S. automobile production workers so that they increased their earnings relative to other production workers. This has stimulated even further automation.

Since restrictions were first placed on Japanese automobile imports, the question of which firms and which production to protect has become more complicated. Clearly, the UAW has been primarily interested in maintaining jobs. UAW representatives were instrumental in helping to convince Japanese firms to set up U.S. operations, primarily to assemble vehicles. The UAW wants much more, though; it is pushing to have more parts made in the United States. In 1990 the UAW president estimated that only 38 percent of parts were made in North America and that Japanese firms were keeping the higher-skilled and higher-paid production jobs in Japan. The UAW has also proposed legislation to force U.S.-owned companies to "invest at home and produce vehicles-covering the full range of market segments." This push for "local content" runs counter to some of the policies being pursued by those U.S. auto firms that are trying to produce "global" cars in order to obtain maximum economies of scale and buying specific parts that can be produced more cheaply in other countries (such as die-cast aluminum parts in Italy). The Ford Escort, for example, which was assembled in the United States, Britain, and the former West Germany, contained parts from many countries. Furthermore, many of the cars sold under the Big Three automakers' brand names have been made abroad by other companies, a fact unknown to most U.S. consumers. These cars include the Ford Festiva made by Kia Motors in South Korea, GM's Pontiac LeMans made by Daewoo Motors in South Korea, and Chrysler's Dodge and Plymouth Colt and Vista made by Mitsubishi Motors in Japan. The competitive situation is complicated by the fact that GM owns 36.7 percent of Isuzu Motors, Ford owns 25 percent of Mazda and Chrysler until recently owned 24 percent of Mitsubishi. In addition, Japanese owned operations in the United States, such as Honda and Mazda, are now exporting parts and finished vehicles to Japan.