TRADE CONFLICTS BETWEEN JAPAN AND THE UNITED STATES OVER MARKET ACCESS: THE

CASE OF AUTOMOBILES AND AUTOMOTIVE PARTS

The conflict in the automobile industry provides an interesting case study of the way trade talks
changed. The auto conflict was sparked by a surge of Japanese cars into the American market in the late
1970s and ended with a VER introduced by Japanese automakers in 1981 after intense pressure from
the United States. Four years later, however, the US government announced it would not call for a
renewal of the VER but would instead lobby for increased access to the Japanese market. Despite this
announcement, the Japanese government asked auto manufacturers to extend the VER. The
manufacturers accepted this request and, as a result, auto VERs continued until March 1994. The United
States then increased its demands for greater access to the Japanese market. The Japanese government
accepted the United States’ demand.
The purpose of this study is to clarify the nature of the trade disputes over market access
between Japan and the United States, using the conflict over autos and auto parts as a case study.

Two questions are posed. First, why did the talks shift from VERs to market access?
Since almost all the trade talks have been initiated by the United States, the answer requires that the
evolution of US trade policy on market access be examined. Without Japan’s agreement, however, the
trade talks would not have begun. The second question is, therefore, how has Japan responded to US
demands for increased access to the auto and auto parts markets?

The rise of VERs

The United States began to pay attention to Japanese auto exports in the late 1970s when imports from
Japan were rapidly increasing. In 1973, only 740,000 Japanese passenger cars were sold to the United
States, representing 6.5 per cent of the market. Sales almost doubled by 1977 and reached 1.9 million
units (21.3 per cent of the market) by 1980 (Harada 1995: 21).
In contrast, the US auto industry was in a heavy slump: industry earnings that were positive in 1978
turned negative in 1980, when domestic sales and production were at their lowest for 19 years. In two
years production had dropped by 30 per cent, 300,000 autoworkers had been laid off and 500,000 jobs
had been lost in the auto parts, steel and support industries. The depressed state of the auto industry
was linked to the surge in auto imports from Japan. At the beginning of 1980, little action had been
taken apart from the introduction of several protectionist bills in Congress. In early March 1980, the
Subcommittee on Trade of the Committee on Ways and Means (1980) held hearings on world
automobile trade. The hearings focused on whether import restrictions could assist the depressed auto
industry. The testimony was pessimistic on this respect. For instance, 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 that the cause was:

The sudden shift in consumer demand toward small, fuel-efficient quality automobiles, which occurred
in response to the gas shortages and rising gas prices, both part of the ongoing 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.
The policy proposal, derived from both statements in the testimony, was that:
[The] role of the government was not to restrict foreign imports … but rather to encourage the United
States’ trading partners to conduct as open a regime as the United States did in matters of trade and
investment. In the case of Japan, this would require efforts to encourage the Japanese to removing [sic]
the remaining barriers to automobile imports from the United States and, particularly, to persuade the
Japanese automobile industry to follow the precedent set by Volkswagen of building plants in the
United States. 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.
What was the stance of the United Auto Workers, the group most affected by the auto slump? Although
the UAW was the party most responsible for initiating the auto dispute, because of its traditional
support for free trade it did not seek import restrictions. Rather, it urged Japanese automakers to build
assembly plants in the United States. The president of 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.
Despite the strong representations made by the president of the UAW, Japanese auto manufacturers
were reluctant investors. Honda had already established an assembly plant in Ohio, but Toyota and
Nissan, the two major firms, had resisted investing in the United States. Japanese firms were extremely
concerned about higher wages, frequent strikes, the lower standard of workmanship, the lack of an
established system of parts suppliers and the different legal system in the United States, all of which
were perceived as increasing the cost of manufacturing in America. Nissan finally decided to establish a
plant in Tennessee in July 1980, but the slow response of the Japanese automakers disappointed both
the UAW and the US administration.
The third solution, an expansion of market access through liberalization of tariffs and non-tariff barriers
by the Japanese government, also proved disappointing to the US administration. Japanese auto tariffs
were completely removed in 1978, and in May 1980, the government announced that the remaining
tariffs on auto parts would be reduced. Under the Tokyo Round of the General Agreement on Tariffs and
Trade (GATT), tariffs on tyre and tyre cases were to be reduced from 7.7 per cent to 5.8 per cent. With
respect to non-tariff barriers in the auto sector, the United States regarded Japan’s safety regulations
and import inspection system as too stringent.
Efforts by the US administration to solve the crisis in the auto industry in line with principles of free
trade, to deal with pressure from the industry and Congress, and to maintain the liberal front of the
labor unions, ended in failure. The auto industry and the labor unions put increasing pressure on the
administration to impose import restrictions. This petition required the ITC to determine whether the
surge of imports had caused substantial injury to the domestic industry. If this were found to be the
case, the ITC would recommend that the President take measures to restrict imports.
The ITC findings came down as negative by a close margin in November 1980, and no recommendation
for increased import restrictions was forwarded to the President. The principal causes for the difficulties
of the US auto industry were attributed to the recession in the US economy, higher oil prices and the
shift in consumer preferences to small cars. The auto industry, however, was not satisfied with this
decision. Congress quickly moved to press the President to negotiate an orderly marketing agreement
with Japan. A succession of bills was proposed to Congress to restrict auto imports. The most
protectionist was a bill proposed by Senators Danforth and Bentsen to limit imported automobiles by up
to 1.6 million units a year over the following three years.
The first test of the new Reagan administration was whether it would maintain its
commitment to the free market and reject protectionist demands, or submit to protectionism.
The administration was divided. The ministers of Transport and Commerce supported import
restrictions, but the other departments opposed them. In the bargaining process, VERs were
settled on as a compromise. The administration sent a signal to Japan to restrict its exports.6
After several ‘consultations’, not ‘negotiations’, with the USTR, in May 1981 the Japanese
government announced a three-year VER on autos. The agreement was to limit exports of
passenger cars by up to 1.68 million units for the first year, with 16.5 per cent of the first year’s
sales added to sales in the second year. An extension of the restrictions would be considered
at the end of the third year.

The fall of VERs

As the first term of the VER drew to a close, discussion was heated within the US administration over
whether it should be extended. In March 1984 it was decided to request a one-year extension for the
time being. The controversy continued during the year. On 1 March 1985, President Reagan finally
announced that the US government would not request a renewal of Japanese VERs, commenting: ‘we
believe that it is wise to maintain fair and free trade principles for consumers all over the world’.
In the same speech, Reagan stated that negotiations on market access would be conducted among
high-level officials and expressed the expectation of the United States that the Japanese government
would comply with its request. The question remains – why did the US
government make this decision?
There are three possible reasons.7 First, the US economy had undergone a rapid
recovery by the mid-1980s (Table 1). The US auto industry, like other industries, had gained from the
strengthening US economy and the protection provided with further assistance by the VER.
By 1983, the US auto industry had recovered from its loss-making position and in 1984, the industry
recorded a US$10.4 billion profit, the best result since 1977. The recovery led to a pay increase for
workers and executives in the industry, who already enjoyed relatively high wages as a result of the
industry’s oligopolistic structure. According to one Japanese newspaper, such a high pay increase
aroused severe criticism in the United States Second, many empirical studies on the auto VER, appearing
a few years after VERs started, reconfirmed that VERs were detrimental to the overall US economy.
Calculation showed that the price of imported Japanese cars had increased by US$900 on average, while
domestic cars had risen in price by around US$400, causing a cost to consumers per job protected of
US$160,000 a year.8 It was also emphasized that because of the way rents were distributed, the welfare
loss from VERs was greater than that from imposing tariffs or quotas.
Third, the restrictions on exports through the VER had led an increasing number of Japanese auto
manufacturers to seriously consider investing in assembly plants in the United States. Each firm feared
that it would lose its share of the US market if other firms launched investment earlier. In February 1984
Toyota came to an agreement with General Motors to establish an assembly plant for producing small
cars while Mazda set up a joint assembly plant with Ford in January 1985. In October 1985 Mitsubishi
announced plans to establish a joint plant with Chrysler. These investments meant the achievement of
one of the two goals that the US administration sought for in vain in the early 1980s.
These improved economic circumstances must have made it easier for the Reagan administration to
change its ‘rhetorical’ free trade to ‘real’ free trade.9 But Reagan’s decision did not only reflect a dislike
of VERs and the emergence of conditions unfavorable to VERs. Rather, the shift should be understood in
relation to the administration’s new focus on market access. The administration proposed market-
access talks on a sectoral basis in 1985. The administration considered this approach to be trade
expansive and thus better than trade restrictive VERs. Auto parts and automobiles were taken up in the
MOSS talks in 1986 and 1990, respectively. While the Japanese auto manufacturers unanimously
welcomed the US decision to drop VERs, Japan’s Ministry of Trade and Industry (MITI) requested the
auto industry continue its VER. MITI was concerned about ‘excess competition’ among auto
manufacturers, believing that if the auto VER were to be removed, each firm would again compete with
each other to expand its share of the US market . Japan continued
with VERs until they were abolished in March 1994 under the World Trade Organisation (WTO)
agreement.
Japan enlarged the quota of passenger cars sold to the United States to 2.3 million units
but, after reaching a peak in 1986, exports decreased and the quota has not been filled since
1987. In contrast, Japanese production in the United States has been growing. The number
of cars produced by US affiliates in 1986 accounted for less than one-fifth of Japan’s exports
that year, but by 1990 had reached 1.49 million – approximately 67 per cent of exports (Table
2). As a result, total sales in the US market, including both exports and production by
Japanese plants, have been largely stable.

Evolution of the market-access policy in the United States

In 1986 the US government proposed that auto parts be included in the MOSS talks. The proposal came
from a belief that US exports of auto parts to Japan were obstructed by the tendency of Japanese
automakers in keiretsu (conglomerates) to favour parts suppliers with whom they had ties. Although
Japanese auto manufacturers were initially opposed to the inclusion of auto parts in the MOSS talks,
claiming that the MOSS talks were not the place to discuss private business practices, they finally
accepted it. In 1990 Japanese automobiles were added to the MOSS agenda. The decision to include
automobiles was based on a similar argument. The United States believed the low penetration of US-
made cars in the Japanese market was due to exclusionary dealerships controlled by the automakers
through financial and relational ties such as the allocation of the most desirable models and cooperation
and technical support. Vertical and distribution keiretsu ties were included in the MOSS talks as
obstacles to US exports.
The Reagan administration announced a further new trade policy strategy in September 1985. In the
announcement the President showed his intention to make more frequent use of Section 301 of the
1974 US Trade Act. Section 301 allowed the President to take retaliatory action if foreign trade practices
were found to impede American exports in an ‘unjustifiable and unreasonable’ manner. The idea, first
embodied in Section 252 of the 1962 Trade Act, had been incorporated into Section 301 of the 1974 Act
and amended to extend the definition of unfair trade practices and expand the range of retaliatory
measures. But the provision had rarely been utilised until Reagan’s announcement of the new trade
policy. The active and frequent use of Section 301 aimed opening up foreign markets alleged by the
United States to be closed and also helped American negotiators at market-access talks place pressure
on foreign countries to either continue with ongoing negotiations or sit down at the negotiating table.
The MOSS talks were not the first bilateral negotiations on market access between
Japan and the United States. Demands for access to the Japanese beef and citrus markets had begun in
the late 1970s and continued until 1988 when the complete elimination of import quotas was finally
agreed. But the MOSS talks were quite different from the negotiations over
agriculture. First, the MOSS talks included the manufacturing sector, in which trade barriers had been
almost completely removed and Japan was usually thought to have the competitive edge. Second, they
extended the range of trade barriers to private business and consumer practices. Third, these sectoral
access talks were supported by the government’s new strategy of aggressive use of Section 301.