Why Not Cut U.S. Car Prices?
Auto imports account for about one-third of the U.S. trade deficit, and with that deficit a record $17.63 billion in October the pressures to impose further restrictions on car imports from Japan seem certain to grow. Even before the latest trade figures were known, Ford Motor Co. chairman Donald Petersen was calling for a 600,000-unit cut in Japan’s U.S. car sales. Such a cut, more than 25% of this year’s imports, would no doubt help lower the trade deficit. It would also, of course, work to push all car prices even higher, denying yet more Americans access to the new-car market.
“Temporary” quotas on Japanese car imports are now in their seventh year. In some of those years U.S. auto makers enjoyed record profits, and no wonder. Since 1980 car prices have soared nearly 80%. The average new car that cost $7,574 seven years ago costs $13,520 today. Import quotas were supposed to let American auto makers become more competitive. But while the quality of U.S. cars has clearly improved, their share of the market hasn’t. In good part that’s because little effort has been made to take advantage of higher Japanese car prices brought on by import quotas and the rising value of the yen. U.S. car makers have instead chosen to kick up their own prices, narrowing their market.
One result has been bloated inventories that increasingly prompt frantic programs of sales incentives and other discounts. Now the Big Three auto makers are preparing to deal with lower demand in a more painful way. In 1988’s first quarter they plan to cut output by 14% from a year earlier. That comes on top of this quarter’s 10% production decline compared to a year ago.
Certainly there’s a better way to boost U.S. car sales than by quotas that deny consumers the chance to buy what they want. Columnist Robert J. Samuelson, writing in Newsweek, makes a strong case that the auto industry could best help itself simply by lowering prices. The average car is now 7.6 years old--older than at any time since 1950. The reason is simple: Fewer and fewer people can afford new cars. But a 10% cut in prices, auto analyst Michael Luckey of Shearson Lehman Brothers thinks, could raise U.S. car sales by 10%. Something like that certainly is preferable to production cuts, desperate incentive programs or limitations on consumer choices in the marketplace. Isn’t it time to give it a try?
