Extended Car Quotas Extend Hidden Costs
Given the $50-billion trade deficit that Japan is running with the United States, the Japanese government’s decision to extend quotas on its auto industry’s exports to this country appears to be good politics. The problem is that the people who have benefited from the quotas have been heard from a lot more clearly than those who have been the victims. If the opposite were true, the politics might be entirely different.
There are two major victims of the quotas. One is the U.S. consumer, who has been paying at least $1,000 extra for the average U.S.-built car because of them. According to a recent study, Americans have been paying an even higher premium if they bought Japanese cars.
The other victim is the less-established portion of the Japanese auto industry which faces a limited chance to grow under the individual company quotas set by the Japanese government. It must be nice to be a major producer in Japan and have your biggest export market carved up for you to limit competition, leaving plenty of room for higher prices.
The Japanese decision, however, contains far more mischief even than that. It comes at a time when car buyers in this country should be on the verge of enjoying a lot more competition for their dollars. South Korean cars are just beginning to flow in, with prices far below those of the Japanese. That could easily set off some price-cutting for smaller cars, domestic and imported, if those quotas weren’t easing some of the competitive pressure.
Pushing Bigger Models
The decision comes at a time of collapsing oil prices, and with price competition restrained in the car business, U.S. auto producers have few qualms about pushing once again to sell the bigger, less fuel-efficient models. That’s especially true since federal fuel economy standards have been relaxed.
Japan isn’t entirely to blame for its quota decision. From the beginning, the quotas were a response to massive pressure from the U.S. government. That pressure supposedly has eased. Last year, President Reagan specifically ended his call for continuing quotas. Protectionist sentiment has been strong enough, however, that Japan feels at least as much pressure as before to keep quotas in place.
The problem with any kind of import restraint is that quotas affect markets in ways that aren’t apparent. To what extent have U.S. auto companies chosen the course of costlier, fancier cars because they knew that they needn’t get into a competitive scrap with foreign producers whose hands were so neatly tied? To what extent have the Japanese stressed costlier versions of their cars, maximizing what they could make on each sale?
Brookings Institution economist Robert W. Crandall concludes in a recent study that U.S. consumers have been paying a rapidly increasing penalty when they buy Japanese vehicles because of the effects of reduced competition. His detailed analysis of pricing decisions suggests that prices paid for new Japanese cars in this country exceeded what they would have been by $500 per car in mid-1982. That figure rose steadily to $1,967 by mid-1983 and $2,646 by mid-1984, the latest year studied.
$4.6-Billion Windfall
Crandall figures that at 1984 sales levels, Japanese auto companies and their dealers received $4.6 billion more for their cars than they would have without quotas. The U.S. auto companies picked up an extra $8 billion for their cars, his study shows.
There’s no question that the quotas have helped the U.S. auto industry in a number of ways. Sales of American-made cars have risen smartly. Employment in the industry is way up.
But this is a very superficial view of the impact of the restraints. What must be considered is how much more competitive the U.S. industry might have made itself without the quotas, how much better prepared it might have been to meet future competition from abroad.
What also must be considered is how much other U.S. industries suffered because consumers were laying out thousands of dollars more for cars than they otherwise needed to, leaving less for other purchases. Jobs gained in Detroit might well have been lost elsewhere.
Protection always has its costs. The politics of the moment just make that difficult to recognize.
