The Cost of Trade Restraints: The Case of Japanese Automobile Exports to the United States

IN EARLY 1981, the Japanese authorities imposed restraints on exports of automobiles to the United States in order to pre-empt more restrictive measures advocated by the U.S. automobile industry. Export restraints have been maintained since that time, although the quantitative limits were relaxed substantially in March 1985. Since the imposition of the restraints, the domestic share of sales has risen appreciably, reversing the previous downward trend. At the same time, new car prices have risen almost twice as rapidly as consumer prices in general. This paper assesses the degree to which developments in automobile sales and prices were affected by export quotas during the period 1981-84, when restraints were at their tightest. These estimates are used to assess the impact of the restraints on net revenues of the domestic automobile industry and foreign producers and to measure the costs to purchasers.

Abstract

IN EARLY 1981, the Japanese authorities imposed restraints on exports of automobiles to the United States in order to pre-empt more restrictive measures advocated by the U.S. automobile industry. Export restraints have been maintained since that time, although the quantitative limits were relaxed substantially in March 1985. Since the imposition of the restraints, the domestic share of sales has risen appreciably, reversing the previous downward trend. At the same time, new car prices have risen almost twice as rapidly as consumer prices in general. This paper assesses the degree to which developments in automobile sales and prices were affected by export quotas during the period 1981-84, when restraints were at their tightest. These estimates are used to assess the impact of the restraints on net revenues of the domestic automobile industry and foreign producers and to measure the costs to purchasers.

IN EARLY 1981, the Japanese authorities imposed restraints on exports of automobiles to the United States in order to pre-empt more restrictive measures advocated by the U.S. automobile industry. Export restraints have been maintained since that time, although the quantitative limits were relaxed substantially in March 1985. Since the imposition of the restraints, the domestic share of sales has risen appreciably, reversing the previous downward trend. At the same time, new car prices have risen almost twice as rapidly as consumer prices in general. This paper assesses the degree to which developments in automobile sales and prices were affected by export quotas during the period 1981-84, when restraints were at their tightest. These estimates are used to assess the impact of the restraints on net revenues of the domestic automobile industry and foreign producers and to measure the costs to purchasers.

In theory, the restraints on Japanese automobile exports would be expected to affect prices, sales, and types of cars purchased in the United States. Under the export quotas, individual Japanese producers are constrained in the number of cars they can export to the United States. To maximize profits subject to this constraint, Japanese producers have an incentive to raise the prices they charge for given models. This action would reduce competitive pressures on U.S. producers and non-Japanese exporters and prompt them to raise their prices in turn, although probably by less than the increase in Japanese prices. Faced with higher prices on most models, U.S. purchasers may be expected to buy fewer new automobiles. Nevertheless, sales of domestic cars and imports of non-Japanese automobiles may increase as purchasers shift away from relatively more expensive Japanese cars.

In addition to these effects, the restraints on Japanese automobile exports may have had a significant impact on the average quality of cars purchased in the United States. To maximize the profits derived from each unit sale, Japanese producers are likely to shift the mix of cars exported to the United States toward larger or more luxurious models that can be sold at higher prices. Producers may also be expected to install more “optional” equipment in each unit. These actions would tend to raise the average quality of imported Japanese automobiles and to reduce the extent to which the quotas would curtail real expenditures on such cars.1 The average transactions price of Japanese automobiles sold in the United States would tend to increase, reflecting the higher average quality of each unit. The average quality of domestic cars may also rise if Japanese automobiles are relatively closer substitutes for higher-quality rather than for lower-quality domestic automobiles.

The technique used in this paper to quantify the effects of the Japanese export restraints is to compare actual outcomes during the quota period with outcomes predicted by a small model of the U.S. automobile sector estimated over the period preceding the imposition of the restraints. The central assumption underlying this approach is that the Japanese export restraints were the dominant factor excluded from the model that affected the auto market during the quota period.

A major difference between the present study and other recent attempts to assess the impact of the Japanese export restraints2 is that the model developed in this paper directly allows for the effects of the quotas on the average quality of automobiles purchased. The estimated effect of the restraints on the average transactions price of new cars is divided between pure changes in price and changes in price associated with variations in the mix of automobiles being sold. The ability to distinguish between pure price effects and quality effects makes it possible to assess the welfare costs and income transfers resulting from the imposition of the export restraints.

Section I of this paper briefly describes events leading up to the imposition of the quotas in 1981 and reviews developments in the industry since that time. Section II describes the model of the U.S. automobile sector that forms the basis for the estimation of the effects of the export restraints that are presented in Section III. Using these estimates, Section IV assesses the welfare costs and income transfers associated with the Japanese export restraints. Some conclusions are presented in Section V, and an appendix provides a formal presentation of the model.

I. Recent Developments in the U.S. Automobile Sector

In the late 1970s, the U.S. automobile industry was faced with severe difficulties as sales dwindled and foreign imports took up an increasing share of the market (Table 1). Japanese imports increased particularly rapidly, accounting for over 21 percent of total U.S. sales in 1980 compared with less than 10 percent five years earlier. Net income of U.S. producers shifted from a profit of $4.9 billion in 1978 to a loss of $4.2 billion in 1980, while production and employment were curtailed sharply (Table 2). In June 1980, the industry filed a petition for import relief under the escape clause, on the grounds that both automobiles and trucks were being imported in such quantities as to damage the domestic industry. The U.S. International Trade Commission ruled that, while increased imports were a contributing factor, the “substantial” causes of the industry’s difficulties were a general decline in the demand for automobiles and a switch by consumers toward more fuel-efficient vehicles. The Commission recommended that no restrictive action be taken.

Table 1.

Automobile Sales in United States

(Millions of units, unless otherwise indicated)

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Includes imports from Canada; such imports accounted for roughly 10 percent of total sales in 1984.

Table 2.

Performance of U.S. Automobile Companies

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Note: General Motors, Ford, Chrysler, and American Motors.

Despite the Commission’s decision, pressures for protection of the U.S. automobile industry remained intense and led to legislation being introduced in the Congress to restrict Japanese imports of passenger cars. In May 1981, the Japanese Government responded by announcing measures to restrain exports of automobiles to the United States for two years. These restraints limited Japanese exports to the United States to 1.68 million units in the year ended March 1982, about 8 percent below their 1980 level. Within this total, individual Japanese producers were allotted export quotas based on their market share prior to the imposition of the restraints. In the second year of the restraints, shipments were to be held at the first-year level, with a provision for an increase if there was a rise in domestic U.S. automobile sales; in the event, this increment did not materialize. Total sales in the United States continued to decline in 1981 and 1982, reflecting the general weakness of the U.S. economy and high interest rates. At the same time, the Japanese share of the U.S. market increased further, albeit at a much slower rate than in previous years.

In 1983 and 1984, demand for automobiles picked up sharply, reflecting a substantial decline in interest rates and the strengthening of economic activity in the United States. Domestic producers increased production in line with growing sales, and were able to achieve record profits after several years of weak earnings (Table 2). The restraints on Japanese car exports were extended for third and fourth years; the ceiling was held fixed in the third year and raised by 10 percent in the fourth year to 1.85 million units.3 Sales of Japanese automobiles remained roughly unchanged in this period, and the market share of imports from Japan declined significantly, dropping to 18¼ percent in 1984.

In early 1985, the U.S. authorities judged that the domestic auto-mobile industry had been able to adjust to import competition and announced that they would not ask Japan to extend the restraints. Nevertheless, the Japanese Government decided to extend the restraints for two additional years through March 1987. In this period, the ceiling was raised by 24 percent to 2.3 million units a year, while the export shares allotted to individual producers were reallocated to increase the shares of producers that previously had received relatively small shares. In early 1987, the export restraints were extended for a further year without an increase in the export ceiling.

The record levels of net income achieved in 1983 and 1984 by U.S. automakers were earned on sales volumes similar to those in 1980, when the automobile industry incurred unprecedented losses. In part, this turnaround reflected efforts made by the industry to control production and inventory costs. Capital spending by the industry was exceptionally high during 1979–81, although it dropped somewhat in 1982-84; much of this investment was directed toward raising labor productivity as well as improving product quality. In conjunction with this investment, employment was cut back sharply while increases in hourly compensation were moderated by union wage concessions in 1981-82. As a result of these measures, the rate of increase in unit labor costs fell substantially, and was well below that in the nonfarm business sector as a whole during 1981–84.

Despite improvements in the cost performance of the U.S. automobile sector, the gap between production costs in the United States and Japan did not appear to narrow significantly. Hourly compensation of auto-mobile production workers in Japan (expressed in terms of U.S. dollars) rose at a somewhat slower rate than hourly compensation in the U.S. industry during 1981–84, although there is some evidence that productivity may have improved somewhat more rapidly in the United States than in Japan. The Japanese cost advantage in producing a subcompact model in 1984 was estimated to be $1,500–2,500, roughly the same as in 1980.4

A dramatic feature of the period 1981–84 was the rapid increase in automobile prices, which far exceeded the rate of consumer price inflation. The average transactions price of new passenger cars jumped by 17½ percent in 1981 alone and increased by 49 percent during 1981–84 as a whole; the consumer price index for all items (CPI) rose by only 26 percent over the period (Table 3). Much of the increase in automobile prices during this period apparently reflected an upgrading in the average quality of cars sold. The new-car component of the CPI, which is adjusted for quality changes in an attempt to isolate pure changes in price,5 rose by only 18 percent during 1981–84. The 31 percentage point difference between the rate of increase in average transactions prices and the CPI for new automobiles during this period would imply an unusually large change in average car quality. By way of comparison, during 1975–79 average transactions prices increased by only 1½ percentage points a year faster than the new-car component of the CPI.

Table 3.

Price Indicators in United States

(Percentage change at annual rates)

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A significant portion of the apparent upgrading in the quality of cars purchased during 1981–84 resulted from compliance with federal safety and emission regulations. It has been estimated that compliance with such regulations may have raised production costs by about $700 a unit during the period, which would imply an increase in transactions prices of about 10 percent (Crandall, 1984). The remaining increase in quality would be accounted for by such factors as a shift in the mix of purchases toward larger vehicles and increased installation of factory- or dealer-installed options. In this regard, there was a shift in the composition of sales away from compact and subcompact models toward intermediate and larger models during 1981–84 (Table 4).

Table 4.

Composition of Automobile Sales in United States

(Percent of total)

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Transactions prices of imported automobiles have generally increased more rapidly than those of domestic cars; import prices rose by 61 percent from 1980 to 1984 while domestic prices rose by 45 percent (see Table 5). In part, the rapid growth in import prices resulted from a substantial change in the composition of European imports away from small automobiles, reflecting a shift toward U.S. production by a major manufacturer and the declining popularity of several models.6 The prices of Japanese automobile imports into the United States also increased considerably after the imposition of quotas, although at a lesser pace than non-Japanese imports. Data available from the U.S. Department of Commerce suggest that transactions prices of Japanese auto-mobiles increased by 38 percent from 1980 to 1984.7 Part of the rise in transactions prices of Japanese cars would be accounted for by an increase in the average quality of cars sold. In this regard, there was a marked shift in the mix of sales toward medium- and high-priced models8 and a significant rise in both factory- and dealer-installed options. However, substantial increases in list prices on standard models and in dealer markups also took place.

Table 5.

Imported Automobile Prices in United States

(Percentage change)

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II. Quantifying the Effects of Export Restraints

To quantify the effects of the Japanese restraints, a simple model of the U.S. automobile sector was estimated using annual data over the period preceding the imposition of the restraints (1968–80).9 This model was then used to predict values for prices, sales, and imports during the quota period (1981–84). The differences between the actual values and the values predicted by the equations provide a broad indication of the impact of the export restraints. These estimates are subject to a considerable degree of uncertainty because shifts in the coefficients of the model or factors not included in the model may be responsible for part of the differences between actual and predicted values. However, attempts have been made to allow for factors, such as changes in relative gasoline prices and federal safety and emission regulations, that may have been particularly important during 1981–84. Estimation difficulties are also caused by the relatively short period for which sufficient data are available and the lack of a quality-adjusted price series for imported automobiles. For these reasons, the quantitative results should be treated with caution, as providing an indication of the magnitude of the effects rather than a precise measurement.

The full model of the U.S. automobile sector developed here is presented in the Appendix. It consists of 6 behavioral equations and 26 identities. Behavioral equations are estimated for the consumer price index for all new cars, the average transactions price of all new cars, and real purchases of new automobiles by consumers and businesses.10 Separate consumer price and transactions price equations are estimated to assess the impact of quotas on the mix and quality of automobiles purchased. The two price equations and the real expenditures equation, together with a series of identities, are used to assess the impact of the quotas on constant dollar automobile expenditures (including expenditures related to changes in the quality of purchases) and on the number sold.

The two price equations express prices as a function of production costs and the inventory-sales ratio, which is used as a proxy for demand pressures.11 Time trends included in the equations are expected to capture the effects on prices of improvements in production technology, such as the increased use of plastics. The estimated equations indicate that changes in production costs are passed fully through into prices. Constant dollar purchases of new automobiles are specified as a function of real income, the price of new automobiles relative to other consumer goods, the auto loan rate, and consumer confidence (as proxied by the change in the unemployment rate).12 Fitted values from the equation for the consumer price index for new automobiles are used to construct the relative price variable in the equation. The equation estimated suggests that the demand for new cars is both income and price inelastic.

To distinguish the effects of the restraints on the U.S. automobile industry and on foreign producers, equations are estimated for the transactions price of domestic relative to imported automobiles and the share of purchases of domestic cars in total automobile expenditures. The equation for the relative transactions price of domestic cars includes as explanatory variables a measure of labor costs in the United States relative to those of competitors and the price of gasoline relative to other consumer prices. Fitted values derived from this equation for the relative price of domestic cars, along with the relative price of gasoline and a time trend, are used to explain the share of domestic producers in total automobile sales.13 The time trend in the share equation captures the effects on the domestic producers’ share of the market arising from nonprice considerations, such as improved availability of products and services and increased consumer acceptance of imported cars.

Estimates for the impact of the restraints on Japanese producers are derived using the assumption that the restraints had the same effect on the average transactions price and the sales of non-Japanese imports as on prices and sales of domestic automobiles.14 This assumption seems reasonable because domestic models and non-Japanese imports would be close substitutes; hence it would be expected that the restraints would have had roughly the same impact on demand for domestic models and non-Japanese imports.

III. Effects of Quotas on Automobile Prices, Purchases, and Imports

Overall Effects

Table 6 presents estimates of the impact of the export restraints on overall automobile prices and purchases. These estimates are derived by comparing actual values for prices and purchases with values for the quota period (1981–84) predicted by the price and real expenditure equations. According to this method, the CPI for new cars was nearly 6 percent higher in 1984 than it would have been in the absence of the export restraints; over the quota period, the CPI for new cars increased by 16 percent compared with a rise of 10 percent that would have been expected in the absence of quotas. In dollar terms, the export restraints are estimated to have added an average of about $625 to the basic price of a given model in 1984.

Table 6.

Estimated Effects of Japanese Export Restraints on Automobile Prices and Purchases

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To estimate the effects of the restraints on the average transactions price of new automobiles, the values predicted by the transactions price equation were adjusted to reflect the impact on prices of federal government safety and emissions regulations during the quota period.15 On this basis, the average transactions price of new cars is estimated to have been 17 percent (or about $1,650) higher in 1984 than it otherwise would have been. Over the period 1981-84, these prices increased by nearly 50 percent compared with a rise of 27 percent that would have occurred if restraints had not been imposed. The effect of the quotas on the average transactions price would be expected to be larger than their effect on the CPI for new cars because of the quotas’ impact on the mix of cars sold and the installation of optional equipment. The estimates suggest that such an improvement in quality owing to the export restraints would account on average for about $1,000 of the cost of an automobile in 1984.

With regard to automobile expenditures, the export restraints are estimated to have lowered constant dollar expenditures by 3¾ percent in 1984 and by percent in the period 1981-84 as a whole. At the same time, the value of these expenditures was about 2 percent (or $2¼ billion) higher in 1984 and 1½ percent (or $5¼ billion) higher in 1981–84 as a result of the restraints, reflecting the inelastic response of demand to price changes. In terms of units, the estimates indicate that some 1½ million fewer automobiles were sold in 1984 and nearly 4 million fewer during 1981-84 than would have been sold without the quotas.16

Effects on Domestic Automobiles

On the basis of estimates derived from the equation for the relative average transactions price of domestic cars, the quotas had less of an impact on prices of domestic cars than on imports. The average transactions price of domestic cars in 1984 is estimated to have been 12 percent (or $1,185) more than it would have been in the absence of quotas (Table 7). Over the restraint period, transactions prices of domestic cars increased by 45 percent compared with a predicted increase of 30 percent. At the same time, according to the market share equation, the quotas increased the share of U.S. producers by 6¾ percentage points in 1984, sufficient to leave domestic unit sales unaffected despite the decline in overall unit sales. As a result, the value of sales of domestic autos was 12 percent (or nearly $9½ billion) higher in 1984 and 7 percent (or more than $17½ billion) higher in the period 1981–84 than it would have been without the quotas.

Table 7.

Estimated Effects of Japanese Export Restraints on Purchases of Domestically Produced Automobiles

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Assuming equal pure price effects on domestic and imported automobiles resulting from the export restraints.

Separate consumer price indices are not published for new domestic and imported automobiles; therefore, there is no readily available indication of the extent to which changes in transactions prices of domestic cars reflected pure changes in prices rather than changes in quality and composition.17 A working assumption is that the pure price effect of the quotas was the same for domestic and imported models; on this basis, changes in their relative transactions prices would reflect changes in relative quality only. Estimates of the effect of the export quotas on constant dollar expenditures, shown in Table 7, are derived using this assumption. On this basis, constant dollar purchases of domestic cars were little affected by the quotas in 1981 and 1982 but were raised by 3 percent in 1983 and by 5¾ percent in 1984.

Rather than supposing that the pure price effects of the export restraints were the same for domestic and imported automobiles, it may be assumed that the quotas had identical effects on the average quality of both domestic and imported cars. Under this alternative assumption, the pure price effect of the quotas is estimated to be 1½ percent for domestic automobiles (rather than 6 percent) in 1984, indicating that real expenditures on domestic autos increased by 10½ percent (rather than percent). The actual effects of the quotas on domestic prices and real expenditures lie somewhere between the alternative estimates. It should be noted that estimates of the effects of the quotas on transactions prices, current dollar expenditures, and unit sales are not sensitive to the change in assumption.

From the estimates of the effects of the export restraints on real expenditures for domestic automobiles and a rough estimate of the elasticity of employment with respect to output,18 it is possible to derive an indication of the impact of the quotas on employment of automobile production workers in the United States. The effects appear to have been minimal in 1981 and 1982 because the restraints had only minor effects on real expenditures for domestic automobiles. However, in the period 1983–84, the quotas had a significant impact on real expenditures and may have boosted employment by 40,000–75,000 workers.19

Effects on Imported Automobiles

Estimates of the quotas’ effects on Japanese automobiles are derived by assuming that the restraints had equivalent effects on average transactions prices and unit sales of domestic and non-Japanese imported automobiles. On this basis it is estimated that, in the absence of restraints, the average transactions price of Japanese cars in 1984 would have been 22½ percent (or $1,700) lower and that unit sales would have been almost 45 percent (or more than 1.5 million) higher (Table 8). Expenditures on Japanese automobiles were reduced by more than 32 percent (or nearly $8½ billion), with the Japanese share of the market being 7½ percentage points lower because of the restraints. Over the quota period, expenditures were 20 percent (or $15 billion) less than they otherwise would have been.

Table 8.

Estimated Effects of Japanese Export Restraints on Purchases of Japanese Automobiles

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Assuming equal pure price effects on domestic and imported automobiles resulting from the export restraints.

On the assumption that the quotas had equal pure price effects on all cars, constant dollar expenditures on Japanese automobiles are estimated to have been 36 percent less in 1984 and 23 percent less during 1981-84 than they would have been in the absence of the quotas. Alternatively, if it is assumed that the quotas had the same impact on the quality of all cars sold, then it is estimated that the pure price effect of the quotas on Japanese imports was 7¾ percent (rather than 6 percent) in 1984; this would imply that the quotas reduced real purchases of Non-Japanese automobiles by 44 percent in that year. On this basis, real expenditures were reduced by 29 percent during the quota period.

Given the assumption that the restraints had the same effect on average transactions prices and unit sales of non-Japanese imports as on domestic automobiles, it is estimated that the share of such imports in total automobile expenditures was increased by nearly 1 percentage point in 1984 as a result of the quotas (Table 9). These expenditures were $1¼ billion higher in 1984 and $2½ billion higher over 1981–84 owing to the restraints.

Table 9.

Estimated Effects of Japanese Export Restraints on Purchases of Japanese Automobiles

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Assuming equal pure price effects on domestic and imported automobiles resulting from the export restraints.

It may be noted that the quotas are estimated to have raised the average transactions price of all imported automobiles by almost $3,000 or 31½ percent in 1984, figures well above the effects on either Japanese or non-Japanese imports. This discrepancy reflects the substantial impact of the quotas on the composition of imports in favor of higher-priced European models; the restraints are estimated to have reduced the Japanese share of imports from 87 percent to 78 percent.

IV. Welfare Costs of Japanese Export Restraints

The estimates of the effects of the Japanese export restraints on prices, sales, and imports presented in Section III can be used to quantify the overall costs imposed by these restraints on automobile purchasers in the United States and the associated benefits to domestic and foreign producers.

Costs to Purchasers

The implications for the welfare of domestic purchasers stemming from the pure price increase induced by the quotas are illustrated in the accompanying figure.20 The line DD relates the demand for real expenditures on automobiles to the CPI for new cars. Pa and Qa are the actual values of the CPI for new cars and total real expenditures on new cars; Pp and Qp are the values predicted for these variables in the absence of the restraints; Qus is the actual value of real expenditures on domestic new automobiles. The welfare cost to domestic purchasers arising from the effect of the export restraints on prices is then represented by the sum of the areas A, B, and C. Areas A and B represent transfers from purchasers to the domestic industry and foreign producers, respectively, arising from the pure increase in prices, while area C represents a dead-weight loss.

As shown in Table 6, the export restraints are estimated to have raised the level of the CPI for new cars throughout 1981-84. This index was 6 percent higher in 1984 than it would have been otherwise, implying that the average price of a standard passenger model was raised by $617. On the basis of these figures, domestic purchasers of automobiles were more than $6½ billion worse off in 1984 owing to higher prices, with a deadweight loss of $130 million (Table 10). Over the four-year period 1981-84, the export restraints cost domestic purchasers $16¾ billion, with a deadweight loss of $280 million.

Table 10.

Cost of Japanese Export Restraints to Automobile Purchasers

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These estimates of the welfare loss to purchasers reflect only the pure price effects of the export restraints. In addition, purchasers would be worse off to the extent that the quotas restricted the effective range of choice available to them. It was estimated above that the export restraints may have led suppliers to sell larger models with more optional equipment, and that this effect may have raised the transactions price of the average automobile sold by over $1,000 in 1984. On this basis, purchasers spent an extra $10¾ billion on increasing quality in 1984 and $25 billion during the quota period. The welfare cost of this additional spending on quality would depend on the degree to which purchasers were willing to substitute quality for quantity. This elasticity of substitution has not been estimated; however, the additional welfare cost to purchasers owing to reduced choice may have been substantial.

Benefits to Domestic Industry

Estimates of the transfer from purchasers to the domestic industry (and to foreign producers) depend on the assumption made concerning the distribution of the pure price effects of the export restraints. Under the assumption that the quotas led to equivalent pure price effects on domestic and imported cars, the U.S. automobile sector is estimated to have gained $5 billion in 1984 and almost $12¼ billion over 1981–84 (Table 11); this transfer from automobile purchasers is represented by area A in the figure. Under the alternative assumption, according to which pure price increases for domestic automobiles are estimated to have been less than those for imports, the income transfer to domestic producers was $1¼ billion in 1984 and $6 billion over 1981–84.21

Table 11.

Effects of Japanese Export Restraints on the Domestic Automobile Industry

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Benefits to Foreign Producers

Foreign producers benefited from the pure price effects of the export restraints by over $1½ billion in 1984 and by almost $4½ billion in 1981–84, assuming that the pure price effects of the quotas were the same for imported and domestic automobiles (Table 12). Under this assumption, Japanese producers are estimated to have received an income transfer of $1 billion in 1984 and $2¾ billion over the 1981-84 period. Making the alternative assumption of equal quality effects, foreign producers are estimated to have received a transfer of nearly $5½ billion in 1984 and a total of $10½ billion over 1981–84, of which Japanese producers received $5¼ billion in 1984 and $9¾ billion in 1981–84.

Table 12.

Effects of Japanese Export Restraints on Foreign Producers

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It should be noted that these aggregate numbers are likely to obscure considerable divergences in the effects of the quotas on individual Japanese producers. Real expenditures on imports are likely to have been adversely affected for all Japanese companies, while the gain in profit owing to the pure price effects of the quotas would mainly accrue to those with established market shares prior to 1981, since they were able to obtain the bulk of the export rights to the United States.

V. Conclusions

According to the analysis presented in this paper, the restraints on exports of Japanese automobiles to the United States have had substantial effects on sales and prices. The precise quantitative estimates provided need to be treated with caution given the difficulties inherent in modeling the U.S. automobile sector, but they do provide a broad indication of the magnitude of these effects. Concerning prices, the results suggest that the average transactions price for new automobiles would have increased by 27 percent during the period 1981–84 in the absence of the quotas compared with an actual increase of nearly 50 percent. These higher prices resulted from a combination of a pure price increase and a shift in the composition of sales toward larger units with more factory- or dealer-installed optional equipment. As a result of the quotas, real expenditures on new cars during 1981–84 were reduced by more than 3 percent and sales by 4 million units, while the value of expenditures on new cars was raised by $5¼ billion, as increases in average transactions prices more than offset the effects of the restraints on volumes sold. The restraints bolstered the domestic industry’s market share and raised real expenditures on domestic models by 2–4 percent and the value of such expenditures by over $17¾ billion during 1981–84. At the same time, expenditures on Japanese automobiles were 23–29 percent lower in real terms and nearly $15 billion lower in value terms.

The rise in car prices (adjusted to exclude price increases owing to changes in the quality of automobiles purchased) induced by the export restraints is estimated to have cost purchasers $16¾ billion during the period 1981–84. Of this increase in purchasers’ costs, $6–12 billion represented a transfer to the U.S. automobile industry. The remaining $5–11 billion is accounted for by a transfer to foreign producers and a deadweight loss to purchasers, and can be considered to be a measure of the loss to the domestic economy as a whole stemming from the restraints on Japanese exports. The net loss may in fact have been larger if account is taken of the loss in welfare stemming from the reduced choice facing purchasers, reflected in the significant increase in the average quality of automobiles purchased during the period.

The 2–4 percent increase in real expenditures on domestic automobiles induced by the quotas during 1981–84 is estimated to have boosted employment in the U.S. automobile sector by 40,000–75,000 man-years. These figures imply that the net cost to the economy of each job created by the quotas was about $110,000 to $145,000.

APPENDIX: Model of U.S. Automobile Sector

This appendix describes the model of the U.S. automobile sector developed to estimate the effects of the Japanese automobile export restraints. The model consists of 6 behavioral equations and 26 identities. The behavioral equations in the model are estimated using annual data for the period preceding the imposition of the restraints (1968-80). In what follows, a lowercase letter represents the natural logarithm of the variable.

Behavioral Equations

Inventory-sales ratio

i=1.951.82(3.2)y˙0.79(7.4)tR¯2=0.830DW=2.49(1)

Consumer price index for new cars

Pc=2.27+0.99c(4.9)0.50i^(2.9)1.03t(2.2)R¯2=0.988DW=1.32ρ=0.67(2.3)(2)

Average transactions price for new cars

Pa=9.97+1.22c(15.78)0.73i^(7.53)1.06t(5.26)R¯2=0.997DW=2.74(3)

Real expenditures on new automobiles

e=0.78y(10.9)+0.72p^(4.2)0.70r(2.9)0.30L˙(4.5)R¯2=0.932DW=2.52(4)

Relative average transactions price of new domestic cars

d=0.18+0.044w1(4.4)0.036g(2.9)R¯2=0.902DW=2.41(5)

Share of domestic producers in total new automobile sales

s=1.785.54d^(4.7)0.44g(7.4)0.53t(7.7)R¯2=0.970DW=2.03(6)

Identities

Total new automobile sales

E$ = Pc.E

U = E$/Pa

Domestic new automobile sales

Pad=DPa
E$d=SE$
Ud=E$d/Pad
Ed=E$d/Pcd
Pcd=Pc

if equal pure price effects are assumed

Pcd=PcPcd*={(PcPa*(Pc*/Pc)Pa+Pad*)/Pad}Pc}ifequalqualityeffectsareassumed;denotesanactualvalue,and*denotesapredictedvalue  

Imported new automobile sales

sf=1s
E$f=SfE$=E$E$d
Uf=UUd
Paf=E$f/Uf
Ef=E$f/Pcf
Pcf=Pc

if equal are pure price effects are assumed

Pcf=PcPcf*={(PaPa*(Pc*/Pc)Pa+Paf*)/Paf}Pc}ifequalqualityeffectsareassumed;denotesanactualvalue,and*denotesapredictedvalue

Non-Japanese new automobile sales

E$n=PanUn
En=E$n/Pcn
Pcn=Pc

if equal pure price effects are assumed

Pcn=PcPcn*={(PaPa*(Pc*/Pc)Pa+Pan*)/Pan}Pc}ifequalqualityeffectsareassumed;denotesanactualvalue,and*denotesapredictedvalue

Predicted values for the average transactions price of non-Japanese imports and unit sales are derived assuming the following (where denotes an actual value and * indicates a predicted value):

Pan*=Pan/(Pad/Pad*)
Un*=Un/(Ud/Ud*)

Japanese new automobile imports

E$j=E$fE$n
Paj=E$j/Uj
Sj=E$j/E$
Ej=E$j/Pcj
Pcj=Pc

if equal pure price effects are assumed

Pcj=PcPcj={(PaPa*(Pc*/Pc)Pa+Paj*)/Paj}Pc}ifequalqualityeffectsareassumed;representsanactualvalue,and*representsapredictedvalue  

Definition of Variables

C = an index of production costs, derived as a weighted average of unit labor costs in motor vehicle manufacturing and the producer price indices for metals and metalworking machinery; weights used are based on coefficients in the 1972 output-input tables of the United States

D= average transactions price of domestic automobiles as a percentage of the average transactions price of all new automobiles sold in the United States

D^=fiftedvaluesfortherelativepricevariablederivatedfromequation(5)

E = real consumer and producer expenditures on new automobiles

Ed = real consumer and producer expenditures on new domestic automobiles

Ef= real consumer and producer expenditures on new imported automobiles

Ej = real consumer and producer expenditures on new imported Japanese automobiles

En = real consumer and producer expenditures on new imported non-Japanese automobiles

E$ = current dollar consumer and producer expenditures on new automobiles

E$d= current dollar consumer and producer expenditures on new domestic automobiles

E$f = current dollar consumer and producer expenditures on new imported automobiles

E$j = current dollar consumer and producer expenditures on new imported Japanese automobiles

E$n = current dollar consumer and producer expenditures on new imported non-Japanese automobiles

G = ratio of the consumer price index for gasoline to the consumer price index excluding energy products

I = ratio of automobile inventories to sales

I^=fittedvaluesfortheinventorysalesratioderivedfromequation(1)

L˙

= change in the unemployment rate

P^ = the relative price of new automobiles, derived as the ratio of fitted values for the consumer price index for new automobiles from equation (2) to the consumer price index for all items

Pa = average transactions price for new automobiles

Pad = average transactions price for new automobiles

Paf = average transactions price for new imported automobiles

Paj = average transactions price for new imported Japanese automobiles

Pan = average transactions price for new imported non-Japanese automobiles

Pc = consumer price index for new automobiles

Pcd =consumer price index for new domestic automobiles, derived depending on the assumption used regarding the pure price and quality effects of the export restraints

Pcf = consumer price index for new imported automobiles, derived depending on the assumption used regarding the pure price and quality effects of the export restraints

Pcj = consumer price index for new imported Japanese automobiles, derived depending on the assumption used regarding the pure price and quality effects of the export restraints

Pcn = consumer price index for new imported non-Japanese automobiles, derived depending on the assumption used regarding the pure price and quality effects of the export restraints

R = interest rate on 36-month new automobile loans at commercial banks S = share of domestic cars in total expenditures on new automobiles

Sf = share of imports in total expenditures on new automobiles

Sf = share of Japanese imports in total expenditures on new automobiles

T = a linear time trend

U = total unit sales of new automobiles

Ud = unit sales of new domestic automobiles

Uf = unit sales of imported automobiles

Uj = unit sales of imported Japanese automobiles

Un = unit sales of imported non-Japanese automobiles

W = relative unit labor cost in the U.S. manufacturing sector vis-à-vis other countries

Y = real gross national product

Y˙ = rate of change in real gross national product

REFERENCES

  • Crandall, Robert W., Import Quotas and the Automobile Industry: The Costs of Protectionism,” Brookings Review (Washington), Vol. 2 (Summer 1984), pp. 816.

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  • Feenstra, Robert C, Automobile Prices and Protection: The U.S.-Japan Trade Restraint,” Journal of Policy Modeling (New York), Vol. 7 (Spring 1985), pp. 4968.

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  • Griliches, Zvi, Hedonic Price Indexes for Automobiles: An Econometric Analysis of Quality Change,” in Price Indexes and Quality Change: Studies in New Methods of Measurement, ed. by Zvi Griliches (Cambridge, Massachusetts: Harvard University Press, 1971).

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  • Rodriguez, Carlos Alfredo, The Quality of Imports and the Differential Welfare Effects of Tariffs, Quotas, and Quality Controls as Protective Devices,” Canadian Journal of Economics (Toronto), Vol. 12 (August 1979), pp. 43950.

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  • Tishler, Asher, The Demand for Cars and the Price of Gasoline: The User Cost Approach,” Review of Economics and Statistics (Amsterdam), Vol. 64 (May 1982), pp. 18490.

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  • United States (1985), International Trade Commission, A Review of Recent Developments in the U.S. Automobile Industry Including an Assessment of the Japanese Voluntary Restraint Agreements, USITC Publication 1648 (Washington: International Trade Commission, February 1985).

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  • Wharton Econometric Forecasting Associates, The Japanese Quota (Philadelphia, 1983).

*

Mr. Collyns, Economist in the Western Hemisphere Department, holds degrees from the University of Cambridge and the University of Oxford. Mr. Dunaway, Economist in the Western Hemisphere Department, holds degrees from the University of Louisville and George Washington University.

1

See Rodriguez (1979) for a formal treatment of the effects of quotas on the quality of imports.

3

Sales of Japanese cars in the United States exceeded the export quota level as inventories were run down.

4

For further information on comparative cost and productivity movements in the U.S. and Japanese industries, see United States (1984).

5

The CPI for new passenger cars is a fixed-weight price index that is adjusted for changes in standard equipment mandated by federal government regulations or made at the manufacturer’s discretion by using data for the production costs of such equipment changes.

6

Direct information on the extent to which the rise in transactions prices of automobile imports reflected a rise in average quality is not available; the CPI for new passenger cars is not broken down between domestic and imported automobiles.

7

This figure may be somewhat low given that the unit value index of passenger cars imported from Japan rose by 55 percent during the same period. It might be expected that transactions prices of Japanese cars would rise more rapidly than import unit values during the quota period, as the latter statistic would not include any effect of the quotas on dealer markups or dealer-installed options. An overstatement of the average transactions price in 1980 and 1981, related to problems in estimating dealer premiums or discounts from list prices, may help to explain the slower rise in transactions prices than import unit values in 1981 and 1982.

8

The share of subcompact models in total sales of Japanese cars declined from 67 percent in 1980 to 48 percent in 1984. During the same period, the share of compact models in sales of Japanese cars increased from 21 percent to 33 percent, and the share of luxury models rose from 12 percent to 18 percent (United States, 1985).

9

Data on transactions prices for new automobiles is not available before 1968. Quarterly information was not used because of the strong effect that model changes and special sales promotions, which have occurred at varying times during a year, have on sales and prices.

10

Constant dollar automobile expenditures are used instead of units as the measure of new car sales in the model because the latter measure does not reflect changes in the mix of models sold and changes in equipment installed. Constant dollar expenditures are derived as the total value of sales of new cars divided by the consumer price index for new automobiles.

11

Values for the inventory-sales ratio used in the price equations were derived from an equation which relates this ratio to the rate of change in real GNP and a linear time trend. The time trend reflects the effects of the sharp rise in inflation and interest rates during the 1970s and early 1980s on inventory behavior. The price of gasoline relative to other consumer prices was also included in the transactions price equation to reflect the effects of fuel costs on the size distribution, and hence the average price, of new automobiles. However, the variable was not found to have a significant coefficient.

12

The cost of operating a car also might be included in the equation specification, as suggested by Tishler (1982), pp. 184–90. However, in estimating the equation, operating costs, as measured by the relative price of gasoline, were not found to be significant.

13

Although the relative price of gasoline does not exhibit a significant influence on total real purchases, it is not surprising to find that the relative gasoline price does have a significant impact on the share of domestic cars in total automobile purchases.

14

This assumption is made because data on the average transactions price of and expenditures on Japanese automobiles before 1980 needed to estimate separate price and share equations are not available. The bias stemming from this assumption is not expected to be significant because of the small number of non-Japanese imports relative to Japanese imports.

15

Adjustments for the costs per automobile of safety and emissions regulations were derived from Crandall (1984).

16

The number of units that would have been purchased in the absence of quotas is calculated as the predicted value of sales divided by the predicted average transactions price.

17

It would be possible to measure pure price changes by directly estimating changes in quality of automobiles using “hedonic” regressions in which model Prices are regressed on characteristics, as suggested in Griliches (1971). Robert Feenstra (1985) has used this method to estimate the change in quality of Japanese and U.S. automobiles between 1980 and 1981. He estimated that the quality of Japanese automobiles rose by 6 percent between these years, while the quality of small U.S. automobiles rose by 0.7 percent and that of large U.S. automobiles by 4.7 percent. However, it is not clear whether the quality changes estimated are due to the quotas or to other factors.

18

Estimates of the employment elasticity are derived from data on man-hours and output.

19

It is interesting to note that, because of the integration of the U.S. and Canadian automobile industries, the restraints on exports of Japanese cars to the United States also boosted employment in Canada. Employment in the Canadian industry may have been increased by 8,000–15,000 man-years in 1983–84 as a result of the quotas.

20

As drawn, the figure is based on the assumption that the pure price effects of the quotas on domestic and imported cars are the same.

21

Estimates presented here are based on the assumption that the automobile industry achieves constant returns to scale in production. If the industry in fact achieves increasing returns to scale, then the benefits to producers would be somewhat higher than the figures presented here.