Quotas on Japanese autos play up the high cost of protectionism
It may not be fashionable to be an I-told-you-so, but in the case of the Japanese auto import quotas the lessons are too important to ignore. It is the American consumer and not the Japanese producer who bears the costs of that misguided effort to ''protect'' American industry from foreign competition. The umbrella of protection has been used to shelter the American automobile industry while it strives to make the adjustments necessary to become more competitive. However, the American consumer has, by and large, not benefited from the resulting productivity gains. And there is growing danger that these gains will be lost.
As visionary economists warned practical businessmen, Japanese auto producers have responded to the ''voluntary'' agreement to limit their sales of motor vehicles in the United States by exporting their more expensive models and loading them with profitable ''extras.''
Those Japanese producers are achieving record profits from their sales of automobiles in the United States. While they export about 30 percent of their auto production to this country, they earn approximately one-half of their profits from US sales. Furthermore, the Japanese companies have used these profits for reinvestment, making substantial improvements in product quality and performance and increasing productivity of their manufacturing processes. Thus, they will be in an enhanced competitive position when restrictions on their sales in the US are removed, which is likely next year.
Moreover, the dealers for Toyota, Nissan, etc., are benefiting from the willingness of American buyers to pay substantially more than the sticker price (up to $2,000) to obtain the now relatively scarce Japanese product. There has been little evidence of price competition on the part of American automakers, however. Prices of domestically produced cars have risen nearly 40 percent since import quotas were imposed in early 1981.
The American auto buyers have, according to a recent study at the Wharton School, paid about $5 billion a year more for cars than would have been the case in the absence of the import restraints. When one stops to think about it - and we should remind policymakers in Washington that economists did just that in 1981 - this is the result you would expect. Reducing the supply without changing demand leads to higher prices. Unfortunately, $5 billion is a high price tag to pay for economic illiteracy on the part of government policymakers.
But back in 1981, domestic automakers were arguing that the temporary import quotas would give them time to regain their competitive edge, especially in the small-car market where the Japanese were then concentrating. That result, however, has not been achieved. The Big Three automobile companies found that they could not compete in that market and have been concentrating in higher-priced (and higher-margin) models.
It is true that Detroit has used the past three years when Japanese imports have been limited to squeeze their costs of production. At General Motors, for example, it now takes 137 man-hours to produce a car. In 1981, the figure was 163. As evidence of the massive economies and efficiencies that have been made, Ford has reduced its break-even point by an estimated 40 percent. Chrysler claims that it has to sell only 1.1 million cars a year to break even. Before the quotas were established in 1981, the comparable figure was 2.2 million.
Unfortunately, the prospects are dim for maintaining that lean regime. Because of the strong upturn in the economy - and also because of the lower production costs - the American automakers are reporting record earnings. Although that is welcomed by the stockholders who have suffered through the famine years, the unions are reacting differently. In gearing up for its contract negotiations, the United Automobile Workers seems to be envisioning a financial feast ahead.
To be fair, we must acknowledge that recent announcements of unusually generous bonuses for the top managements of the major auto companies are providing encouragement for high union expectations. Ironically, the long-term interests of auto workers will surely suffer from a round of outsize increases in wage costs and fringe benefits.
As we have seen all too frequently in recent years, cost increases that are out of line with competitive market realities are a sure-fire way of reducing job opportunities. Shareholders and management certainly suffered during the 1980-82 decline in auto sales, but those who felt the most pain were the unemployed UAW members. Unfortunately, memories are short, especially on the part of high-seniority union members who expect to reap the benefits of generous pay increases and shift the cost to low-seniority employees, who may be laid off when competition gets rough next year.
But these results are almost inevitable when measures are taken to ''protect'' an industry from competition. A relatively small group gets the benefits and the rest of society bears the costs. The situation is not limited to the auto industry. We have another example in the textile sector.
Last year, the domestic producers succeeded in getting the federal government to establish quotas on the import of textile products from China. Since we enjoy a large and rising trade surplus with the Chinese, are they going to be able to continue to be major customers of American farm products if we are not willing to buy some of their goods?
In any event, the Chinese reacted to our protectionist policy in predictable fashion by reducing their imports of agricultural and chemical products from this country. Once again, the benefits of protection were gained by one sector of the economy and the burden fell on innocent bystanders.