Rift Widens Over Import Quotas for Japanese Cars

Sometime within the next few days or weeks, one of the most hotly debated economic issues facing the United States will come to a head as Japan announces whether it will extend its “voluntary” restraints on exports of Japanese cars to the United States for a fifth year.

Even though the fourth year of the controversial import quota program is scheduled to end March 31, there are still few signs from the Reagan Administration or the Japanese government indicating just what the decision will be.

And, on the eve of what could be the final deadline for quotas, deep rifts remain both in Japan and the United States over whether restraints have been useful and whether they should continue. Evidence shows that car prices in the United States have risen sharply since quotas were imposed four years ago, although there is strong disagreement over how much of the increase was due to the quotas themselves. It’s also clear that thousands of jobs in the U.S. auto industry have been saved by the quotas, but some economists argue that at least as many jobs were lost in other areas because of higher car prices and fewer import sales.

No matter which way Japan goes, someone’s ox is sure to be gored: the importers of Japanese cars, their dealers and U.S. suppliers; or the domestic producers, their workers, and the communities that rely on jobs in the domestic auto industry.

Various pressure groups with a vested interest in quotas have been hard at work for months now posturing on both sides of the issue, and last week U.S. Trade Representative William E. Brock went to Japan to discuss the issue with Japanese trade officials.

Back in May, 1981, however, when the restraints began, almost no one thought that quotas would still be under consideration in 1985. The program, begun at the bottom of the recession by the Japanese under intense pressure from the United States, was initially designed to provide only a temporary respite for the U.S. auto industry by limiting imports of Japanese passenger cars to 1.68 million units annually--7.7% below 1980’s level--for one or two years.

But the Japanese, under continuing pressure from the Reagan Administration, kept the quotas at their original levels for three years, and a fourth year was added last spring with a slightly higher ceiling of 1.85 million units that allowed the Japanese to share in the U.S. auto sales recovery.

No promises have been made by the Japanese government or the Administration about 1985, however.

Industry executives and outside observers who support quotas argue that they have saved hundreds of thousands of jobs for U.S. auto workers, at only a modest price to consumers in the form of slightly higher car prices. But those critical of restraints say quotas have priced millions of consumers out of the car market and have allowed the domestic industry to become less competitive once again, while protecting only a few thousand jobs for overpaid U.S. auto workers.

“Most importantly, the quotas have been successful in accomplishing their primary goal of allowing the auto industry to regain its balance,” says John Hammond, automotive analyst with Data Resources Inc., a Lexington, Mass.-based economic forecasting firm.

“I think the benefits of quotas have gotten short shrift,” adds David N. McCammon, controller of Ford Motor Co. and one of the company’s experts on international trade.

But Robert McElwaine, president of the American International Automobile Dealers Assn., a trade group representing import dealers, counters: “It is the absence of price competition from Japan that has allowed Detroit to raise its prices and to continue to ignore the low(priced) end of the market.”

Robert W. Crandall, an economist at the Brookings Institution, adds: “They (the quotas) have certainly increased the profits of the auto industry, but they haven’t served the purpose of increasing the competitiveness of the domestic industry.”

Even in Detroit, the major domestic auto makers are squabbling among themselves about what should be done now. General Motors Corp., which hopes to import nearly 300,000 small cars from Japan, is lobbying hard to end quotas. Ford and Chrysler Corp., on the other hand, are far more vulnerable to Japanese imports, and so have joined with the United Auto Workers in pushing for a quota extension.

No Position on Quotas

For its part, the Reagan Administration is playing it close to the vest. “The Administration has no position on quotas--that’s our private policy as well as our public one,” insists David Demarest, a spokesman for Brock’s office.

Brock and other key trade officials have made it clear, however, that they lean toward ending quotas, but the quota issue has been engulfed in the larger debate over the nation’s worsening trade deficit. Therefore, quotas may be held hostage in U.S.-Japanese negotiations on other aspects of trade.

Brock hinted at that in Japan last week, when he warned that the threat of worldwide protectionism is growing, and he called on the Japanese to open their markets to American goods.

And, while they all state publicly that they oppose quotas, the Japanese auto makers are also split. Most of the large firms, whose profits are now heavily dependent on U.S. sales, have already invested in new plants to build cars in the United States, gambling that quotas on imports will continue.

If quotas are dropped, firms such as Nissan Motor Corp. and Honda Motor Co., which have opened assembly plants here, and Toyota Motor Co., which has begun a U.S. joint venture with GM, fear that they will be stuck with high-cost American facilities while smaller Japanese competitors, such as Mitsubishi Motors Corp. and Isuzu Motors Ltd., which have not been able to make significant inroads in the United States under quotas, flood the market with their cheaper Japanese-built products.

Specific Allotments

The Japanese government assigned individual auto companies specific allotments under the quota program based on their share of exports to the United States before quotas were imposed, and therefore smaller Japanese car makers who had not yet entered the U.S. market have been left out.

Most economists and analysts now believe that quotas played only a minor role in the car market during their first two years, when the recession kept a lid on consumer demand. In fact, the Japanese share of the U.S. market increased in both years, hitting a record 22.6% in 1982 despite the quotas.

“In the first couple of years, quotas were set with the idea that the industry’s (sales) volume would be higher than it was, so it is doubtful that they provided any real protection,” says Brent Upson, GM’s director of economic and strategic analysis. “The perverse thing is that this quota system didn’t provide protection when it was most needed during the recession, and only provided it when it was least needed during the recovery.”

David Cole, director of the Center for the Study of Automotive Transportation at the University of Michigan, adds that for the first two years, the only real effect of quotas was to give the Japanese more incentive to sell larger and more expensive cars, in order to maintain their profits on a smaller sales volume.

Moved Customers Upscale

“All the quotas did was give the Japanese an excuse to move their customers upscale, and sell more expensive cars,” that competed in the compact and intermediate-sized car segments traditionally monopolized by Detroit, Cole says.

But as the economy began to recover during the third year, the restraints began to bite. Car sales rose 15.1% in 1983, and prices--especially for imports--began to rise more swiftly. In addition to sticker price increases imposed by the Japanese manufacturers, import dealers began adding their own price premiums on cars in short supply because of the quotas.

Meanwhile, the domestic industry began to make more money, and more auto workers were called back to their jobs.

And in the last year, as car sales rose 13.2%, the Japanese share of the car market fell to 18.3%, its lowest level since 1979, as the Japanese auto makers bumped up against the sales ceiling imposed by restraints.

“In the last two years, there has been a significant impact--the Japanese could have had much more of the market, especially if companies like Mitsubishi and Isuzu had been able to expand further,” says Lee Price, a UAW economist. “You could paint a scenario where the imports would have 10 percentage points more in market share than they do now if quotas hadn’t been imposed.”

Paid Much More

A new study by the U.S. International Trade Commission sent to Congress last week estimates that consumers have paid $5.05 billion more for Japanese cars over the last two years (and a total of more than $6 billion over all four years) than they would have if quotas had not been imposed. The ITC adds that prices of all cars have risen $13.2 billion since 1983, after rising less than $2.5 billion during the first two years of restraints.

“Consumers have paid the price for the auto industry’s higher profits through higher prices,” says Charles King, head of Nissan’s U.S. sales arm. And McElwaine adds: “There is no real way to argue that prices--for both imports and domestics--haven’t accelerated fantastically under the quotas.”

But many industry analysts now believe that the domestic auto makers did not exploit the quotas by raising their prices as fast as the importers. Even Crandall of Brookings, who is critical of quotas, estimates that domestic car prices are, on average, $400 higher than they would have been without quotas, but he adds that import prices have risen an average of $1,000 during the same period.

Domestic industry executives argue that quotas have not caused prices to rise even as much as Crandall suggests. Robert A. Perkins, Chrysler’s vice president for Washington affairs, insists that prices of Chrysler’s smaller and cheaper cars, which compete most directly with imports, have risen just 1% per year since 1981.

Buying Bigger Cars

Ford’s McCammon adds that the average prices consumers are paying for new domestic cars have risen primarily because consumers are demanding larger, more expensive models, and are buying relatively few cheap subcompacts.

There is also a sharp debate over how many consumers have decided to buy domestic cars because they couldn’t get Japanese imports. Ward’s Research, an independent automotive research firm based in Detroit, estimates that the Japanese could have sold another 500,000 cars in 1984.

Ward’s said between 75% and 90% of those lost import sales went to the domestics. GM’s Upson, however, argues that quotas kept out just 200,000 Japanese cars last year, and that Detroit auto makers picked up only about 100,000 of those sales.

Because of such disagreement, there is a wide range of estimates of how many jobs have been created as a result of quotas. The ITC study concludes that there were 44,100 people working in the auto industry in 1984 who would have been unemployed without quotas.

Other estimates range from Crandall’s low of 26,000 jobs in auto plants plus another 25,000 in supplier companies, to the UAW’s estimate that 300,000 jobs have been saved.

But critics of quotas pooh-pooh those claims.

Gains Probably Offset

“I think the job creation has been negligible. Inefficiencies elsewhere in the economy, which are hard to identify, have probably offset gains in the auto industry,” says David Healy, automotive analyst with Drexel Burnham Lambert.

Still, there is general agreement that no matter what happens on quotas next month, the Japanese, in an effort to avoid further protectionist measures, won’t immediately flood the United States market with cheap small cars. Japanese analysts and industry executives have made it clear that they don’t plan to increase exports much beyond 2.2 million units annually, about 19% above the 1.85 million unit level allowed under quotas last year.

“The restraints make people feel good, but I’m not sure it would mean a lot if they were removed,” Cole says.

But some analysts warn that if the smaller Japanese firms--as well as new competitors from South Korea expected to enter the market next year--aggressively try to increase their share of the market, a price war could erupt. If that happens, a new report suggests that the Japanese could undercut their current sticker prices by $1,300 per car on subcompacts and $2,400 on compact cars, leaving the American car makers far behind in cost competitiveness.

Big Jump Forecast

In a new report, Data Resources estimates that Japanese imports will increase by more than 1 million units annually by 1988, and that the share of the market held by U.S. auto makers could decline from 77% today to less than 60% in three years.

McCammon, along with other Detroit executives, agrees that it is too soon to pull the plug on quotas, because the Japanese have maintained an advantage due to the strength of the dollar and the weakness of the Japanese yen, which keeps production costs in Japan relatively low compared to those in the United States.

“The quotas have given us a chance to modernize and compete with Japan, and we have closed the gaps on quality and productivity,” he says. “But the exchange rate problem is still overwhelming, offsetting all the gains we have made in narrowing the cost gap.”

Imported Car Sales by Country of Origin As a percentage of U.S. imports

Year Japan Germany Others 1978 67.8% 21.8% 10.4% 1979 76.0 15.0 9.0 1980 79.6 12.7 7.4 1981 79.9 10.7 9.4 1982 81.1 11.1 7.8 1983 80.3 11.7 8.0 1984 78.1 13.5 8.4