Automobile Sector: Return of Voluntary Export Restrictions?

You may recall during Reagan’s first term when U.S. policymakers convinced the Japanese automobile manufacturers to limit their exports to the U.S. BBC reports we may seen round two of VERs:

Toyota boss fears US trade fury

Japan’s carmakers should consider giving their US rivals a breathing space to avoid the risk of a political backlash, the boss of Toyota has said. Japanese carmakers have taken nearly one third of the US market. Last week, General Motors posted a quarterly loss of $1.1bn, and Ford’s profits fell. By contrast, Nissan had record profits, and Honda’s net profit rose 27%. “We need to give time for some American companies to take a breath,” said Toyota Motor chairman Hiroshi Okuda.

The Bureau of Labor Statistics and BEA’s NIPA Table 6.4D show employment in the manufacturing of motor vehicles, bodies, trailers, and parts sector declining from 1.31 million in 2000 to 1.11 million in 2004. While this decline is not as dramatic as the decline from 1978 to 1982, where Table 6.4B shows employment in the manufacturing of motor vehicles and equipment sector declining from 1,008,000 to 752,000, so maybe this Administration can resist doing what it did to imports of steel, lumber from Canada, and fresh fish from Asia. Then again, there is consideration for renewed restrictions on apparel from China.

BEA also has a mini-GDP table for the motor vehicle sector for the period from 1967 to 2004. The following graph shows domestic production and consumption as shares of GDP as well as exports (X) and imports (M). Production in the U.S. motor vehicle sector has been volatile mainly because of the variability of U.S. purchases of automobiles. While U.S. motor vehicle producers export their products abroad, exports as a share of GDP have rarely been above 0.3%. Imports of motor vehicles as a share of GDP, however, have grown to over 1.2% of GDP. Detroit’s decline a generation ago did not begin from foreign competition but rather a decline in U.S. consumption of motor vehicles – likely caused by a weak economy and high gasoline prices. The decline in production was exacerbated by the massive appreciation of the dollar, which encouraged imports.

During the late 1990’s the trade gap in the motor vehicle sector widened even as U.S. production grew because of the very strong U.S. demand for motor vehicles. While U.S. production and employment in this sector have declined since 2000, the decline is from lower demand and not simply more imports. The motor vehicle sector typifies much of the U.S. economy: weak growth in production and a weak labor market mainly because of weal aggregate demand growth. Import demand is not the primary cause, but if Detroit could find a way to attract more foreign buyers and hence more exports – this would help their profits as well as employment.

One last note: George Will double counts one element of employee compensation by saying GM and Ford have additional costs related to health care coverage. Does Will understand that firms and workers negotiate on the overall compensation package that includes both wages and fringe benefits? Maybe one can argue that GM and Ford management made a bad deal with the UAW on the compensation package as Mark Kleiman did, but Will’s column makes no more sense to me than it does to Jesse Taylor.

Footnote to a sidenote: Don Singleton says I may have been unfair to George Will. Don also correctly notes that providing universal health care coverage would require tax increases. Let me pose the following amended version of why I think Mr. Will is totally off the mark here. U.S. company A and Japanese company B compete in the same sector. B hires workers at $20 an hour and provides no fringe benefits. A hires workers at $15 an hour paying them a fringe benefit package that includes non-health care items worth $5 an hour. So far – we have similar compensation packages in terms of costs to the firm. Let’s add health care costs in the following way: A provides health care costs worth $5 an hour, but B does not as workers are covered by the government. Now Don’s point is that the Japanese government is providing for this health care by imposing taxes. So if B has to pay $5 per employee-hour in taxes than A does not, what is the difference? Yes, AB and Kash will likely note that health care costs more in the U.S. than in other nations.