Through use of interviews as well as primary and secondary written materials, I have assembled a reasonably complete chronology of key decision-making events in the Reagan administration that eventually convinced the Japanese government in 1981 to "voluntarily" restrict exports of automobiles to the U.S. market. I have virtually completed an analysis of the political and economic environment, a description of the arguments and counterarguments about the need to restrict U.S. imports of Japanese cars, and a survey of the external stimuli affecting the cabinet-level deliberations on how to respond to the plight of the Big Three U.S. automobile makers.
There is one major gap that I have not been able to close, because: 1) the officials whom I have interviewed cannot remember the details, and 2) the written accounts are incomplete and contradictory. This gap centers on the identity of the person who proposed the compromise option (between unilateral import barriers and no U.S. action) of inducing the Japanese to unilaterally adopt export restraints. This suggestion eventually broke the deadlock between two opposing cabinet factions, the hard-liners and free traders, that had prevented a final, consensus recommendation being made to the president. One can only hope that details on who offered this compromise, when and where, and initial reactions to it can be found in still-to-be declassified briefing papers/ memoranda of conversations written by participants in the meetings.
A secondary point that I would like to clear up through reading relevant documents prepared by participants in the automobile task force is how/if the alleged proponents of unilateral U.S. import barriers on Japanese cars explained the legal basis for such an action. It is not at all clear that the president had the authority in 1981 to act in such a unilateral manner.
The Reagan administration's successful effort in 1981 to induce the Japanese government to implement a voluntary automobile export restraint program took a number of unique twists and turns from the traditional path by which the U.S. government seeks to protect a domestic industry from intense foreign competition. Unique decision-making and policy implementation processes arose as the result of the tension between the perceived need to afford the U.S. automobile industry time to respond to extraordinary circumstances and the desire to maintain the fiction that the administration would not violate its free market/free trade rhetoric in its first months in office. The decision-making process was relatively organized and methodical, but it did not prevent a triumph of political necessity over economic logic. Although the U.S. automobile industry defied the economic theorem that an industry never enhances its competitiveness while protected from foreign competition, the costs of Japanese export quotas vastly outweighed the benefits. Quantitative export restraints were a third-best policy because over the long-term, they imposed severe costs on American consumers while delivering windfall profits to the larger Japanese automobile manufacturers.
On May 1, 1981, the government of Japan announced that it was voluntarily limiting the number of automobiles it exported to the U.S. market for a two year period. The Japanese did not jump into this action; they were pushed. Although technically acting on a unilateral basis, the restraint program reflected the successful culmination of an orchestrated trade policy crafted by the Reagan administration. The genesis of this initiative was a policy review process begun in the last year of the Carter administration. While poles apart in their economic ideology, both administrations felt compelled to consider a broad range of measures to address the deteriorating economic fortunes of the U.S. automobile industry at the onset of the 1980s.
General Motors, Ford, and Chrysler, the so-called Big Three producers in Detroit, were faced with serious and worsening financial difficulties. Many observers perceived this situation to be sufficiently severe to pose a clear and present danger to the future of one of the country's most economically significant and politically powerful industries. At the time, U.S. automobile producers accounted for an estimated one of every twelve manufacturing jobs and were major consumers of glass, steel, aluminum, and other materials.
There was ample statistical data by the beginning of 1981 to make a credible case that the survival of both the Ford and Chrysler corporations was at risk. In 1980, the Big Three collectively lost a record $4.2 billion as their sales in that year plummeted 30% below 1978 sales, reaching their lowest level since 1961. Ford and Chrysler set records for annual losses by an American company. An estimated 300,000 to 500,000 workers in auto factories and supplier companies had been laid off or furloughed. The membership of the United Automobile Workers (UAW) union had declined by upwards of 40%. Compounding the effects of record financial losses was the fact that the Big Three were facing a massive bill--estimated at $80 billion--for modernizing and retooling their increasingly obsolete factories. (1)
The relatively sudden severity of the economic misfortunes striking U.S. automobile producers was mainly attributable to two distinct, albeit interrelated "exogenous" factors not of their making. The first was the second oil shock of 1979-1980 that followed the swift decline in oil production in post-revolutionary Iran. Gasoline prices in the United States shot up dramatically, not only because of higher prices for imported oil, but also because the Carter administration in 1979 had implemented the first stage of price decontrol for domestically produced oil. The combination of a near doubling of gasoline prices and subsequent emergence of sporadic gasoline shortages sharply accelerated what had been a gradual shift of American consumer demand toward smaller, fuel efficient cars caused by the first oil shock in 1973-74. The start of the 1980s found the relatively large, non-fuel-efficient, and high-profit-margin cars long favored by the U.S. automobile industry becoming a glut on the market.
Nearly two years of steadily rising oil prices in 1979 and 1980 also caused double-digit inflation in the industrialized countries. The latter triggered a tightening of monetary policy in the United States and most other industrial countries sufficiently restrictive that it produced a classic good news-bad news situation. Very restrictive monetary policy produced record high real interest rates that soon achieved the objective of breaking the back of inflation. The decline in inflation, however, was accompanied by a recession so deep that it represented the most severe decline in global economic activity since the 1930s.
Fewer Americans were able to purchase new cars in this recessionary setting. New car sales plummeted, but sales of domestically produced cars fell at a faster rate than total sales of new cars. Conversely, sales of imported cars steadily increased. The bottom line was that the U.S. automakers' share of the market was declining sharply. Detroit was not able to alter production lines fast enough to capitalize on the growing demand for small cars. Between 1978 and 1980, sales of small cars in the United States increased by one-third (from 48% to 64%) as a percentage of all new car sales. The problems of the industry were also attributable to management shortcomings in maximizing the quality of and minimizing the prices of their products, as well as by excessive union demands. Government policies like price controls on domestically produced oil and relatively low gasoline taxes "held gasoline prices artificially low, encouraging consumers to continue buying the larger cars..." (2)
Detroit's pain was not universally felt. It looked on helplessly while it lost substantial sales and market share to the smaller, fuel efficient imported cars--overwhelmingly from Japan--now avidly sought by new car buyers. The U.S. automobile industry found itself with inadequate production capacity to meet the rising demand for small cars. Furthermore, it was unable to match the lower production costs and fast rising reputation for quality of the Japanese competition. U.S. imports of Japanese cars rose from 381,338 units in 1970 to 1.1 million in 1976, and to just under 2 million in 1980. Japan's share of the U.S. new car market rose from about 9% in 1976 to approximately 22% in 1980. (3)
These trends induced the inevitable: the workers (and later the management) of the financially distressed U.S. automobile industry began demanding assistance from the federal government. Although trade policy is the focus of this study, the automobile issue was never confined solely to consideration of reducing import competition. The ensuing policy review process did not initially pursue this option. The debate was sufficiently broad in scope that it can best be described as an exercise in industrial policy (a very out-of-favor term in Washington except on those rare occasions when government and industry agree that the former does need to help the latter). The complex array of potential federal assistance to the domestic automobile industry required Washington to conduct a broad review of the myriad internal and external measures that might help restore its competitiveness and financial stability.
The first major public proposal aimed at alleviating the problem came in early spring, 1980, when the UAW urged the major Japanese auto producers to build assembly plants in the United States in lieu of continued exclusive reliance on exports. The UAW apparently defined the automobile problem in terms of rising U.S. unemployment and sought measures to increase employment opportunities for auto workers consistent with the union's traditional free trade philosophy. The Japanese automobile industry, however, flatly rejected the foreign direct investment proposal. None of the Japanese companies at the time was willing to begin building cars in what for them was a mysterious legal and cultural environment in which labor-management, supplier-assembler, and business-government relations all were radically different from what they experienced in Japan.
Having been rebuffed in this initial proposal, UAW president Douglas Fraser quickly shifted gears to advocacy of an orderly marketing agreement between the United States and Japan to restrain the rapidly rising volume of U.S. imports of Japanese automobiles. The Japanese industry again formally rebuffed the UAW. However, if one Japanese observer is correct, the leaders of Japan's automobile industry then subtly signaled that it might be possible for them to compromise by initiating a genuinely voluntary restraint arrangement entirely of their own design.(4) The U.S. side ignored this alleged feeler, more likely because they did not pick up on it rather than outright opposition. Ironically, it was exactly this kind of measure that would eventually resolve bilateral automobile frictions many months down the road.
In the meantime, the Carter administration was already acting on behalf of the U.S. automobile industry. In January, 1980, the president had signed the Chrysler Corporation Loan Guarantee Act providing federal credit guarantees to ensure that the faltering company could secure the bank loans essential to its survival. The administration intensified its efforts to have the Japanese government reduce non-tariff barriers (mainly technical standards) to imports of U.S.-made automobiles and to lower tariffs on Japan's imports of auto parts. It also publicly exhorted Japanese auto makers to build assembly plants in the United States. In July, 1980, a cabinet-level automotive task force chaired by then Secretary of Transportation, Neil Goldschmidt, recommended to President Carter that a number of mostly domestic measures be enacted to facilitate the industry's recovery. Soon thereafter, the administration announced a package consisting, among other things, of an estimated $500 million in production cost savings from an easing in federal auto emission standards.
The U.S. automobile industry's economic problems and the need for Japanese import restraints were first formally linked in the Washington policy debate by the actions of Congress. As discussed below, individual members began introducing bills that would have unilaterally restricted automobile imports, and committees began holding oversight (fact-finding) hearings on the relationship of world trade to the industry's misfortunes. The Carter administration had quickly reached consensus on one major point, as revealed by the firm opposition to restrictions on Japanese auto imports that officials articulated to the Trade Subcommittee of the House Ways and Means Committee in March, 1980. The then U.S. Trade Representative (USTR) Reuben Askew testified that the import controls being advocated by the UAW, now joined by Ford Motor Company, would cause higher auto prices and increased fuel consumption at a time when reducing inflation and promoting energy conservation were high national priorities.(5) Testimonies by all other departments and agencies were in full agreement with this position.
In summer, 1980, the administration's anti-protectionism position entered a state of suspended animation. Everyone concerned with the auto issue awaited the response of the International Trade Commission (ITC), an independent U.S. government agency, to the petition for import relief submitted in July by the UAW and Ford. Because it was filed under the so-called escape clause, at the time a widely used statutory vehicle for temporary relief from import-induced injury, this petition required the ITC to conduct a non-partisan inquiry. The statutory purpose of the inquiry was to determine whether increased imports were in fact a "substantial" cause of economic injury to the industry in question. Since the Big Three were suffering all of the maladies associated with import-induced injury,(6) predictions were virtually unanimous that the ITC would rule in favor of the UAW and Ford. A determination of injury would be followed by a proposed remedy for relief from import-induced injury (higher tariffs and/or quotas) that would be sent to the White House as a recommendation for presidential action.
By a vote of three to two, however, the ITC commissioners in November determined that the biggest causes of the U.S. automobile industry's economic problems were first, the overall reduction in new car sales induced by the deep recession, and second, the domestic industry's inability in the short-term to meet the surging demand for gas-efficient cars (U.S. producers at this time were selling all the smaller cars they could make). Under the law, import-induced injury must be judged to be at least as significant in quantitative terms as any other single factor before "substantial" cause can be found and import relief suggested to the president.
Using 20/20 hindsight, the decision might have been foreseen through use of a clever, but simple arithmetic exercise. The net increase in imports from Japan in 1980 was equivalent to only about 24% of the total decline in sales by domestic auto makers.(7) An objective assessment would have suggested that the largest sources of the industry's financial and sales problems had to lie elsewhere, namely in the recession and insufficient production of domestically produced small cars.
The ITC's decision was a critical turning point in U.S. trade policy in general and in bilateral trade relations with Japan in particular. Opponents of restrictions on automobile imports took relief in the fact that the Carter administration's opposition to trade barriers had been vindicated and reinforced. There was no known precedent for a president pressing for import barriers after the ITC (or its predecessor, the Tariff Commission) had rejected an escape clause petition. The ITC Commissioners recommend no import relief when they determine that the petitioner's problems do not meet the criteria for proving import-induced injury as defined in the escape clause statute. A negative finding on a petition always had meant that no new U.S. import barriers were in the offing.
The assumption that the free trade option would prevail was short-lived because of three events. First, Jimmy Carter lost the presidential election. Second, Ronald Reagan, the winner, would not forget what he had said while campaigning at a Chrysler Corporation plant in September, 1980:
Third, an intensely bleak study of the U.S. automobile industry's outlook, completed by the Department of Transportation in the final days of the Carter administration, was handed over to the incoming Reagan team. After submitting the report to Mr. Carter, outgoing Transportation Secretary Goldschmidt went public with his conversion to the position (included in the written report) that the industry's prospects had deteriorated to the point that a "voluntary" export restraint agreement (VER) needed to be negotiated with Japan, along with tax breaks and other regulatory assistance. (9)
An ad hoc, cabinet-level interagency task force on the auto industry was created within weeks of President Ronald Reagan's inauguration. The senior-level decision-making process in the new administration was designed as cabinet government. The president initially would keep his own views quiet on pending policy issues, get the advice of all relevant cabinet members in an open collegial setting, do some thinking, and then make a decision. By hearing everything that the president heard, interested cabinet members would be part of the process and would be expected to sign on to the final results, i.e. the president's chosen course of action.(10) The auto task force operated in accordance with this larger decision-making design. Many of the participants sensed that a determination of what, if anything, to do about automobile imports probably would be the most important trade policy issue to be determined in the first term. Nevertheless, the automobile issue did not rank as a top economic policy priority. It was vastly overshadowed by the number one priority of implementing reductions in three areas: tax rates, government spending on social programs, and federal regulation of business. This package would soon be termed "Reaganomics."
The Reagan task force, like its Carter administration predecessor, found itself in agreement on a fundamental point: the domestic automobile industry was in such a bad financial and competitive state that a careful review had to be given to any government policy or regulation that might be a source of harm. Unlike its predecessor, the Reagan auto task force found itself from the beginning deeply divided over the advisability of including restraints on imports from Japan as part of a rescue package for the domestic industry. Cabinet departments and White House offices split on this question in exactly the pattern that would be predicted by the bureaucratic politics model of decision-making. This paradigm argues that governments seldom think in a unified manner when deciding on what policy would maximize the "national interest," an especially subjective term in international economic policy formulation. Instead, agencies' policy recommendations reflect the divergent interests, priorities, and desires of the respective constituencies they have been created to represent and protect in inter-agency forums.
Amenable to temporary import barriers were the secretaries of the departments of Commerce, Transportation, and Labor. They viewed the issue from the perspective that the industry and its workers were at risk if increases in auto imports from Japan continued unabated. None of these people considered themselves protectionists, and none gladly and unequivocally championed this position. Instead, they dubbed themselves "pragmatists" who viewed limited import restraints as the lesser of two evils. Temporary restraints were viewed as being essential to permit "breathing room" for Detroit to adjust to the new era of small car preference; the alternative was prohibitively expensive damage to the American economy. The pragmatists' stated goal was getting auto workers out of the unemployment lines and back into production lines.
William Brock, serving as the U.S. Trade Representative (USTR), initially displayed a somewhat equivocal, flexible, and hedged stance, one hinting that negotiations might be appropriate to stem the surge of auto imports. In early public pronouncements, he was quoted as saying that sometimes it is necessary to "take one step backwards for every two steps forward." He also said there were times when a "major domestic industry" is in such serious trouble "you have the right to seek from your trading partners... some understanding of that problem, and some restraint on their part."(11) He did not specify publicly whether he thought the auto situation in early 1981 justified such actions.
Opposing import restraints were the liberal-trade-leaning "macro" economists whose constituencies favored free market forces. This faction was composed of the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Chair of the President's Council of Economic Advisers. They saw unacceptably large costs and relatively few benefits to the overall U.S. economy and to the automobile industry accruing from import restraints. Secretary of State Alexander Haig, after an initial silence, would oppose mandatory quotas for fear that threats of retaliation if Japan did not comply with U.S. demands would antagonize an important ally. There is no public record of the State Department vigorously opposing negotiation of voluntary restraints, perhaps because of Secretary Haig's later emphasis on having his department take charge of communications and negotiations with the Japanese government on the auto issue.
Four external stimuli had a significant impact on the brief but hotly contested automobile task force debate on the advisability of a protectionist versus free trade policy strategy. In varying degrees, all four of the linkages to external factors nudged the decision in the direction of an ostensible "compromise" by which the Japanese government would be induced to unilaterally implement an export restraint program. The first factor external to cabinet deliberations was the recognized need to provide a policy recommendation to President Reagan that was fully consistent with both his economic beliefs and perceived political needs. As explained below, it would become increasingly clear that neither the free trade option nor formal import restraints could fully meet these two criteria.
A second external link was activity on Capitol Hill. In the early spring of 1981, Congress reprised its periodic role of the excitable, angry "bad cop" in the trade negotiating process. This effort is crafted as counterpoint to the executive branch's "good cop" role as representative of reason and conciliation. In order to influence Japanese thinking, key members of the Senate Finance Committee, whose jurisdiction includes import policy and taxation, co-sponsored legislation that would have imposed mandatory limits of 1.6 million units on imports of Japanese automobiles for at least three years. The original sponsors of S. 396, newly installed Chair of the trade policy subcommittee Jack Danforth (R, MO) and Lloyd Bentsen (D, TX), first and foremost wanted to provide the U.S. automobile industry with "breathing room" while it retooled. Senator Danforth, on the Senate floor, noted that "There is no denying that quotas, in general, constitute poor public policy . . . Unfortunately, the alternatives are even worse."(12)
The sponsors made it clear that they were much less interested in getting their bill passed than in expediting a negotiated bilateral agreement. Congress was sending a clear signal that it wanted something done about import increases. The unpleasant possibility of unilateral quota legislation--which easily could be permanent and spread beyond automobiles--could not be dismissed by either the Reagan administration or the Japanese government. As one internal Treasury Department memorandum worried, "Congress may take the question out of our hands if we fail to act." (13) On the Japanese side, the possibility of a frustrated Congress passing severely protectionist legislation was a serious and continuing worry since bilateral trade frictions had escalated in the early 1970s. Japanese thinking could not help but be affected by the public warning from the then Senate Majority Leader, Howard Baker, that there was "a building pressure in the Congress to do something by statute if the Japanese don't do something voluntarily." He added that mandatory quotas would come about if the Japanese didn't "understand that the situation's out of hand." (14)
The widely held perception that the bill could pass was more important than the reality that there was very little likelihood that it would be enacted into law. Given the intricacies of the U.S. government's separation of powers, there was virtually no chance at this time that a bill mandating unilateral quotas on car imports could have survived a presidential veto. However, there was no guarantee that one would have been forthcoming; President Reagan never announced that he would veto a congressionally-passed quota on auto imports. Calling Congress's bluff in this case was not without risk.
Lobbying from interested observers outside the U.S. government was a third external factor on the policy formulation process. In a clear case of asymmetrical pressure, organized efforts to sway the administration's thinking were monopolized by those favoring inclusion of import restraints in the government's relief package for the auto industry. President Reagan attended a White House meeting specially arranged by Transportation Secretary Drew Lewis in which Republican governors from eight key states linked regional economic conditions to the need for negotiating import restraints with Japan. In addition, the corporate heads of all U.S. car producers sent the president a letter in February, 1981 formally requesting, among other things, that he "persuade the Government of Japan to demonstrate responsible international behavior by taking actions which will result in a voluntary, immediate, and substantial reduction in passenger car exports to the United States for a meaningful period of time." (15) This message had the added political significance of including General Motors, which heretofore had avoided public endorsement of import restraints, among its signatories. Organized opposition to import barriers by American consumers and car importers was inconsequential.
A final external stimulus was the repeated indications from the Japanese government, specifically the Ministry of International Trade and Industry (MITI), that they understood the political need to stem the large increases in their car shipments to the United States. The absence of a categorical rejection by Japanese government officials of a voluntary export restraint effort aided and abetted those in the Reagan administration who advocated this option. Although the Japanese industry initially was adamantly opposed to export restraints, MITI did not embrace their constituents' point of view. The Ministry was ready to cut a deal. This position partly reflected MITI's long standing amenability to defuse bilateral trade frictions if it could do so by agreeing to export restraints (as opposed to genuinely opening the Japanese market to more U.S. imports--a less appealing option). Furthermore, it was widely assumed that MITI officials were delighted at the thought of administering an export restraint program on an industry that historically had displayed an unusually high propensity to disregard MITI's administrative guidance. (16) In short, a long institutional memory meant that MITI was itching for the opportunity to belatedly exercise some control over the business activities of what it regarded as an excessively independent group of companies.
The cabinet-level deliberations on the automobile issue provide an excellent case study of the machinations used by senior U.S. executive branch officials to resolve a stalemate in the formulation of foreign trade policy. During the month of February, members of the automobile task force began preliminary work by measuring the magnitude of the automobile issue, preparing a work agenda, and initiating leaks of individual opinions to the press. With Transportation Secretary Drew Lewis serving as chair, the task force began drafting a policy position in early March and would complete their work just a few weeks later, fundamental disagreements and frayed tempers notwithstanding.
The first full inter-agency discussion on what to include in the assistance package for the domestic auto industry took place at the end of a March 3, 1981 meeting of the Cabinet Council on Commerce and Trade. If published accounts of this discussion are accurate, the "discussion" was extremely one-sided. According to David Stockman, no agenda for the meeting had been circulated, so he assumed it would be an off-the-cuff, informal exchange of views. Instead, the 30 minute segment allocated to the auto issue "had been rigged" by Transportation Secretary Drew Lewis. "He didn't plan to hear from the other side, wrote Stockman."(17) Lewis allegedly spoke for 15 minutes about the need for restraining imports, followed by similar assessments from Commerce Secretary Mac Baldrige, USTR Brock, and Labor Secretary Ray Donovan. As the meeting was about to reach the scheduled adjournment time, Treasury Secretary Regan lost his temper, slammed his hand on the table, and blasted the one-sidedness of the now expired discussion. (18)
Two opposing camps on the question of whether to limit imports now squared off against one another. Transportation Secretary Lewis unofficially assumed leadership of the "pragmatist" faction advocating import restraints. Treasury Secretary Regan assumed unofficial leadership of the free trade faction. No disagreement existed on the need to assist the auto industry by reducing or eliminating those regulatory burdens (mainly relating to safety and emissions standards) identified as excessive. No significant disagreement existed on the idea of a limited easing of anti-trust enforcement, mainly to allow joint research efforts by the Big Three. Nor was there any disagreement about the Treasury's dismissal of special tax breaks, e.g. tax credits for buying new U.S.-made cars, as being neither appropriate nor cost-effective.
The desirability of including import restraints in the final policy package was the only major source of dissension in the task force.
The reasoning behind the Treasury Department's immediate and firm opposition to restricting auto imports can be gleaned from comments in internal memoranda. A January 21, 1981 memo to Secretary Regan argued that all decisions on auto policy should be made in the context of our overall economic policy. It should not be made by the Transportation Department alone without considering the broader ramifications. The auto decision should not precede the announcement of the Administration's new economic program. (19)
In another memorandum to Secretary Regan, the Assistant Secretary for Economic Policy lamented the need for the Treasury Department to direct so many resources to "defeating a policy decision initiated from the bottom up by a holdover low level Carter appointee in a minor department." (20)
The supply-side philosophy of Regan and his senior assistants meant that they were firm believers in the salutary effects of the president's proposed domestic economic program that centered on large tax cuts. Once it was implemented, supply-side devotees anticipated that the new program would so stimulate the overall U.S. economy that it was the single-most important policy initiative available for reversing the misfortunes of the auto industry. The Treasury Department's economic analysis assumed that the auto industry was suffering from a "short run transitory" problem that would quickly respond to the salutary effects of the return of sustained growth and low inflation, trends that would follow in the wake of the new economic program. Departmental studies forecasted a major turnaround in the domestic automobile industry's fortunes as early as 1983. Another internal Treasury memorandum argued that
The Department's economic analysis also assumed that the economic program would reduce production costs for the industry by reducing inflation, thereby lowering the cost of borrowing money (interest rates) for investment and moderating labor's demands for wage increases. This unrestrained optimism was not universally shared within the administration. One of the task force members later described Treasury's forecasts of a quick and large turnaround for the Big Three as "blue sky numerology." (22)
Only a small handful of outside economists believed in the coming of massive salutary effects from the individual and corporate tax cuts called for by the Reagan administration's economic program. However, the task force's liberal trade faction did advance several standard, mainstream economic arguments in further defense of their position. These included the assertions that erection of barriers on Japanese-made cars would shield U.S. producers from the consequences of poor management, reduce pressure on the UAW to exhibit wage restraint, and encourage other countries to rely on imports barriers to address their own domestic problems.
Forecasts of serious negative economic effects of import restraints, although brushed aside, later proved to be remarkably accurate. The staff of the President's Council of Economic Advisers (CEA) estimated that a Japanese export quota of 1.6 million cars annually would contribute a total increase in Detroit's cash flow of only $2.9 billion cumulatively over the three year period beginning in 1981 and generate an average increase of about 108,000 direct and indirect new jobs per year. They further estimated that Japanese car producers would raise prices an estimated 12%, thereby costing American consumers at least $5.1 billion over the three year period--more if U.S. companies also raised prices--and boosting the consumer price index by as much as 0.6% annually. (23)
Other economic analysis suggested that the net burdens on the U.S. economy of restraining auto imports meant that the cost of each added American worker, many of whom would "soon be replaced by automation," would be in the range of $17,000 to $80,000 during each year the Japanese restrained exports. With great prescience, a briefing paper warned that such restraints could "prove a disaster in the longer term." Quantitative limits on Japanese auto imports might "...look like a stay of execution for existing competitive strategies, but actually grant a license to our foreign competition to take over the most profitable segments of the domestic industry--the more luxurious of the small cars."(24)
The "pragmatist" faction in the auto task force keyed its economic arguments to the need for temporary import restraints as an essential means to the essential end of granting "breathing space" that would afford the U.S. auto industry the opportunity to turn itself around and restore its vitality. In a sense, an infant industry situation existed as domestic car makers sought to reinvent themselves. Economic theory accepts the logic of temporary import barriers to allow a new industry the opportunity to make itself internationally competitive.
Industry analysts estimated that $80 billion would be needed to produce the new and modernized factories needed by the Big Three to turn out cars on equal footing with their Japanese competitors. Before amassing the huge $80 billion war chest, Detroit would first have to convince potential commercial banks of their creditworthiness. Bankers are loathe to lend to an industry in which a steadily rising volume of imports threatens to further erode its sales volume, cash flow, profits, and overall financial health.
A second economic argument advanced on behalf of restraining imports of Japanese cars was the assertion that the United States was engaged in the folly of being the only major country practicing free trade in automobiles. Although high import barriers on cars are not universal, it is a fact that most European countries have long had informal quota agreements with the Japanese to restrict imports of their cars to some predetermined number or percentage of market share. To some extent, Japanese car makers "divert" overseas sales to less protected markets. Furthermore, Japan at the time did not reciprocate U.S. openness in automobiles. It had numerous non-tariff barriers that added considerably to the final sales price of foreign-made cars shipped to that market. (25)
When observing the increase in Japanese auto production capacity in the early 1980s, a time of little growth in domestic demand and widespread foreign trade barriers, U.S. critics argued it was natural to assume that Japanese automakers were gearing up to increase exports to the relatively open U.S. market. Commerce Secretary Baldrige told the Senate Finance Committee in early March that he had no use for free trade arguments from academia, adding that Transportation Secretary Lewis and he were "the businessmen in the Cabinet, and we know what it's like to trade with the Japanese." (26)
Several of the task force participants tried to drum up outside support (with little apparent success) for their version of "good" policy by taking their case to the media. The then OMB Director, David Stockman, later admitted he was the source of a syndicated column by Robert Novak; the article accused the new Reagan administration of unnecessarily selling out its free market principles for an import restraint proposal written and supported by a "leftover Carterite" who was still a senior policy adviser to Transportation Secretary Drew Lewis. The latter, who was repeatedly telling the press that import restraints were necessary and imminent, phoned in a rage when he learned Stockman was the column's source. After trading accusations of telling tales out of school, the two negotiated a truce: "Lewis agreed to stop `backgrounding' the press and telling them that the President had already decided in favor of import restraints, and [Stockman] agreed not to have breakfast with [Novak] for a while." (27)
The March 19 auto task force meeting attended by President Reagan was a critical event in what would be a "soft" decision to go with the middle ground option of convincing Japan to implement a voluntary export restraint (VER) approach. A draft memorandum briefing the president for this meeting stated that the most recent meeting of the task force "focused on voluntary actions by Japan. There was a considerable measure of agreement." Presumably, this attitude reflected the belief, noted earlier in the memo, that "Even a successful recovery program may not generate sufficient capital to enable the industry to meet changing customer demands, increasingly stringent government regulations, and competition from abroad." (28)
At the March 19 meeting, Secretary Lewis reportedly told the president that a majority backed voluntary Japanese restraints. However, cabinet members did not offer a unanimous, unambiguous recommendation on how to handle the import situation. Some of them still verbalized their antipathy to any kind of import restraints. After listening to the "pragmatist" and free trade arguments, the president told the assembled cabinet members that he had heard enough and promised that he would soon make a final decision.
In fact, the president already had made up his mind. Reagan wrote in his memoirs that immediately after the meeting, he met privately with Secretary of State Haig. He told the Secretary to phone the U.S. ambassador in Tokyo, Mike Mansfield, and instruct him to
At their meeting in the Oval Office the next week, Reagan continued sending oblique signals to the Japanese, telling Ito that his administration "firmly opposed import quotas but that strong sentiment was building in Congress among Democrats to impose them." Although he could not guarantee prevention of congressional action, Reagan suggested that if Japan would voluntarily set a limit on its auto exports to the United States, he could "probably" head off mandatory quotas.(29) Doctrinal purity precluded the president's requesting any specific export restraint action by Japan.
Minister Ito also conferred with the USTR, Bill Brock, and Secretary Haig. Both gave Ito the same elliptical message about the need to head off congressional action without providing any specifics on how to accomplish this. Apparently reflecting instructions given him by the president during their private meeting of the previous week, Haig told Ito on March 23 that the Reagan administration was "not seeking a formal agreement, but rather voluntary guidelines by the Japanese on which both sides had expressed their views." (30)
Between these vague messages and the ongoing newspaper stories detailing the cabinet split on import restraints, Minister Ito said afterwards that he found "no specific policy direction" in Washington as to how to resolve the auto issue. (31) According to one account, Ito told the president that his government could not ask its auto industry to make economic sacrifices in the face of deep and apparent divisions within Reagan's own cabinet and in American public opinion. A Japanese foreign ministry spokesman later promised cooperation "if there is a specific request" for voluntary export restraints. Then he added (in apparent contradiction of the spirit if not the specifics of the message that Ambassador Mansfield was instructed to deliver) that no such request had been made. The Japanese, the spokesman said, had received no notice of a final administration decision or a formal proposal. They had received only the suggestion of further bilateral talks.(32)
Further confusing the situation in Washington at this time was Secretary Haig's effort to gain control of the auto talks with the Japanese. The Office of the USTR quickly counterattacked and was formally put in charge of the discussions that would finally settle the issue. This move was aided by a letter sent to the president by several leaders of the House Ways and Means Committee expressing deep concern that the State Department was trying to usurp the legislatively-based role of USTR as leader of international trade negotiations. USTR Brock said later that the "Japanese weren't sure who to deal with. They started dealing with everyone and got confused."(33)
The unrelenting refusal of the administration to publicly declare even a reluctant desire for some specific level of voluntary export restraints continued to delay conclusion of a bilateral deal. The hazy nature of the U.S. stance on restraints was further demonstrated on April 6, when Vice President George Bush (President Reagan at this time was recovering from wounds received in an assassination attempt) publicly announced the final results of the auto task force exercise. The centerpiece was the easing, eliminating, or delaying of 34 environmental and safety regulations. This package was supposed to save the domestic car industry an estimated $1.3 billion in capital costs and hold down consumer prices by more than $9 billion over a five year period. Conspicuous by its absence was any direct reference to Japanese export restraints, even though the president wanted them and had had his ambassador to Japan hint at their advisability. Mr. Bush said that the administration would "stop well short of telling the Japanese what we think they should be doing." In a written statement, President Reagan spoke of removing federal "shackles" on the auto industry and the need for its management and unions "to take the strong necessary steps to restore...competitiveness."(34) The low-level mission dispatched to Tokyo to brief the Japanese government on the details of these measures shed little light on what the administration was expecting from Japan. U.S. trade officials again presented a non-demand: while warning of impending congressional quotas, they resolutely refused to discuss any specific export levels or their duration. By now, the Japanese government understood--and was willing to go along with--what the administration wanted in principle. It just did not know the details.
The president's non-decision on export restraints eventually led to the initiation of non-negotiations between the USTR, William Brock, and senior MITI officials that culminated in a non-agreement on automobile exports. In the final days of bilateral discussions, Japan and the United States reversed roles in what was by then a well-rehearsed dialogue about trade frictions. The Japanese dropped their propensity for vagueness and symbolism and doggedly sought specifics for defusing U.S. annoyance with auto imports. The U.S. government dropped its practice of making specific trade demands of the Japanese and refused to even admit that it wanted to negotiate anything. The Reagan administration was acting in a highly legalistic manner in that it sought to avoid leaving any tangible evidence of overt support for non-market actions. Efforts to minimize damage to the administration's free market, free trade credentials had an unusual effect on the Japanese. They were forced to observe the nuances of a hastily written American version of a Japanese kabuki play in order to discern what action on their part would produce a definitive settlement of the auto flap. U.S. offerings of abstruse hints and subtle body language might have continued indefinitely, but an action-forcing event was now looming. Both governments wanted to reach closure on automobiles prior to Prime Minister Zenko Suzuki's first state visit to Washington in early May. The first phase of the climactic non-negotiations involved MITI Vice Minister Naohiro Amaya coming to Washington in April to get a briefing from the Justice Department on how his country could administer auto export restraints without violating U.S. antitrust laws. (To minimize the risk that Japanese auto makers could be found guilty of illegal restraint of trade by U.S. courts, the companies would need to respond to Japanese government dictates issued in accordance with Japanese law and not act on their own.)
The final phase of talks took place shortly after the suddenly inscrutable Bill Brock arrived in Tokyo and began speaking with his MITI counterparts on the last day of April, 1981. He had left Washington with a detailed negotiating strategy given to him at a White House meeting attended by President Reagan, Ed Meese, and Jim Baker, the chief of staff.
It was a curiously ambiguous set of marching orders, and a perfect reflection of the elaborate charade underway. Brock recalls Reagan telling him that he was to inform the Japanese that the United States would accept whatever option they chose. If the Japanese couldn't agree to limit their exports, the administration would accept that and fight the quota bills in Congress. If the Japanese did want to restrict their auto shipments, Brock was to suggest no numbers.(35)
As Brock later recounted, he told the Japanese that the administration would support any number they selected as an export ceiling. "...[I]t was true; the president would support whatever they chose to do. That was the commitment that we had with the president." The administration was not going to reject any Japanese offer; it "would have accepted whatever they finally decided and lived with it." (36)
Once in Tokyo, however, Brock went beyond the role of a passive data-collecting courier. He stopped short of becoming an active negotiator by in effect assuming the role of unofficial, unpaid consultant to the Japanese government and auto industry. In so many words, he indicated that he was there not to make demands, but rather to offer his expertise on how to defuse the "bad cop's" threat to pass quota legislation. (Brock's credentials in this effort were enhanced by the fact that he had been a Senator from Tennessee earlier in his career.) The unspoken message was "tell me the extent to which you plan to limit auto exports, and I will tell you whether it will buy peace on Capitol Hill."
Acting in this capacity, he reacted negatively to MITI Minister Rokusuke Tanaka's first suggestion: a one year export ceiling of 1.7 million cars. After telephoning key senators in Washington, Brock worried out loud that this would be inadequate to assure that the administration could put an end to possible unilateral quota legislation. One can almost picture a Japanese-like Brock sucking in air and stoically pronouncing that it would be "very difficult" to restrain Congress unless the export ceiling was lower. On the night of the first session of talks, U.S. reporters were told, and filed stories, that the talks were going badly.
During a second day of non-negotiations, Tanaka proffered a tighter export restraint package. Brock smiled and then pronounced the prospect of statutory quotas dead. In the end, that was all it took to consummate the non-agreement that settled a long running, delicate diplomatic minuet. The Japanese on May 1 announced that exports of automobiles to the United States in the one year period beginning April 1, 1981 would not exceed 1.68 million units (approximately the mid-point between their shipments in 1979 and 1980). They also agreed that in the year that followed, they would maintain voluntary export restraints of 1.68 million units plus 16.5% of whatever growth occurred in the U.S. market. An examination of the state of the U.S. automobile industry and market in early 1983 would determine if the controls were to be extended for a third and presumably final year. Although the Bush and Clinton administrations would later make it clear that they truly did not want continuation of voluntary export restraints, Japan seemed to believe that discretion was the better part of valor. An annual ceiling on auto exports to the United States was retained on a genuinely voluntary basis until March, 1994. By that time, the large volume of production in the United States by the local subsidiaries of major Japanese auto makers had eliminated any real need for trade restraints.
The "Option B" gambit is a legendary Washington bureaucratic ploy for convincing a senior decision-maker to select the policy option favored at the staff level. It begins with submission for approval of an Option A that recommends the U.S. government immediately launch the equivalent of all-out nuclear war; Option C recommends the equivalent of immediate unilateral disarmament. Option B presents a moderate middle ground strategy that appears logically brilliant by comparison. The decision to induce Japan to adopt a VER program was the centrist position between the two relatively extreme options of a pure free trade approach and an overtly protectionist approach, either through unilaterally imposed import quotas or a formally negotiated orderly marketing agreement.
An examination of the political balance of power within the automobile industry task force group would suggest that the upper hand belonged to those members opposed to inclusion of import restraints in the assistance package assembled for the auto industry. Option A, the free trade approach, was discarded for two main reasons. The first and foremost was political: President Reagan (and presumably some of his closest personal advisers) believed that he had made a clear campaign promise to the industry and its workers that required action to stem the steady increases in U.S. imports of Japanese cars. The second reason was the deeply held belief among the "pragmatist" faction that temporary and limited relief from intensifying import competition was a prerequisite for enabling domestic auto producers to successfully develop and execute plans for becoming internationally competitive.
Option C, active efforts to negotiate formal export restraints by the Japanese (or, more aggressively, encouraging congressionally-passed mandatory quotas), was discarded in part because it flagrantly contradicted the Reagan administration's free trade, free market philosophy, a belief system that started at the top. White House officials had no problem with the idea that a genuinely voluntary and external restraint program was reasonably compatible with the administration's economic philosophy. Non-economists seldom dwell on the fact that quantitative export restraints are the equivalent in pure economic terms of import quotas.
A government to government agreement restricting trade in automobiles was never a strong option due to the high probability that it lacked a legal basis. The president's statutory authority to implement and enforce orderly marketing agreements is directly linked to a finding of injury under the escape clause statute by the International Trade Commission--something that had not happened in the auto case. Without new legislation, whatever loophole that government lawyers found to legitimize a formal bilateral export restraint agreement would have been susceptible to a court challenge accusing the administration of trying to regulate foreign commerce without specific delegation of power by Congress. In the words of William Brock, the policy option of a formal restraint agreement was rejected because U.S. "laws didn't allow it" and "politically, we didn't want to do it." (37) Restricting Japanese auto imports without that country's acquiescence was a non-starter. Such unilateral action would have violated U.S. commitments under the General Agreement on Tariffs and Trade (GATT).
There is no conclusive record--either in the memory of participants interviewed for this study or in primary and secondary written materials--that the interagency automobile task force ever unambiguously and unanimously recommended Option B (purely voluntary restraints) to the president. What the president apparently heard in the critical task force meeting on March 19 was that its members either enthusiastically supported voluntary restraints or could live with them. The liberal trade faction seemed resigned to the idea that such a measure could provide some benefits to the industry without shredding the administration's free market principles--something different from genuine advocacy or support.
As the political and economic drawbacks of "Option A" and "Option C" became clearer, the middle ground of voluntary export restraints became increasingly attractive. The task force could never ignore Mr. Reagan's abovementioned promise of relief from import competition that he made to auto workers during the presidential campaign. Neither could they ignore the refusal of Congress to ease its demand for the same kind of trade policy action. Even politically astute skeptics who dismissed the bill's chances of enactment worried about winning the battle but losing the war. If the administration and the Japanese thumbed their noses at a strong, publicly articulated congressional commitment to assist important constituents, they would have risked eventual retribution from an angry Capitol Hill.
For the newly elected Reagan administration, early 1981 was absolutely not a time to be having any unnecessary battles with Congress. The top policy priorities consisted of securing passage of tax cut legislation, the centerpiece of the president's economic program, and increased defense spending. Furthermore, several cabinet members did not want to battle Congress on imported car restraints, about which "we were somewhat sympathetic as far as the result." Very few, if any, senior advisers were ready to assure the president that it was all right for him to risk appearing to be against American workers and industry by criticizing the Danforth-Bentsen legislation and threatening to veto it.(38) Even a limited threat of Congress's passing protectionist legislation strengthened the voice of those in the automobile task force who supported "Option B" (voluntary Japanese export restraints) and weakened the resolve of opponents.
Before and after hearing from his task force, Ronald Reagan was clearly predisposed to providing some relief from import competition to Detroit. The requirement was that it be packaged in a form that would not be flagrantly inconsistent with his administration's publicly espoused beliefs in the wisdom of government avoiding interference with free market forces. William Brock, the USTR at the time, believes that candidate Reagan's abovementioned statement to Chrysler workers in September, 1980 about the need for Japan to exercise export restraint was neither an idle promise nor one that would be forgotten or written off after the election. Task force advocates of import restraints repeatedly referred to this statement, but they also knew that President Reagan did not want to impose overt import barriers. In the end, said Brock, the decision to go for voluntary restraints was almost preordained. The cabinet-level policymaking exercise ended up exactly where the president wanted it to end up.(39) The timing of President Reagan's formal decision to induce the Japanese to act unilaterally on restraints is not completely clear. Mr. Reagan wrote in his memoirs that as he listened to the auto task force debate, he agreed with those opposing trade barriers, but "wondered if there might be a way in which we could maintain the integrity of our position in favor of free trade while at the same time doing something to help Detroit and ease the plight of its thousands of laid-off assembly-line workers."(40) There was no need for him to wonder about this. The voluntary restraint option was espoused early in the task force's work.
For whatever reason, the president made no effort to immediately make it clear--even to his own cabinet--what he had decided. Only gradually did he make it clear that he wanted to convince the Japanese to come forward on their own volition, not with direct administration prompting, with their own export restraint program. Perhaps the president was comfortable with this option without being proud of it. In any event, nothing was formally written down. Cabinet meetings in the Reagan administration were long on discussions and short on memoranda. Minutes of such meetings were not usually kept, and final decisions were written out only if they required implementing documentation such as an executive order.(41)
If a single task force member introduced and became principal advocate of the "grand compromise" centering on voluntary restraints, his or her identity remains a mystery. The reason for this uncertainty may be the absence of written records and the hazy memories of participants about events almost 20 years old. Articles written about this decision are of little help because they identify at least four different initiators of the compromise: Edwin Meese, at the time the president's counsellor and Mr. Fix-it; David Stockman, Director of the OMB; William Brock, the USTR; and Vice President George Bush.(42) Curiously, the sole reference to any involvement by Bush in the formulation of an auto import policy is in Ronald Reagan's memoirs, where he is credited with proposing the VER alternative. Perhaps the move to a middle of the road compromise came about by plodding incrementalism rather than a dramatic and loudly applauded formal introduction.
The possibility remains that the president did not select the VER option completely on his own and only after hearing all the opinions of the auto task force. David Stockman has written a less benign (and unprovable) explanation of how the grand compromise was fashioned:
While the cabinet task force was arguing feverishly, [Ed] Meese was trundling around the White House, doing what he did best: quietly pounding square pegs into round holes, convincing himself and the President that all we had to do to maintain our free trade position was to convince the Japanese "voluntarily" to restrict their own exports...It was another case of not knowing the difference between campaigning and governing.(43)
In an interview with the author, Meese flatly denied such activity. He described his role as counsellor to the president as being an honest broker who made sure that all relevant cabinet-level voices had the opportunity to put their views before the president.
The Reagan administration's decision to manipulate the Japanese into accepting an autonomously administered automobile export restraint agreement makes sense when judged in either a political or procedural context. When measured in purely economic terms, however, its costs significantly outweighed its benefits. The kindest economic assessment that can be made of the VERs is that they were a second-best means of dealing with the serious financial problems of an important domestic industrial sector.
The newly inaugurated Reagan administration established a credible and effective policy-making process in 1981 to respond to the predicament faced by the domestic automobile industry. All interested departments and White House offices were given an equal opportunity to introduce their views and make their recommendations heard. Detailed economic analyses on all relevant data were prepared by various agencies. These reports provided policymakers with assessments of the business conditions in the automobile sector, forecasts of future economic and business trends, warnings of the economic downside of restricting imports of Japanese cars, and import statistics.
The process did not drag on. By Washington standards, a decision was made relatively quickly and with little or no subsequent complaining in public by those whose views did not prevail. The cabinet-level task force on automobiles did not consist of like-minded ideologues engaged in one-dimensional thinking. The automobile task force did not operate in a political vacuum; its deliberations did not disregard either President Reagan's campaign statement at the Chrysler plant or his larger economic philosophy. Last and far from least, when his presence was needed, the president was fully engaged. Keeping his own preferences quiet in order to avoid biasing the task force's debate, he made a final decision only after listening to informed and diverse advice from relevant cabinet members and advisers.
Although the decision to go for VERs represented the triumph of domestic priorities, the tactics employed by the Reagan administration to secure the VERs did not damage U.S. foreign policy objectives. Far from angering an ally, the U.S. Trade Representative gently convinced the Japanese that their foreign policy interests would be damaged by the animosity that many Americans would feel towards them if they were deemed responsible for causing one or more U.S. automobile giants to go bankrupt. The 1981 automobile "non-agreement" generated relatively little anger in Japan. It was different from most other bilateral trade frictions in that there were no publicly-issued U.S. demands and threats of retaliation if the Japanese failed to comply.
From the point of view of economic theory, the decision to press the Japanese for quantitative export restraints was an excessively costly approach to the domestic automobile problem, no matter how politically convenient and foreign policy-neutral the VERs might have been. Even if one accepts the argument that no administration should have adopted a dogmatic free trade philosophy at a time when bankruptcies of corporations the size of Chrysler or Ford were a clear and present threat, the form of protection selected was not optimal. There were better ways for the federal government to provide breathing room for the industry and to help make it more competitive. When stripped of the euphemisms used to make them politically palatable, Japan's "voluntary" export restraints were virtually identical in economic terms to imposition of unilateral import quotas. The heavily market-distorting effects of arithmetic quotas are very inconsistent with overall American trade sentiments and the Reagan administration's economic ideology. In addition, giving MITI the ultimate authority to set auto export quotas on a company-by-company basis stoked the fires of the "Japan, Inc." syndrome that U.S. trade policy was trying to extinguish in favor of free market forces in that country.
An objective economic assessment of the impact of Japan's auto export restraints should be disaggregated according to the time frame being considered. The VERs had far worse effects in the first half of the 1980s than its advocates ever anticipated. Acute shortages were the immediate effect of a politically-dictated ceiling on U.S. imports of a commodity in heavy demand. As soon as Japanese auto makers realized that American consumers had a relatively price inelastic demand for their products, they steadily increased sticker prices; eliminated "options" by converting power steering, sun roofs, rust proofing and other high mark-up luxuries into standard equipment; and added hefty destination and dealer preparation charges. Meanwhile, the Big Three responded to the price spikes of their Japanese competition by steadily raising prices on domestic models. Detroit's marketing strategy placed profits ahead of regaining lost market share by being price competitive. In economic terms, export restraints had begun causing a massive transfer of income from American car buyers to automobile makers in both Japan and Detroit--a process that would continue for several years.
A Brookings Institution economist, Robert Crandall, calculated that the prices of Japanese cars in the United States by mid-1984 had increased 20 to 30 percent--between $1,500 and $2,500--over what they would have been in the absence of de facto trade barriers. He also assumed that the prices of U.S.-made cars increased by at least half of this amount. The VERs added as much as $3 billion to the profits of Japanese automobile companies in 1984 and contributed between $3.2 and $6 billion to the workers and pre-tax profits of U.S. car makers in that year.(44) In another study, Crandall divided the estimated $4.3 billion total burden to U.S. consumers in 1983 from contrived shortages of Japanese imports by his estimate of 26,000 jobs saved in the auto industry via the VERs. The result was an estimated annual cost to the U.S. economy of $160,000 for each job saved in the auto industry.(45) Similar estimates for total incremental costs imposed on American consumers by the restraints and for the number of jobs saved were made by the U.S. International Trade Commission.(46) In economic terms, it would have been far less costly to the country as a whole to pay the returning workers a direct subsidy, more closely related to their wages, to remain idle and let imports flow in according to demand.
American consumers were not the only ones blindsided by the Japanese VERs. The Big Three U.S. producers eventually suffered indirect damage that they had not foreseen. The more established Japanese car exporters to the U.S. market at this time--Toyota, Nissan, Honda, and to a lesser extent, Mazda and Suburu--suffered no financial damage from the restraints. Quite the contrary, they enjoyed windfall profits, or what economists call economic rents, that would help make them an even greater competitive threat.
Facing the combination of strong U.S. demand for their products and a quantitative ceiling on their allowable shipments, Japanese automobile exporters reacted in the economically rational manner. First, they raised sticker prices. Eventually, these increases were high enough to more than offset lost opportunities for increased sales volume. Next, the major Japanese auto makers began moving "upmarket" into the segments most prized by profit-margin-minded Detroit: first into mid-size cars and then into full-sized luxury cars. Having no economic incentive to continue concentrating on selling a fixed number of low-price, low-profit-margin small car models in the United States, they replicated the earlier strategy of the Big Three U.S. producers. They gradually turned over the market for these low margin vehicles to someone else (in this case, smaller Japanese and large Korean producers).
The larger Japanese companies did not distribute their windfall profits to shareholders. Instead, they spent the money on research and development to produce cars more efficiently and with even higher quality. They enhanced their technology, added new models at a faster than usual pace, and installed flexible manufacturing systems in their assembly plants to permit quicker responses to shifts in consumers' tastes. In short, the accelerated product shift into mid-size and luxury cars facilitated by the VERs upgraded the Japanese into a "greater threat in market segments traditionally held by domestic manufacturers," according to a leading Wall Street auto analyst.(47) Detroit's success in convincing Washington to limit import competition was a pyrrhic victory in some respects.
The longer-term costs of the VERs to the U.S. economy were not as large as their worst critics feared. A once infantile industry recognized its predicament and grew up in a relatively few years. The U.S. automobile industry surprised many critics when it did not conform to the liberal traders' rule of thumb that industries receiving protection from imports do not restore their international competitiveness. Despite their immediate propensity to raise prices in the wake of more expensive Japanese imports, Chrysler, Ford, and to a lesser extent General Motors utilized the grace period provided by the VERs to restore their ability to provide what consumers wanted.
In addition to investing massively in new production facilities, the Big Three also adapted a number of highly effective manufacturing strategies perfected by their Japanese competition: enhanced quality control; greater coordination between engineers, product designers, assembly line workers, and suppliers; just-in-time delivery of parts; less middle management and more delegation of authority to assembly line workers; and so on. The empirical result was that the quality and cost structure of most U.S.-made cars were significantly better by the onset of the 1990s than they had been a decade earlier. More efficient manufacturing processes meant that U.S. automakers could attain profitability at lower volumes of sales. The later proliferation of Japanese assembly plants in the United States, designed to circumvent present and future U.S. protectionism, removed any temptation in Detroit to rest on its laurels while automobile imports were being restrained. It is an oversimplification (not an inaccuracy) to damn the VERs for forcing American consumers to pay large price premiums for several years in order to fatten the profits of domestic automakers and to preserve jobs of auto workers at wages above the average for the manufacturing sector. No one can demonstrate that placing a ceiling on Japanese imports was not critical to assuring the "breathing room" necessary for U.S. automakers to raise and invest the estimated $80 billion necessary to correct their competitive shortcomings.
Even if one accepts the argument that a temporary respite from rising import competition was needed to allow the domestic industry to revitalize itself, the chosen means of providing that respite was decidedly sub-optimal. Subsidies could have been provided to defray the investment costs of modernizing automobile factories (presumably in amounts less than the higher costs imposed by the VERs on purchasers of new cars). If government action was to be limited to restraining imports, the most efficient means would have been tariffs. Tariffs are not as market-distorting as arithmetic quotas. The latter arbitrarily limit imports without any regard to supply and demand conditions or price factors.
More importantly, imposition of higher tariffs in this case would have achieved the political goal of dampening U.S. consumers' purchases of Japanese-made cars without the large income transfer to Japanese auto makers triggered by the VERs. Higher tariffs would have increased U.S. government revenue and sharply reduced the windfall profits that accrued to Japanese automobile makers when U.S. government-inspired export quotas caused shortages of their products in the United States. A second way that the United States could have retained these shortage-induced profits would have been to give thical goal of dampening U.S. consumers' purchases of Japanese-made cars without the large income transfer to Japanese auto makers triggered by the VERs. Higher tariffs would have increased U.S. government revenue and sharply reduced the windfall profits that accrued to Japanese automobile makers when U.S. government-inspired export quotas caused shortages of their products in the United States. A second way that the United States could have retained these shortage-induced profits would have been to give thalso would have violated U.S. commitments in the GATT.
Two important policy lessons of the automobile export restraint arrangement initiated in 1981 are applicable to this day. First, presidential candidates should be very circumspect in promising import protection to interest groups. Second, the policy tools available under U.S. trade law to the president (then and now) were grossly inadequate to efficiently and effectively deal with a domestic industrial problem. The selection of VERs, a less than satisfactory strategy, cannot be attributed to a faulty decision-making process. Voluntary export restraints were foisted on Japan in 1981 because policy options that would have achieved better economic results were not available to the Reagan administration.
(1) Data sources included a memorandum from Secretary of Commerce Malcolm Baldrige to the Automobile Industry Task Force dated March 7, 1981; "Japan Economic Survey," published by the Japan Economic Institute, February 16, 1981; and a press release from Senator Jack Danforth dated February 3, 1981.
(2) Statement of Senator Jack Danforth, Congressional Record, February 5, 1981, p. 1786.
(3) Data sources: Dick Nanto, "Automobiles Imported from Japan," Congressional Research Service Issue Brief dated June 2, 1982, p. 9; statement of Senator Jack Danforth in the Congressional Record, February 5, 1981, p. 1786.
(4) Noboru Fujii, "The Road to the U.S.-Japan Auto Crash: Agenda- Setting for the Automobile Trade Friction," in U.S.-Japan Relations: New Attitudes for a New Era (Cambridge, Mass.: Program on U.S.-Japan Relations, Center for International Affairs, Harvard University, 1984), p. 40.
(5) Press release issued by the Office of the U.S. Trade Representative, March 18, 1998.
(6) The major indicators of injury under the escape clause are domestic producers going bankrupt, losing money, losing market share, suffering declining sales in absolute numbers, and having problems raising investmen t capital; increased unemployment among workers; and increased imports.
(7) Fujii, op. cit., p. 34.
(8) As quoted in the The Washington Post, May 26, 1981, p. A2.
(9) "U.S.-Japan Pact on Cars Is Urged by Goldschmidt," The Wall Street Journal, January 14, 1981, p. 4.
(10) Interview with Edwin Meese, fall, 1997.
(11) As quoted in the New York Times, March 5, 1981, p. D5; and the Washington Post, February 18, 1981, p. D8.
(12) Congressional Record, February 5, 1981, p. 1787.
(13) Memorandum to Secretary Regan from Acting Assistant Secretary Nachmanoff dated February 9, 1981; obtained from the collection of former Treasury Secretary Donald Regan's papers deposited in the Library of Congress).
(14) As quoted in the Washington Post, March 25, 1981, p. D9.
(15) As quoted in a memorandum to Treasury Secretary Donald Regan from Acting Assistant Secretary Leddy, March 2, 1981; obtained from the collection of former Treasury Secretary Donald Regan's papers deposited in the Library of Congress.
(16) Most importantly, the auto industry had rebuffed MITI's efforts, dating back to the 1960s, to "rationalize" the industry through mergers that would create fewer, larger and presumably more efficient companies.
(17) David Stockman, The Triumph of Politics (New York: Harper & Row, 1986), p. 154.
(18) John Stacks, "The Administration's Split on Auto Imports," Fortune, May 4, 1981, p. 158.
(19) U.S. Treasury Department memoranda obtained from the records of former Treasury Secretary Donald Regan deposited in the Library of Congress.
(20) Memorandum from Paul Craig Roberts to Secretary Donald Regan dated March 6, 1991; obtained from the collection of former Treasury Secretary Regan's papers deposited in the Library of Congress.
(21) Undated draft memorandum to President Reagan from the automobile task force; obtained from the collection of former Treasury Secretary Donald Regan's papers deposited in the Library of Congress.
(22) Telephone interview with Professor Murray Weidenbaum, February, 1998.
(23) Memorandum to Secretary Regan dated March 2, 1981, pp. 3, 6; obtained from the collection of former Secretary Regan's papers deposited in the Library of Congress.
(24) "Economic Analysis of Restrictions," undated memorandum with no author cited; obtained from the papers of former Treasury Secretary Donald Regan deposited in the Library of Congress.
(25) Free trade theory would argue that a country should opt to import cheaper or better produced goods even if other countries are not wise enough to do the same.
(26) As quoted in Business Week, March 23, 1981, p. 42.
(27) Stockman, op. cit., p. 156.
(28) Undated draft memorandum to the President from the auto task force, obtained from the papers of former Treasury Secretary Donald Regan deposited in the Library of Congress.
(29) Ronald Reagan, An American Life (New York: Simon and Schuster, 1990), pp. 254, 255.
(30) State Department memorandum dated April 8, 1981. Reproduced in National Security Archive US-Japan Project, "Power and Prosperity: Linkages Between Security and Economics in U.S.-Japanese Relations Since 1960," Volume I, 1997 (processed), p. 320.
(31) Steve Dryden, Trade Warriors--USTR and the American Crusade for Free Trade (New York: Oxford University Press, 1995), p. 272.
(34) "Reagan Plans to Ease 34 Car Rules, Sees $1.4 billion Industry Saving Over 5 Years," The Wall Street Journal, April 7, 1981.
(35) Dryden, op. cit., p. 274.
(36) Remarks of William Brock to the conference on "Power and Prosperity: Linkages between Security and Economics in U.S.-Japanese Relations Since 1960," La Jolla, CA, March 16, 1997.
(38) Interview with Edwin Meese, fall, 1997.
(39) Personal interview, February, 1998.
(40) Reagan, op. cit., p. 253.
(41) Interview with Edwin Meese, fall, 1997.
(42) David Stockman, The Triumph of Politics, p. 157; John Stacks, Fortune, May 4, 1981, p. 162; and Ronald Reagan, An American Life, p. 254.
(43) Stockman op. cit., p. 157.
(44) Testimony of Robert W. Crandall, The Legacy of the Japanese Voluntary Export Restraints, Hearing of the Subcommittee on Trade, Productivity, and Economic Growth of the Joint Economic Committee, June 24, 1985 (Washington: U.S. Government Printing Office), pp. 50, 59-60.
(45) Robert W. Crandall, "Import Quotas and the Automobile Industry: The Costs of Protectionism," The Brookings Review, Summer, 1984, p. 16. If jobs restored in the domestic suppliers to U.S. automakers had been included in this calculation, the "cost" of each job saved by the VERs would have been lower.
(46) See "A Review of Recent Developments in the U.S. Automobile Industry Including an Assessment of the Japanese Voluntary Restraint Agreements," U.S. International Trade Commission report, February, 1985, p. ix.
(47) Testimony of Maryann Keller, in "The Legacy of the Japanese Voluntary Export Restraints," p. 66.