The Japanese auto industry, insulated from foreign competition and subsidized by the state, was not a catastrophic failure, but a global leader in quality and innovation. America\u2019s open market did not foster more resilient, productive, or innovative firms; it exposed them to near-fatal import competition. Only when American policymakers stepped in did the domestic manufacturing base improve and grow.<\/p>\n\n\n\n
Bounded markets channel investment and competition in the national interest. <\/strong>Blunt constraints that set market boundaries, while encouraging competition therein, help to ensure that capitalism\u2019s power is serving the national interest. Rather than fostering sclerosis and cronyism, the import quota encouraged innovation, spurred investment, and boosted long-term production.<\/p>\n\n\n\n Trade barriers create new incentives for investment.<\/strong> <\/em>Cars made in America were exempt from the import quota, which led Japanese automakers to invest in U.S.-based assembly facilities.<\/p>\n\n\n\n Production is a function of past policy and investment choices. <\/strong><\/em>Once assembly moved onshore, Japanese firms had incentives to onshore the rest of their value chain\u2014production, research, and design\u2014and they\u2019ve chosen to continue their American investments long after the import quota was lifted.<\/p>\n\n\n\n Within a decade, the import quota generated:<\/p>\n\n\n\n Today, Honda and Toyota have among the highest domestic content<\/strong> of cars sold in America.<\/p>\n\n\n\n After four decades of aggressive public support from its Ministry of International Trade and Industry (MITI)\u2014direct subsidies, tax breaks, cheap loans, and information-sharing\u2014Japan had built an automotive juggernaut by the 1970s with the world\u2019s most efficient production processes and its highest-quality cars.1<\/a><\/sup>Robert E. Cole and Taizo Yakushiji, \u201cThe American and Japanese Auto Industries in Transition: Report of the Joint U.S.-Japan Automotive Study,\u201d University of Michigan Center for Japanese Studies (1984), 37.<\/span> Its top automaker, Toyota, had perfected its management of material to the point that its inventory costs were only a tenth of General Motors\u2019.2<\/a><\/sup>Joseph M. Callahan, \u201cThe Metamorphosis of an Industry,\u201d Automotive Industries <\/em>(June 1983), 16.<\/span> American automotive engineers awarded many more top product-quality honors to Japanese automakers than to American ones.3<\/a><\/sup>Ronald Schiller, \u201cCan America Win the Car War?\u201d Reader\u2019s Digest <\/em>(January 6, 1981), 72.<\/span> Over the decade, the Japanese industry improved its productivity at 4.3% annually\u2014three times the American rate of progress.<\/p>\n\n\n\n Whereas American firms competed in a free and open market, Japan had insulated its automakers from foreign competition. On top of the aggressive government support it provided to its own producers, high tariffs kept imports uncompetitive, while onerous standards made it virtually impossible for foreign firms to build operations in Japan.4<\/a><\/sup>Stephen D. Cohen, \u201cThe Route to Japan\u2019s Voluntary Export Restraints on Automobiles: An Analysis of the U.S. Government\u2019s Decision-Making Process in 1981,\u201d Working Paper No. 20.<\/span> American tolerance for such an imbalanced arrangement was a feature of Cold War-era trade policy and had long been a source of frustration for American auto executives.5<\/a><\/sup>Carl H. Tong and Allen L. Bures, \u201cThe Voluntary Export Restraint (VER) Agreement with Japan on Automobiles in the 1980s,\u201d Essays in Economic and Business History<\/em> (2003), 58.<\/span><\/p>\n\n\n\n From 1970 to 1976, Japanese cars tripled their sales volume in the United States to more than 1 million units and 8% market share.6<\/a><\/sup>American Compass analysis of data from Automotive News<\/em> and Steven Berry et al., \u201cVoluntary Export Restraints on Automobiles: Evaluating a Trade Policy,\u201d The American Economic Review<\/em> (June 1999).<\/span> Then came the decade\u2019s second oil crisis. In the wake of the Iranian Revolution in Spring 1979, as oil prices more than doubled, American consumers lost their taste for American-made \u201cgas guzzlers\u201d and switched en masse to smaller, more fuel-efficient cars.7<\/a><\/sup>Carl H. Tong and Allen L. Bures, \u201cThe Voluntary Export Restraint (VER) Agreement with Japan on Automobiles in the 1980s,\u201d Essays in Economic and Business History<\/em> (2003), 53.<\/span> In 1980, nearly two out of every three new automobiles sold were small or compact cars, up from fewer than half in 1978.8<\/a><\/sup>Stephen D. Cohen, \u201cThe Route to Japan\u2019s Voluntary Export Restraints on Automobiles: An Analysis of the U.S. Government\u2019s Decision-Making Process in 1981,\u201d Working Paper No. 20.<\/span><\/p>\n\n\n\n Small, fuel-efficient cars were a Japanese specialty and the American automakers, unable to quickly retool, quickly lost ground. Japanese automakers reached 21% market share in 1980,9<\/a><\/sup>American Compass analysis of data from Steven Berry et al., \u201cVoluntary Export Restraints on Automobiles: Evaluating a Trade Policy,\u201d The American Economic Review<\/em> (June 1999).<\/span> at which point they were exporting nearly two million cars annually to the U.S.\u2014more than they were selling in their home market.10<\/a><\/sup>Douglas R. Nelson, \u201cThe Political Economy of U.S. Automobile Protection,\u201d The Political Economy of American Trade Policy<\/em> (January 1996), 161.<\/span> That year, the Big Three American automakers suffered a $6.2 billion loss,11<\/a><\/sup>The US. Motor Vehicle and Equipment Industry since 1958<\/em>, U.S. Department of Commerce (May 1985), 137.<\/span> after an average of $4.4 billion in annual profits during the previous decade.12<\/a><\/sup>Ibid.<\/em><\/span> In the span of two years, Big Three sales had plummeted 30%, to their lowest level since 1961.13<\/a><\/sup>Stephen D. Cohen, \u201cThe Route to Japan\u2019s Voluntary Export Restraints on Automobiles: An Analysis of the U.S. Government\u2019s Decision-Making Process in 1981,\u201d Working Paper No. 20.<\/span> Chrysler was on the verge of bankruptcy,14<\/a><\/sup>William Proxmire, \u201cThe Case Against Bailing Out Chrysler,\u201d The New York Times <\/em>(October 21, 1979).<\/span> and over 100,000 auto factory workers had been laid off.15<\/a><\/sup>Christopher J. Singleton, \u201cAuto industry jobs in the 1980\u2019s: a decade of transition,\u201d Monthly Labor Review <\/em>(February 1992), 19.<\/span><\/p>\n\n\n\n Backed by the threat of an outright import quota, President Reagan negotiated a \u201cvoluntary export restraint\u201d (VER) with Japan\u2019s Ministry of International Trade and Industry (MITI). Japan agreed to limit its auto exports to the United States to 1.68 million, the level from 1979, for three years beginning in 1981. It was the economic equivalent of an import quota.<\/p>\n\n\n\n In the near term, the quota reduced the sales of Japanese cars by 20%16<\/a><\/sup>American Compass analysis of data from Automotive News<\/em>, the U.S. Department of Commerce, and the U.S. International Trade Commission.<\/span> and raised prices for consumers by an average of 8%, costing American consumers an additional $5.1 billion.17<\/a><\/sup>American Compass analysis of U.S. International Trade Commission data. Calculated based on the differences between the actual and estimated total volume and average price of Japanese automobiles sold in the U.S. from 1981 to 1984.<\/span> But within the decade it had prompted nearly three times that much in foreign direct investment18<\/a><\/sup>American Compass analysis of U.S. Department of Commerce data.<\/span> and brought 26,600 new auto-assembly jobs to the American South and Midwest.19<\/a><\/sup>Brett C. Smith, \u201cJapanese Automotive Supplier Investment Directory,\u201d University of Michigan Transportation Research Institute (October 1991).<\/span> The investment in assembly plants spurred Japanese automakers to onshore more of their value chains, including component manufacturing and materials, which created 101,700 American jobs by 1991.20<\/a><\/sup>Ibid.<\/em><\/span><\/p>\n\n\n\n Trade barriers created new market incentives to invest.<\/strong><\/p>\n\n\n\n The quota set no limit on the number of vehicles Japanese automakers could sell in America, only on how many they could export to the country. Cars built in the U.S. were exempt. As a result, the Japanese automakers had new incentives to invest in U.S.-based manufacturing capacity. In 1980, there were no Japanese auto assembly plants in the U.S. Within a decade of Reagan\u2019s action, every major Japanese automaker\u2014Toyota, Honda, Nissan, Mazda, Mitsubishi, Isuzu, and Subaru\u2014began assembling cars in America.21<\/a><\/sup>Mike Arnholt and Tim Keenan, \u201cForeign invasion: imports, transplants change auto industry forever,\u201d Wards Auto (May 1, 1996).<\/span><\/p>\n\n\n Reduced imports encouraged innovation and competitiveness.<\/strong> <\/strong><\/p>\n\n\n\n Meanwhile, American automakers took advantage of the breathing room afforded by reduced import competition. They improved their capabilities to compete in the newly fuel-conscious consumer market. Car size and weight declined, while fuel efficiency increased. Operations improved to better control quality while also cutting costs.22<\/a><\/sup>Robert J. Carbaugh, International Economics <\/em>(1995), 157.<\/span> By 1989, American automakers could produce cars with 25% less labor than in 1979, which equated to robust 3% annual productivity growth.23<\/a><\/sup>Christopher J. Singleton, \u201cAuto industry jobs in the 1980\u2019s: a decade of transition,\u201d Monthly Labor Review <\/em>(February 1992), 25.<\/span><\/p>\n\n\n\n New production better served American workers and the national interest.<\/strong><\/p>\n\n\n\n Because of the quota, Japanese competition no longer posed the threat to American workers that Japanese imports once did. Once assembly moved onshore, Japanese automakers employed American workers and began to onshore the rest of their value chain, including parts production, research, and design. Many Japanese cars became American-made cars, and the share of American-made cars sold in the U.S. held steady.24<\/a><\/sup>American Compass analysis of Automotive News <\/em>data.<\/span><\/p>\n\n\n\nKey Facts<\/strong><\/h2>\n\n\n\n
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Background<\/b><\/h2>\n\n\n\n
Policy Intervention<\/b><\/h2>\n\n\n\n
Impact<\/strong><\/h2>\n\n\n\n
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