Voluntary Export Restraints on Automobiles

By Daniel K. Benjamin

Now we know what a decade of
quotas on Japanese cars cost consumers.

In May 1981, with the American auto industry mired in recession, Japanese car makers agreed to limit exports of passenger cars to the United States. This "voluntary export restraint" (VER) program, initially supported by the Reagan administration, allowed only 1.68 million Japanese cars into the U.S. each year. The cap was raised to 1.85 million cars in 1984, and to 2.30 million in 1985, before the program was terminated in 1994.

Recent research (Berry, Levinsohn, and Pakes 1999) now gives us a clear picture of the all-too-predictable effects of this restriction on free trade: By limiting the supply of cars from Japan, the export restraints raised the prices of Japanese cars. This increased car sales by U.S. firms, thereby hiking their profits. All of this came chiefly at the expense of American auto consumers, particularly those who bought Japanese cars during this period. Overall, Americans as a whole were made worse off due to the introduction of the export restraints.

The key impacts were felt during 1986-1990. Over this period the restraints (in essence, quotas) caused the prices of Japanese cars sold in the United States to average about $1,200 higher (in 1983 dollars), some 14 percent above what they would have been without the restraints.

The higher prices for Japanese cars caused some consumers to defer purchases altogether and others to switch to American autos. In fact, the negative impact on sales of the Japanese automakers completely offset the profit-enhancing effects of higher prices. Hence, Japanese firms were no better off than if unrestrained trade had prevailed.

Matters were different for American firms, however. The consumers who switched to domestic cars tended to be price-sensitive, so the American makers were able to raise prices by only about 1 percent. But with less Japanese competition, sales of American cars increased sharply at a time when U.S. assembly lines had substantial excess capacity. Hence, during the years 1986-90, profits of U.S. automakers jumped about $2 billion per year as a result of the VERs--an increase of better than 8 percent.

The big losers were American car buyers, particularly those who (like me) opted to purchase Japanese vehicles even in the face of their higher prices. Overall, American consumers suffered a loss of some $13 billion, measured in 1983 dollars. After accounting for the higher profits of American automakers, the U.S. economy as a whole thus suffered welfare losses totaling some $3 billion due to the restraints on Japanese car exports.

One surprising finding of Berry et al. is that, contrary to prevailing wisdom, the impact of the VER program was important only during the 1986-90 period. The authors find that the export restraints had essentially no impact on observed prices and quantities from 1981 through 1983, and little impact in 1984 and 1985. Apparently, the 1981-82 recession, combined with high interest rates, depressed auto sales so much that the restraints initially did not constrain Japanese sales in the United States. Only beginning in 1986 did the program begin to bite, as economic recovery, declining interest rates, and a sharp drop in gasoline prices spurred new car demand.

These results immediately suggest at least two questions. Since the restraints failed to raise Japanese profits, why were the Japanese manufacturers so anxious to agree to them? The authors suggest that the likely alternative to the program was a U.S.-imposed tariff on Japanese cars--which would have cost Japanese makers more than $11 billion over the 1986-90 period.

If this is true, why didn't the Reagan administration simply impose such a tariff? After all, a tariff would have done as much good for American manufacturers and done consumers no more harm, while also raising government revenues. The answer, I suggest, is that such a tariff--which would have amounted to a huge tax hike--would have complicated negotiations over the massive and politically crucial economy-wide tax cuts the administration was proposing at the same time.

One key long-run consequence of the VER program stems from the provision that any Japanese cars produced in the U.S. were excluded from the limits. Beginning with Honda's Marysville, Ohio, plant in 1982, Japanese makers responded to this provision by investing heavily in U.S. production facilities. By 1990, Nissan, Toyota, Mazda, and Mitsubishi had joined Honda in producing substantial numbers of cars in America. That entry, combined with the recession of 1991, was sufficient to eliminate the effects of the restraints after 1990. More importantly, this Japanese auto manufacturing presence in the U.S. has almost surely made it impossible to exclude Japanese cars during future recessions. The scoundrel in me is thus forced to ask: From whom, then, will the American manufacturers seek protection the next time around?

REFERENCE
Berry, Steven, James Levinsohn, and Ariel Pakes. 1999. Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy. American Economic Review 89(3): 400-30.


Daniel K. Benjamin is a PERC senior associate and professor of economics at Clemson University. His regular column, "Tangents-Where Research and Policy Meet," investigates policy implications of recent academic research. He can be reached at: wahoo@clemson.edu

Type: 
Media Source: 
The effect of government policy changes on the private sector has been the unifying theme that ties together Daniel K. Benjamin's broad-scale research. He not only examines the outcomes of policy changes, but also the reasons behind the modifications.Taxes, unemployment, risk assessment, and drugs have been the focus of much of Benjamin's...
Read More > More Articles by Daniel Benjamin >