A Case Study on

Import Quotas on Japanese Cars

Prepared For:

Dr. Sheikh Abu Taher

Assistant Professor and
Course Teacher, Managerial Economics (FNB 503)

Prepared By:

Asma Ahmed (ID: 1251)

Manisha Sarker (ID: 1252)
First batch, MBA Program

Department of Finance & Banking

Jahangirnagar University, Savar, Dhaka -1342

April 16, 2014

 Case Study 1.2: Import Quotas on Japanese Cars

Case Study 1.2: Import Quotas on Japanese Cars

In 1980 the United Auto Workers (UAW) and Ford Motor Company petitioned the
International Trade Commission (ITC) to recommend relief from import
competition; during the first half of that year foreign car companies shipped 1.2
million passenger cars to the United States, an increase of 21 per cent over the
previous year. The foreign share of the US new car market increased from 17 per
cent to 25 per cent in that period. US car manufacturers and workers faced big
problems. American Motors sold out to Renault, Chrysler made huge losses and was
forced to sell most of its foreign subsidiaries, Ford made even larger losses and
General Motors had to borrow large sums to keep afloat. By the end of 1980 193,000
out of 750,000 members of the UAW were unemployed.

The ITC rejected the appeal, saying that the problems of the motor industry were
due to a shift in demand to small, fuel-efficient cars caused by higher petrol prices,
and that the industry had failed to anticipate this. The reason for the US consumers’
preference for Japanese cars was debatable. One theory, along the lines of the ITC
position, was that imports were perceived as having better fuel economy,
engineering and durability. This was supported by a survey of 10,000 US
households carried out by the Motor and Equipment Manufacturers Association.
Supporters of this theory felt that imports should not be limited.

However, another theory was that price differences created by labor cost
differences were the cause. The Bureau of Labor Statistics estimated that average
Japanese car workers’ wages and benefits in the first half of 1979 were only half
those of US car workers. Those supporting this theory largely favored taxing
imports in order to raise their prices.

The arguments for protecting or aiding the US motor industry were based on two
main premises. The first was that the costs of unemployment were higher than the
increased costs to consumers of limiting imports, and the second was that the US
manufacturers could recover and become fully competitive with imports if they
were given temporary help. The first issue involved an estimation of the hardships
of being unemployed, the adverse effect of their lost purchasing power on other
industries, and the higher taxes necessary to support the unemployed. A New York
Times poll5 showed that 71 per cent of Americans felt that it was more important to
protect jobs than to get cheaper foreign products. The second issue related to the
past performance of US manufacturers, the possibility of achieving economies of
scale and higher productivity with new plants. Ford, for example, estimated that the
conversion of its Dearborn engine plant would cost $650 million but would increase
productivity by 25 percent.

Those who rejected the idea of protection, like the ITC, blamed the managers of the
US companies for their bad decisions. They claimed that these managers and firms
should not be rewarded at the expense of the consumer and taxpayer, who would
not only face higher prices and taxes, but also suffer from limited choice. Retaliation
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 Case Study 1.2: Import Quotas on Japanese Cars

from foreign countries was another problem that they said might ensue from any
kind of protection.

The UAW was mostly concerned about maintaining jobs rather than protecting the
profits of the manufacturers. They thus pushed for foreign manufacturers to
produce in the United States and to have 75 per cent of their parts produced in the
US. This was against the interests of the manufacturers, who were trying to produce
cars globally by buying parts in many different countries wherever they could be
bought cheapest. The Ford Escort for example, which was assembled in the United
States, Britain and Germany, contained parts from nine countries.

The UAW gathered much public support and, with opposition from consumers being
largely unorganized, was successful in 1981 in obtaining a ‘voluntary’ agreement
with Japan to limit car exports to the United States to 1.68 million units a year for
three years. Japanese producers and politicians entered the agreement fearing that
lack of cooperation could result in even stricter limits. When the agreement expired,
Japan continued to limit exports, but by that time the major manufacturers like
Honda, Toyota and Nissan already had plants in the United States and sales from
these soon outnumbered imports.

The effects of the import quotas are also controversial. The US car industry did
recover, but some of this was due to the economy moving out of recession. US
consumers switched back to consuming more expensive and profitable cars, but this
was partly an effect of the import restrictions, which gave US consumers little choice
except to buy more expensive cars. The limits on Japanese imports were in quantity
not in value; therefore Japanese firms redesigned their cars to make them more
luxurious and expensive. During the three years of the original export agreement,
the average Japanese import increased by $2,600; a Wharton Econometrics study
attributed $1,000 of this to the import limits. In the same period the prices of US-
made cars increased by 40 per cent.

Summery

The auto conflict was sparked by a surge of Japanese cars into the American market
in the late 1970s. The US manufacturers could not anticipate the sharp world oil and
gas price rising which caused sudden shift in consumer demand toward small, fuel-
efficient quality automobiles. US car manufacturers and workers faced big problems
and a large number of downsizings. In 1980 the United Auto Workers (UAW) and
Ford Motor Company petitioned the International Trade Commission (ITC) to
recommend relief from import competition. The ITC rejected the appeal, saying that
the problems of the motor industry were due to a shift in demand to small, fuel-
efficient cars caused by higher petrol prices, and that the industry had failed to
anticipate this. One theory was that imports were perceived as having better fuel
economy, engineering and durability. Supporters of this theory felt that imports
should not be limited. However, another theory was that price differences created
by labor cost differences were the cause.
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 Case Study 1.2: Import Quotas on Japanese Cars

The Bureau of Labor Statistics estimated that average Japanese car workers’ wages
and benefits in the first half of 1979 were only half those of US car workers. Those
supporting this theory largely favored taxing imports in order to raise the
unemployed. The UAW was mostly concerned about maintaining jobs rather than
protecting the profits of the manufacturers. They thus pushed for foreign
manufacturers to produce in the United States and to have 75 per cent of their parts
produced in the US. This was against the interests of the manufacturers, who were
trying to produce cars globally by buying parts in many different countries
wherever they could be bought cheapest. The UAW gathered much public support
and, with opposition from consumers being largely unorganized, was successful in
1981 in obtaining a ‘voluntary’ agreement with Japan to limit car exports to the
United States to 1.68 million units a year for three years.

Japanese producers and politicians entered the agreement fearing that lack of
cooperation could result in even stricter limits. The effects of the import quotas are
also controversial. The US car industry did recover, but some of this was due to the
economy moving out of recession. US consumers switched back to consuming more
expensive and profitable cars, but this was partly an effect of the import restrictions,
which gave US consumers little choice except to buy more expensive cars. Japanese
firms redesigned their cars to make them more luxurious and expensive. During the
three years of the original export agreement, the average Japanese import increased
by $2,600; a Wharton Econometrics study attributed $1,000 of this to the import
limits. In the same period the prices of US-made cars increased by 40 per cent.

Question 01: Explain how different theories presented in this case study are
supported and how they can be tested in general terms.

The US Motor industry had faced big problem due to surge of increased import of
Japanese passengers’ cars. The United Auto Workers (UAW) and Ford Motor
Company petitioned the International Trade Commission (ITC) to recommend relief
from import competition and ITC rejected the appeal. The following two theories
were stated to explain this problem:

Theory 01: Imports were perceived as having better fuel economy, engineering and
durability.

During the first half of 1980s, foreign car companies including Japan shipped 1.2
million passenger cars to the United States, an increase of 21 per cent over the
previous year. The foreign share of the US new car market increased from 17 per
cent to 25 per cent in that period. The reason was that as Japanese cars were small
and fuel-efficient, US consumers shifted their preferences to these cars due to an
increase in petrol price. This increased demand created an increased supply of
Japanese car in US in accordance with demand-supply relationship with an effect of
complement product (petrol price). Moreover, US car market was seemed as more
engineered and stable to Japanese car manufacturers. This theory can also be tested
in this manner. In handset or mobile market in Bangladesh, increased demand
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 Case Study 1.2: Import Quotas on Japanese Cars

creates a large number of supplies of different companies’ mobile phones. Besides,

this market is growing and being durable.

Theory 02: Price differences created by labor cost differences were the cause.

US manufacturers produced large, luxurious and expensive cars where Japan

exported small, fuel-efficient cars at cheaper rate. This price difference was created
because the manufacturing cost particularly labor cost in US was significantly high
enough than Japan. The Bureau of Labor Statistics estimated that average Japanese
car workers’ wages and benefits in the first half of 1979 were only half those of US
car workers. However, according to the law of diminishing demand, the demand for
US cars decreased and shifted to Japanese cars. In mobile or handset market in
Bangladesh, Symphony grabs a large market share due to its price.

These theories were supported by the consumers’ behavior to price, quality and
efficiency and resulted that US customers shifted their demand to Japanese cars and
imports were perceived.

Question 02: Explain why the results of the New York Times poll reported
above are meaningless.

By the end of 1980, 193,000 out of 750,000 members of the UAW were unemployed.
A New York Times poll showed that 71 per cent of Americans felt that it was more
important to protect jobs than to get cheaper foreign products. These results are
meaningless from following perspectives:

• To protect the jobs during that period, aid was must for US motor industry.
But this aid was only possible by raising taxes. If the tax rate was increased, it
would decrease the purchasing power of the consumers.
• To reduce unemployment rate, government had to aid this industry from
higher expense of taxpayers. This higher tax rate would affect the other
industry. Manufacturers of different industries would have to set higher price
to make profit (EBT). This increased price could decline the supply and affect
the economy as a whole.
• Higher price would limit the choice for products. Besides, increased import
duty and taxes might also reduce the export quantity.

Question 03: Explain the conflict of interest between the US car manufacturers
and the UAW.

The UAW was mostly concerned about maintaining jobs rather than protecting the
profits of the manufacturers. By the end of 1980, 193,000 out of 750,000 members
of the UAW were unemployed. They pushed for foreign manufacturers to produce in
the United States and to have 75 percent of their parts produced in the US. UAW
emphasized on this issue as it created the way to foreign direct investments in

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 Case Study 1.2: Import Quotas on Japanese Cars

motor industry. Moreover, UAW put pressure on Japanese manufacturers to

establish assembly plants in US. The purpose of this strategy was clearly reflected
their concern.

However, UAW’s concern was against the interests of the manufacturers, who were
trying to produce cars globally by buying parts in many different countries
wherever they could be bought cheapest. As the labor cost was high enough in US, it
would be difficult for the manufacturers to compete in the market as well as to make
profit.

Question 04: Explain how the costs and benefits of the import quotas can be
estimated in monetary terms, describing any problems involved.

Before imposing import quotes, let’s assume following terms:

Cars’ Type US (per units) Japan (per units)

Selling Production Profit Selling Production Profit
price cost price cost
Basic $6000 $5000 $1000 $6000 $4000 $2000
Luxury $8500 $6000 $2500 $8500 $5000 $3500
Traditional $7500 $7500 $0 $7500 - -

Before imposing import quotas, it is found that US made $1000 and $2500 profit per
cars by selling basic and luxury cars respectively. On the other hand, Japan made
profit per cars $2000 and $3500 by selling basic and luxury cars respectively in US
market.

As import quotas were imposed on quantity of Japanese cars, Japan did the
following cost-benefit analysis:

For example, Japan assumed to export 1000 luxury cars.

Profit for Japanese cars = $3500*1000 =$3,500,000

If US sold same amount of basic cars, their profit would be:

Profit for US cars = $1000*1000 = $1,000,000

Besides this cost and benefit estimation, US need to consider other relevant costs
like petrol price, opportunity costs, cost to save per job etc.

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 Case Study 1.2: Import Quotas on Japanese Cars

Question 05: Why would the Japanese car manufacturers be willing to co-
operate with the limiting of their exports to the United States?

The president of the UAW visited Japan in February 1980 and met with business and
union leaders in the Japanese auto industry, as well as politicians, urging them to
lobby for direct investment or export restraints. Although he repeated his support
for free trade, he held that Japanese exports were responsible for unemployment in
the US auto sector and pointed out that unless Japanese auto manufacturers made
investment decisions quickly, the UAW might be forced to support import
restrictions. The UAW gathered much public support and, with opposition from
consumers being largely unorganized, was successful in 1981 in obtaining a
‘voluntary’ agreement with Japan to limit car exports to the United States. Japanese
producers and politicians entered the agreement fearing that lack of cooperation
could result in even stricter limits. To make profit Japanese firms redesigned their
cars to make them more luxurious and expensive.

Question 06: One study estimated the cost of the quotas at $160,000 per job
saved. In view of this, why do you think the quotas were implemented?

The aim of implementation of import quota on Japanese car was to solve trade
conflicts arising from increasing Japanese exports. The causes behind this were:

• Sudden shift in consumer demand toward small, fuel-efficient quality

automobiles
• Gas shortages and rising gas prices
• Energy crisis facing the United States

The U.S. industry was unprepared to meet this shift, partly because it had failed to
draw the proper conclusions from the long gas lines, spot shortages, and sharply
increasing world oil prices after 1973. Above all this policy was taken for the
betterment of the economy of USA, to aid for the harmed auto mobile industry and
also to check the unemployment problem. In the end we can see that during the
three years of the original export agreement, the prices of US-made cars increased
by 40%.

Question 07: Explain the differences between the decision making processes
of the US car manufacturers and the US government.

US Car Manufacturers:
The main goal of US manufacturer was to make profit by regaining their previous
position. Some of them were sold out to other companies. Some sold most of their
foreign subsidiaries and some other borrowed a large amount to keep afloat. They
also downsized the workers and wanted aid to the authority.

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 Case Study 1.2: Import Quotas on Japanese Cars

US Government:
The depressed state of the auto industry was linked to the surge in auto imports
from Japan. The Council of Economic Advisers presented a projection of the
economic effects of import restrictions, indicating that any import restrictions
‘would cost the US economy far more than it would gain from increased production
and employment in the United States’. The US Trade Representative (USTR) argued.
In accordance with this proposal, the Carter administration announced that the
government would:

1. Neither restrict auto imports nor request Japan for VERs;

2. Request Japanese automakers to invest in the US; and
3. Ask the Japanese government for a further reduction in tariffs and non-tariff
barriers on autos and auto parts.

This was the US government’s basic stance toward Japan during the auto crisis in
the early 1980s. Actually US car manufacturers had nothing to do when they were
rejected for the aid. Moreover the UAW was very much concern about their lost job.
So they perform according to the authority’s decision after imposing import quota
on Japanese auto.

Reference:

• “Trade Conflicts between Japan and the United States over Market Access:
the case of Automobiles and Automotive Parts” a paper on Pacific Economic
Paper, No. 310, December, 2000

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