US-Japan Automotive Trade
in the Reagan and Obama
Administration: Explaining the
Rise and Fall of Protectionism
Craig VanGrasstek
GTA Analytical Paper No.1
bcde
GLOB L
TR DE
LERT
GLOBAL TRADE ALERT
GTA-AP1:
US–JAPAN AUTOMOTIVE TRADE IN THE
REAGAN AND OBAMA
ADMINISTRATIONS: EXPLAINING THE
RISE AND FALL OF PROTECTIONISM
Craig VanGrasstek
US–Japan Automotive Trade in the Reagan and Obama
Administrations: Explaining the Rise and Fall of
Protectionism
Craig VanGrasstek, Center for International Governance Innovation
Abstract
This paper will present a structured comparison of policy responses by the United States to competition
with Japan in the automotive sector in two difference administrations. It will examine one case in which
the United States chose to impose protectionist measures and another in which it did not, in order to
consider the effects of economic downturns on both the demand and supply of protection. After
reviewing the facts of the two cases, this paper will evaluate four possible explanations that are
variously legal, political and economic in nature. While these explanations are not mutually exclusive,
and each may offer some part of the answer, the evidence suggests that the most persuasive case is
based on long-term changes in the structure of the US automotive industry.
Keywords:
Introduction
The outbreak of the financial crisis in late 2008, coupled with the recession that began the year before
and memories of the Great Depression of the 1930s, produced warnings that a new wave of
protectionism could be imminent. But is it the case that economic downturns always produce demands
for protection, and that policymakers are unable to resist them? This paper addresses that question by
presenting a structured comparison of policy responses by the United States to competition with Japan
in the automotive sector in two different administrations. It examines one case in which the United
States chose to impose protectionist measures and another in which it did not, in order to consider the
effects of economic downturns on both the demand and supply of protection.
Presidents Reagan and Obama both had to deal with uncertainty in the economy at large, and in the
automotive sector in particular, in their first year in office. Both administrations inherited automotive
policy initiatives that were already under development during the post-election transition. The Reagan
administration took a protectionist approach, opting to concur in Japan’s imposition of restrictive
(though putatively ‘voluntary’) quotas on imports of its vehicles to the US market. Twenty-eight years
later, when members of Congress introduced bills that would aid the auto sector but discriminate in
favour of domestic producers, the Obama administration negotiated with legislators to ensure that the
bills made no distinction between domestic and imported vehicles. This was especially notable in the
case of a ‘cash-for-clunkers’ programme that was non-discriminatory in theory, and in actual practice
encouraged the scrapping of older, less efficient American cars for more fuel-efficient Japanese or
Korean vehicles.
What explains the outcomes of these two episodes? After reviewing the facts of the two cases, this
paper presents and reviews four possible explanations that are variously legal, political and economic in
nature. While these explanations are not mutually exclusive, and each may offer some part of the
answer, the evidence suggests that the most persuasive case is based on long-term changes in the
structure of the US automotive industry. Three decades of globalisation have seen the establishment of
Japanese and other foreign ‘transplants’ in the United States, greater dependence on global supply
chains and strategic alliances for the ‘Big Three’ US auto producers (Chrysler, Ford and General Motors),
2
a decline in the size and strength of the unionised workforce, and increasing numbers and influence for
the auto dealers who sell Japanese cars. The result is a political landscape today in which there are
fewer groups that perceive import protection to be in their interests, those few who do so are less
powerful than they were a generation ago, and they face countervailing pressures from other interests.
Review of the Episodes
There are four different responses that a government may offer when an industry is in a decline that is
associated with import competition. The first is to do nothing, and to let the industry either adapt or die.
The other three options might be pursued separately or in some combination: provide various forms of
assistance (grants, tax treatment, government procurement of its goods, etc) in order to help the
industry re-establish its competitiveness; bargain with or threaten other countries (including the chief
competitor[s]) in order to reduce their barriers to one’s own exports; or restrict imports through one
means or another. As reviewed below, Presidents Reagan and Obama both took office at times when
the automotive industry was in serious trouble, and the debate over these options was already well
underway. In both cases their predecessors had already taken steps to extend government assistance to
the industry, but had not imposed import protection. There the similarities end: while the Reagan
administration extended import protection and also offered some regulatory relief, the Obama
administration greatly expanded government aid without import protection.
The 1981 recession and the voluntary export restraints (VERs)
The proximate cause for the decline of the US auto industry in the 1970s was the twin energy crises of
that decade. First as a sanction that the Organization of Petroleum Exporting Countries imposed against
the West following the Yom Kippur War in 1973, and then as a consequence of the Iranian Revolution
and the Iran–Iraq War (see Box 1), the price of oil and gasoline rose in two great waves. Americans
responded by purchasing smaller, more fuel-efficient cars. The subcompacts then offered by the US
producers were generally more expensive and less mechanically reliable than their Japanese
counterparts. As can be seen from the data in Figure 1, imports from Japan rose at a sharp and steady
rate.
The Big Three took a big, collective hit. Production of automobiles dropped from an annual rate of 9.1
million units assembled in January 1979 to 6.2 million in January 1980, and took a further tumble down
to 5.7 million in January 1981.1 The first policy response of the Carter administration was to provide aid
to the Chrysler Corporation, which sought a loan guarantee in 1979 to forestall bankruptcy. The
administration and Congress agreed that this firm was, in terms often repeated in the 2008–9 financial
crisis, ‘too big to fail’. It was not until the next year that another of the Big Three producers, in this case
Ford, proposed import protection. This took the form of Ford’s support for a petition that the United
Auto Workers filed in June 1980 for relief under the ‘safeguards’ law. Also known as the escape clause,
this provision of law (and the corresponding instruments of international law)2 allows a president to
impose temporary tariffs, quotas or other restrictions on imports. That can be done only upon the
recommendation of the US International Trade Commission (USITC), however, which must determine
whether rising imports are a substantial cause of serious injury to the domestic industry. Although the
Carter administration gave the impression that it was eager to aid the industry in this way, with the
president asking the USITC to accelerate its investigation,3 this path was blocked when the USITC
reached a negative determination.
1
Federal Reserve data at http://www.federalreserve.gov/releases/G17/iphist/autohist_sa.txt.
Safeguards are permitted under GATT Article XIX. The domestic law is s. 201 of the Trade Act 1974.
3
In the normal course of events the investigation would be concluded six months after the petition was filed; that would mean
finishing in mid-December 1980. The Commission instead finished about one month early, announcing its conclusions a week
after the presidential election.
2
3
Box 1: Key events leading to the 1981 auto VERs
1978
16 January 1979
15 July 1979
7 September 1979
Rising turmoil in Iran throughout the year, coupled with production cuts by other
members of the Organization of Petroleum Exporting Countries, leads to the second
energy crisis of the 1970s and higher gasoline prices. Fuel-efficient Japanese vehicles
capture an ever-higher share of the US market.
The Shah of Iran flees the country.
President Carter outlines his plans to reduce oil imports and improve energy efficiency in
the ‘Crisis of Confidence’ speech, calling the energy crisis ‘the moral equivalent of war.’
The Chrysler Corporation petitions the US government for $1.5 billion in loan guarantees
to avoid bankruptcy.
4 November 1979
15 November 1979
The Iran hostage crisis begins when radical students take over the US embassy.
Iran cancels all contracts with US oil companies.
20 December 1979
Congress narrowly approves the Chrysler Corporation Loan Guarantee Act.
11 January 1980
18 March and
3 April 1980
May 1980
3 June 1980
12 June 1980
10 July 1980
Honda announces that it will build the first Japanese ‘transplant’ in Ohio.
The Joint Economic Committee in Congress and the Senate Banking Committee each hold
hearings on automotive trade and competition with Japan.
The Yasukawa-Askew Agreement commits the Japanese government to encourage
economically viable investment in the United States by Japan’s auto and auto parts
companies.
The National Bureau of Economic Research (NBER) announces that the United States has
been in a recession since January 1980.
The United Auto Workers (UAW), with Ford’s support, files a petition with the US
International Trade Commission (USITC) seeking protection from automotive imports
under the safeguards law.
President Carter asks the USITC to complete the safeguard investigation ‘as expeditiously
as possible’ because it has ‘become a matter of great national and international
importance’.
23 September 1980
War breaks out between Iran and Iraq, causing oil prices to rise even higher.
4 November 1980
10 November 1980
Ronald Reagan is elected president.
In a 3–2 decision the USITC votes against the UAW’s safeguard petition, finding that the
standard set in the law (ie rising imports must be a substantial cause of serious injury to
the US industry) has not been met. President Carter thus has no legal basis for imposing
restrictions on imports.
The House of Representatives approves by 317–57 a measure authorising the president
to negotiate an ‘orderly marketing agreement’ to limit car and truck imports.
2 December 1980
3 December 1980
12 December 1980
20 January 1981
5 February 1981
3 March 1981
9 March 1981
1 May 1981
8 July 1981
The Senate Finance Committee approves a similar measure on a vote of 11–2.
The Finance Committee’s measure survives a procedural challenge in the full Senate on a
vote of 12–65, but the measure is dropped before the bill to which it was to be attached
is enacted.
Ronald Reagan is sworn in as president. The Iranian hostage crisis ends.
Senators Danforth and Bentsen introduce an auto import quota bill.
At a cabinet meeting the advocates of import protection (Commerce, USTR and
Transportation) have the upper hand over those who favour an open market (especially
Treasury).
The Senate Finance Committee holds a hearing on automotive trade issues with Japan.
Following indirect consultations and negotiations with the United States, Japan
announces the imposition of VERs on auto exports.
NBER announces that the recession that began in January 1980 ended in July 1980. (On 6
January 1982 NBER will announce that a new recession began in July 1981.)
4
Figure 1: US auto imports by value ($ billion), 1976–1984
$14
Japan
$12
$10
$8
Canada
$6
Western
Europe
$4
$2
Rest of World
$0
1976
1977
1978
1979
1980
1981
1982
1983
1984
Source: Calculated from US Department of Commerce data (FT990 series).
That decision came early in the transition period between Carter and Reagan, and Congress seized the
initiative in order to promote action in the incoming administration. Meeting in a ‘lame duck’ session,4
legislators attempted to enact a resolution that would authorise the president to negotiate import
quotas. That resolution received majority and bipartisan support in both chambers of Congress, and
although it was not actually enacted into law it served to underline the strong interest in limiting
automotive imports from Japan.
The Reagan administration had many options that it might have pursued in response to these pressures,
as summarised in Table 1. The first option, which is not shown in the table, would be to do nothing and
allow the market to decide whether and what kind of automotive industry would survive. That would
have been the course of action most consistent with the pro-trade rhetoric of the Reagan
administration, and there were voices in the new cabinet that advocated that position. Secretary of the
Treasury Don Regan was outweighed, however, and the question soon became not whether but how
the United States would restrict the market.
Most of the options would have been difficult or impossible for the United States to pursue without
violating its obligations to Japan and other exporters in the General Agreement on Tariffs and Trade
(GATT). Consider, for example, across-the-board tariffs on imports of cars. Automotive tariffs have long
been relatively low in the United States. Even under the notoriously protectionist Hawley-Smoot Tariff
Act 1930, the United States imposed only a 10% tariff on automobiles. The rate was cut in successive
tariff negotiations to 7.5% by 1960, 5.5% by 1968, and 3% by 1973.5 In the Tokyo Round negotiations of
4
The votes discussed here were cast in a post-election meeting of the 97th Congress (1979–80), including some members who
either had not run for re-election or were defeated in the November 1980 election. The 98th Congress (1981–2) would not be
seated until January 1981.
5
Toder et al (1978: 19).
5
1972–9 the United States made a commitment to cut it further, to 2.5%; that is where the tariff rate
remains to this day (ie, the product was ‘off the table’ in the Uruguay Round negotiations of 1986–94).
6
Table 1: Advantages and disadvantages of different forms of US automotive import protection from the perspectives of distinct stakeholders
Japanese firms and government
Reagan administration
US firms
US labour
Impose higher tariffs
under the escape
clause (ie, safeguards)
The relative (un)attractiveness of
this option would depend on the
specific remedy chosen, which
might include tariffs, quotas, etc
Potentially a useful means but
the negative determination in
the 1980 case made it difficult
for the Reagan administration to
request new action
The option was attractive
enough for one of the Big Three
firms (Ford) to join with labour in
the 1980 petition
The UAW already showed that it
favoured this approach, but
there was no reason to expect
that it would get a different
result a second time
Impose higher tariffs
without invoking the
escape clause
This option would too clearly
violate Japan’s rights, and would
require either renegotiation of
the US concession or a disputesettlement case
Problematic because tariffs
could not be raised above the
GATT-bound rate without
violating those obligations or
seeking a negotiated revision
In addition to being vulnerable
to a GATT challenge, this
approach might encourage other
countries to do the same
This approach would be
attractive if it were feasible
Strict domesticcontent laws
This option would be
unattractive unless and until
there was greater Japanese
investment in the US parts sector
Like tariffs, this approach would
likely be GATT illegal
This approach would make it
difficult for the firms to pursue
the increasingly favoured option
of outsourcing parts production
This was the most attractive of
all options for the unions, as it
would encourage production in
the United States no matter who
owned the firms
Import quotas
imposed and
administered by the
United States
Like tariffs, unilateral quotas
imposed by the United States
would be too great a violation of
the rules for Japan to avoid a
GATT dispute
In addition to concerns over
GATT legality, this approach
could make the pro-market
president appear hypocritical
This would be a more attractive
option for the Big Three than a
Japanese-administered quota
programme
This would be a more attractive
option for labour than a
Japanese-administered quota
programme
Export quotas
imposed and
administered by
Japan
This was the least unattractive
option for Japan, being semilegal and allowing for greater
flexibility in administration than
would a US-imposed quota
scheme
This approach placed the least
onus of responsibility and
hypocrisy on the administration
Though less attractive than a
system administered by the
United States, this approach was
preferable to doing nothing
Though less attractive than a
system administered by the
United States, this approach was
preferable to doing nothing
Light trucks comprise the one segment of the US automotive sector that is subject to relatively high
tariffs.9 Concerns over GATT legality also weighed in the administration’s views of domestic-content
legislation and US-imposed quotas.
As one can appreciate from the summary in Table 1, the choice of the VERs over alternative means
of protection was logical. While they were a second-best option for some, they were at least
minimally acceptable to all of the concerned parties. First-hand10 and secondary11 accounts of the
episode recount a highly indirect process in which President Reagan was loath to express a firm
opinion to his subordinates on what the United States should seek, and the US negotiators did not
make precise demands on Japan. The VER option in general, as well as its particulars, seemed to be
chosen virtually as the default option, and then worked out with Japan through a process that might
be called non-negotiations. In the end, however, it was clear that this was a restrictive instrument
that Washington required of Tokyo, even though it did not explicitly bear a ‘Made in the United
States’ label. The putatively voluntary and unilateral nature of the VER did not prevent US legislators
who were opposed to Japanese imports from treating the policy as if it were a legal obligation,
including claims that Japan had ‘violated’ its terms by shipping vehicles in excess of the stated limits.
On 1 May 1981 the Japanese Ministry of International Trade and Industry announced that Japanese
producers would limit their shipments to the United States for two years to 1.68 million units
annually. The VER subsequently evolved in response to changing market and political conditions.
Although the United States decided in 1985 not to request a further extension of the agreement,
Japan nevertheless maintained the restrictions until they were terminated in March 1994. As the
data in Figure 1 show, the quotas did not prevent growth in the total value of automobile imports
from Japan. After plateauing in the first year of the programme, those imports resumed their steady
rise in subsequent years. The reason was simple: Being restricted in the number of vehicles but not
total value, Japanese exporters decided to make the most of the limitations and switch to highervalue units. They also accelerated the establishment of transplant factories in the United States.
With a growing share of the Japanese firms’ sales coming from US-built cars, by the late 1980s the
quotas were no longer ‘binding’ in the sense employed by economists (ie, actual exports were
substantially below the ceiling level). Bilateral trade tensions increased once again in the early
1990s, however, leading Japanese officials to reduce the VER from 2.3 to 1.65 million units in 1992.
The VER was formally terminated two years later, as part of Japan’s implementation of the Uruguay
Round results.
The VER had multiple consequences for producers in the United States, Japan and in third countries.
According to one study, lifting the VER would have produced a gain of $9.8 billion for the United
States.12 Another estimated that the VER reduction in 1992 saved 1,234 jobs in the United States,
but also imposed a $1.7 billion cost on consumers and a quota rent loss of $1.2 billion.13 Yet another
study stressed that the biggest losers were US consumers who had to pay an average of about
$1,200 more (in 1983 dollars) per Japanese car, and suffered a combined loss of some $13 billion;
the US economy as a whole suffered welfare losses totalling some $3 billion.14 From the Japanese
perspective, perhaps the most important effect was the stimulation of quality upgrading.15 As can be
appreciated from Figure 2, the VERs also created opportunities for other producers who sought to
fill the gap left by reduced US imports of Japanese vehicles. Imports from Canada, most of which
were supplied by the Big Three, began to recapture lost market share. European producers
9
Although such trucks are considered to be commercial vehicles in other parts of the world, in the United States they are
used as both passenger and service vehicles. The 25% tariff was originally imposed in 1963 in retaliation for the European
Community’s restrictions on US poultry exports. This so-called chicken tax was imposed on a most-favoured nations (MFN)
basis, and hence created a barrier to imports from Japan that is still in effect.
10
See, for example, Stockman (1986).
11
See, for example, Cohen (N.D.).
12
De Melo and Tarr (1987: 108).
13
Hufbauer and Elliott (1994: 100).
14
Berry et al (1999). For a much lower estimate of the cost to consumers, see Dardis and Decker (2005).
15
De Melo and Tarr (1987: 78–81).
8
benefited from higher prices in the restricted US market. Korean producers benefited significantly
from this opportunity, which fortuitously coincided with their entry into the North American market
in the late 1980s.
In the long term, as illustrated by the data in Figure 3, the VERs paused but did not halt or reverse
the relative decline of the Big Three. Those firms’ combined share of the US market, as well as the
share of the Japanese producers, fluctuated very little during the 1981–95 period. While the US
producers did improve quality during that time, they continued to lose ground to Japanese and
other foreign firms in the first decade of the 21st century.
Figure 2: US auto imports by share of total value, 1976–1984
100%
Rest of World
Western Europe
80%
Canada
60%
40%
Japan
20%
0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
Source: Calculated from US Department of Commerce data (FT990 series).
Figure 3: Shares of the US vehicle market, 1975–2009
100%
All Other Japanese
Nissan
Honda
80%
Toyota
All Other
60%
Chrysler
40%
Ford
20%
General Motors
07
05
03
09
20
20
20
20
99
97
95
93
91
89
01
20
19
19
19
19
19
19
85
83
81
79
77
87
19
19
19
19
19
19
19
75
0%
Source: Calculated from Ward’s Auto data posted at http://wardsauto.com/keydata/historical/UsaSa28summary/.
9
The 2007–2009 recession and the automotive support package
As was the case in the 1980–1 episode, the Obama administration inherited a policy debate that was
already in development before the election and that ripened during the transition from the Bush to
the Obama administrations. The proximate cause of the financial crisis that erupted in late 2008 was
the bursting of the housing bubble, but the resulting economic turmoil affected all segments of the
economy. The auto industry was hit especially hard, with consumers postponing purchases of ‘big
ticket’ items. Automobiles were assembled in the United States at an annual rate of 4.0 million units
in January 2008, but one year later this fell to just 1.3 million.16 Imports dropped as well, as can be
seen from the data in Figure 4. The decline hit all major US partners in this sector. Unlike the 1980–1
episode, when imports rose from Japan at a far higher rate than imports from other partners, the
data in Figure 5 show that shares of the US import market were remarkably steady both before and
after the outbreak of the crisis.
Figure 4: US auto imports by value ($ billion), 2001–2009
$50
Japan
$45
$40
Canada
$35
$30
European Union
$25
Rest of World
$20
$15
$10
$5
$0
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Calculated from US International Trade Commission data.
In a series of steps taken during late 2008 through 2009, the US government provided massive
amounts of aid to both the financial and automotive industries (among others). Some of the
principal events are summarised in Box 2. This included billions of dollars in loans and other forms of
support to domestic automotive producers, though not in equal degrees; whereas the relationship
between the government and GM has grown especially tight,17 Ford declined direct government aid.
16
Federal Reserve data at http://www.federalreserve.gov/releases/G17/ipdisk/auto_sa.txt.
The Obama administration and GM reached an arrangement on 30 March 2009 by which, in exchange for funds already
committed by the US Treasury and a new injection of $30.1 billion, the US government will receive approximately $8.8
billion in debt and preferred stock in ‘New GM’ and approximately 60% of the equity. For more details see the Global Trade
Alert description at http://www.globaltradealert.org/measure/united-states-america-support-general-motors-andchrysler.
17
10
Figure 5: US auto imports by share of total value, 2001–2009
100%
Rest of World
90%
80%
70%
European Union
60%
50%
Canada
40%
30%
20%
Japan
10%
0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Calculated from US International Trade Commission data.
Box 2: Key events affecting US automotive policy in 2008–2010
7–17 September 2008
The financial crisis breaks out in a series of takeovers, sales, bankruptcies, and
bail-outs in the banking, insurance and brokerage industries. The stock market
slide accelerates.
4 November 2008
Barack Obama is elected president.
Representatives of the Group of Twenty hold an emergency meeting in
Washington.
The CEOs of the Big Three appear at a hearing of the Senate Banking Committee,
stating that they need $25 billion in financial aid.
15 November 2008
18 November 2008
1 December 2008
NBER announces that a recession began in December 2007.
2 December 2008
The Big Three submit revised plans to Congress pledging deeper reforms.
The House of Representatives approves the Auto Industry Financing and
Restructuring Act by a vote of 237–170, but the Senate rejects the broader
package in which it is included.
11 December 2008
31 December 2008
14 January 2009
20 January 2009
GM and the US Treasury sign a loan agreement.
Two weeks after the 111th Congress convenes a non-discriminatory cash-forclunkers bill is introduced in the House of Representatives.
17 February 2009
President Obama is inaugurated.
GM issues a new viability plan. President Obama signs into law a stimulus package
providing non-discriminatory aid to the industry through government
procurement and tax incentives.
18 February 2009
Chrysler and GM seek a second bridging loan for $5 and $16.6 billion, respectively.
20 February 2009
17 March 2009
The Presidential Task Force on the Auto Industry holds it first meeting.
Representative Sutton introduces in the House of Representatives a new cash-forclunkers bill that would make incentives available only for the purchase of vehicles
made in North America.
30 March 2009
President Obama lays out a framework agreement with GM.
30 April 2009
Chrysler files for bankruptcy after talks break down with its lenders.
14 May 2009
Chrysler announces the closure of one-fourth of its US dealerships.
11
19 May 2009
Following negotiations among the sponsors, the Obama administration, and
stakeholders in the auto industry, the House Energy and Commerce Committee
approves a compromise cash-for-clunkers proposal that does not discriminate
between imported and domestic vehicles.
1 June 2009
GM files for bankruptcy after failing to negotiate deals with its bond holders.
Most Chrysler assets are sold to ‘New Chrysler’ with $6.6 billion in Federal
financing.
The Consumer Assistance to Recycle and Save (CARS) Act is approved in the House
and the Senate with $1 billion in funding, and President Obama signs the bill into
law.
The House of Representatives approves an appropriations bill requiring that any
vehicles purchased with money provided in the bill be produced by the Big Three
firms.
The CARS programme is in effect, with Congress approving a further $2 billion in
funding on 7 August after the initial $1 billion is quickly depleted.
A House-Senate conference committee removes from the appropriations bill the
requirement that government-purchased vehicles be produced by the Big Three.
Representative Sutton and Senator Stabenow introduce resolutions calling Japan’s
scrappage programme ‘unfair and discriminatory’ and directing the president to
initiate immediate consultations. The New Democrat Coalition in the House writes
to the ambassador of Japan to protest against the measure.
The House Subcommittee on Trade cancels a planned hearing on discrimination
under both the Japanese and Korean programmes after Japan announces changes
to its scrappage programme.
Japan releases a list of US auto models that qualify under the scrappage
programme.
10 June 2009
9–24 June 2009
17 July 2009
27 July–24 August 2009
30 September 2009
5–20 January 2010
21 January 2010
3 February 2010
The question of whether this aid discriminates against foreign automotive producers is complex. On
the one hand, there are no elements of the support packages that explicitly provide for blatantly
trade-distorting measures such as tariffs or other border barriers, production or export subsidies,
etc. On the other hand, government supports to industry can distort markets by erecting barriers to
exit and favouring some producers over others. That is especially true for those kinds of support that
are made available only to domestic firms and not to the transplant operations of foreign firms in
the United States. It is also possible that the state may acquire control or influence over the
decisions of the firm, and seek to exercise this power in ways that are intended to favour investment
and production in the domestic market. While the US delegation to the WTO has stressed that the
government loan to GM is intended to benefit all of the firm’s continuing operations without regard
to geographic location,18 there is also anecdotal evidence to suggest that in at least one case the
result may have been restrictive.19
Compared to the blatantly protectionist approach taken in 1981, however, the restrictiveness of
these latest measures is quite minor. At no time has the Obama administration or Congress
advocated or approved anything in the nature of new tariffs or quotas on imports of automobiles. To
the contrary, there were two notable episodes in which some members of Congress advocated
discriminatory initiatives but these were either defeated or significantly modified. In one instance
18
As cited by the WTO’s Trade Policy Review Body (2009: 45).
The timing and content of two decisions simultaneously announced on 29 May 2009 suggest that the concurrent
bargaining over government support, a new labour contract, and GM’s plans for investment may have led in at least one
instance to a decision against multinational investment and trade. GM announced that day that its employees represented
by the UAW had ratified key modifications to the GM-UAW 2007 National Labor Agreement. The modified agreement
included concessions that will help GM reach the objectives of its Viability Plan. The company also announced that day that
it plans to build a future small car in the United States, utilising an idle UAW-GM facility. That announcement came after
GM was reported to be considering the production of a small car in China, with part of the output to be exported to the
United States; those plans were then dropped.
19
12
Congress considered, but ultimately rejected, a Buy-America provision affecting the purchase of
motor vehicles by several US government agencies. The House of Representatives had approved a
provision in the ‘Energy and Water Development and Related Agencies Appropriations Act of 2010’
(designated as H.R.3183) stating that, ‘None of the funds made available in this Act may be used to
purchase passenger motor vehicles other than those manufactured by Ford, General Motors, or
Chrysler.’ This provision would not even permit the procurement of vehicles made in the United
States by the transplant factories of foreign automotive companies. There was no such provision in
the Senate version of the bill, however, and the Buy-American provision did not appear in the
compromise version produced by a House-Senate conference committee in September 2009.20
The other measure, and our main focus here, was the ‘cash-for-clunkers’ programme. In this
instance the initiative was ultimately enacted into law, but only after its discriminatory aspects were
removed. As finally implemented, the programme was actually more beneficial to foreign than
domestic automobile producers. The Consumer Assistance to Recycle and Save (CARS)21 Act 2009 is
Title XIII of the Supplemental Appropriations Act 2009 (Public Law 111-32). The programme provided
credits to consumers who traded in old, fuel-inefficient vehicles when buying or leasing new, more
fuel-efficient vehicles. The law was notably non-discriminatory, applying equally to the purchase of
domestic and foreign vehicles. The National Highway Traffic Safety Administration made that point
clear in the website that it created to promote the programme, the ‘frequently asked questions’
section of which included the following exchange:22
I don’t drive an American car but I would like to trade in my old car for a newer, more
fuel efficient one. Is this program only for American cars?
No. You may trade in or buy a domestic or a foreign vehicle.
Congress explicitly chose the non-discriminatory route by opting between two very different
measures. One was the Accelerated Retirement of Inefficient Vehicles Act 2009 (H.R.520), as
introduced in the House in mid-January 2009. This bill did not discriminate between domestic and
imported vehicles. Two months later, however, another measure was introduced that would have
provided credits only for North American vehicles. Sponsored by Representative Betty Sutton
(Democrat of Ohio) and 35 co-sponsors, most of them from automobile-producing states in the
Midwest, the original version of the CARS Act 2009 (H.R.1550) would have limited credits to the
purchase of vehicles assembled in the United States or, for some classes of vehicle, in North America
(ie, Canadian or Mexican vehicles would qualify).23 Although this was the bill that lent its name to
the programme that Congress eventually approved, the discriminatory provisions in the bill did not
survive the legislative process.
Negotiations between the Obama administration, members of Congress, and stakeholders in the
automotive industry led to agreement on a compromise measure that did not discriminate between
domestic and foreign vehicles. On 19 May 2009 the Committee on Energy and Commerce in the
House of Representatives passed the compromise by a bipartisan vote of 50–4. That vote appended
the CARS Act to the American Clean Energy and Security Act 2009 (a wide-ranging bill dealing with
climate change), but the CARS Act was later decoupled from that larger measure and considered by
the House as a stand-alone bill. In the 9 June 2009 debate over this measure on the floor of the
House of Representatives, the sponsors introduced letters of support from a wide range of
interested parties, including US and foreign-owned automobile manufacturers as well as labour
unions and business organisations. The House voted for the bill by 298 to 119, with Democrats
favouring it overwhelmingly (239–9) and even a sizeable minority of Republicans giving their support
20
For further details on the episode see the Global Trade Alert description of the measure at
http://www.globaltradealert.org/measure/united-states-america-government-purchase-vehicles-big-three-producers.
21
Note that the CARS acronym is also rendered in some places as the ‘Car Allowance Rebate System’.
22
http://www.cashforclunkersfacts.com/.
23
For example, a $4,000 voucher would be available for a ‘passenger automobile assembled in the United States with a
minimum highway label fuel economy value of 27 miles per gallon’, or for a ‘passenger automobile assembled in North
America with a minimum highway label fuel economy value of 30 miles per gallon’.
13
(59–110). The measure was later attached to an appropriations bill that both houses of Congress
then approved during 16–18 June 2009.24 President Obama signed the bill into law on 24 June 2009.
The programme proved to be much more popular than its sponsors or critics had originally expected,
and ran through the initial $1 billion within a week of its implementation. Congress approved
additional funding for the programme, but that money too was soon exhausted and the programme
ended in August 2009. The program’s designers and administrators were well aware of the fact that
many of the most fuel-efficient vehicles sold in the US market are either imported into or made in
the United States by Japanese and Korean firms,25 and that the law was likely to be more beneficial
to them than to the Big Three. The data on actual usage confirm that this was indeed the case: Of
the 401,274 passenger cars, 274,602 light trucks, and 1,966 heavy trucks that were purchased using
the program’s incentives, only 48.6% were manufactured domestically.26 Toyotas accounted for only
2.6% of the trade-in vehicles, for example, but for 17.8% of the new vehicles; 28.9% of the trade-ins
were Fords, compared to just 13.3% of the new vehicles.27
One great irony of the cash-for-clunkers experience is that it was not the US programme but its
Japanese counterpart that raised questions over discrimination against imports. The government of
Japan introduced in 2009 an ‘Eco-friendly Vehicle Purchase’ that, like the US programme, provided
credits to consumers who scrapped older vehicles for new, more efficient cars. The programme
excluded, however, all vehicles that are certified under the government’s ‘preferential handling
procedure’ (PHP) regulatory programme (a system that allows imported vehicles to be sold without
individual inspection of each car or truck as it is imported). Significantly, all vehicles exported to
Japan by the three US manufacturers enter Japan under the PHP regulatory protocol for
certification. This meant that US cars, unlike their domestic or some other imported vehicles, were
not eligible for the Japanese programme.
There followed a series of protests and threats from members of Congress (see Box 2). As criticism
mounted, Japan decided to change its programme. On 19 January 2010 the Trade Ministry posted a
statement on its website clarifying that its car-scrappage programme was being altered to allow the
incentives to be offered to suitable cars imported under the PHP. As of this writing the United States
remains unsatisfied with the extent of the Japanese efforts to ensure that the programme is nondiscriminatory. Following the release on 3 February 2010 of a limited list of vehicles that qualify for
the programme, US Trade Representative Ron Kirk expressed ‘disappoint[ment] with Japan’s
announcement’, calling it ‘particularly unfortunate in light of its recent announcement to open
opportunities for U.S. autos to qualify for its program, which was a welcome step’. He said that the
United States ‘will continue to urge Japan to implement its program in a manner that is transparent
and as inclusive of U.S. autos as possible’.28
Whether or not these complaints ultimately lead to further changes in the Japanese programme,
two points are clear. The first is that, in the short term, the United States took a more liberal
approach to its scrappage programme than did Japan. The second and more significant point is that
the United States took a far more liberal approach in this latest episode than it did in 1981. Far from
imposing unilateral import restrictions or encouraging Japan to restrict its exports, the rescue
packages for the auto industry this time were remarkably free from the kinds of economic
nationalism that Detroit demanded and Washington granted a generation earlier.
Four Explanations for the Different Outcomes
24
Note that the Senate did not vote on this measure as a separate initiative and hence the partisan breakdown cannot be
stated.
25
See the data posted at http://www.fueleconomy.gov/feg/bestworst.shtml.
26
US Department of Transportation, National Highway Traffic Safety Administration (2009: 36). Note that the report does
not identify how many of these US-produced vehicles were Big Three versus transplants.
27
Ibid: 22 and 24.
28
USTR statement posted at http://www.ustr.gov/about-us/press-office/press-releases/2010/february/kirk-commentsrelease-list-us-autos-models-qualif.
14
The question that we must now answer is, ‘What accounts for the differences between these two
episodes?’ If one were to hazard a prediction based on some of the common perceptions of US trade
politics, the likelihood for a protectionist outcome would seem to be higher in the more recent case
(a very deep, lengthy recession and a Democratic president) than in the older one (a brief recovery
between successive recessions and a Republican president). Why then did the incoming Reagan
administration take a much more protectionist approach than the incoming Obama administration?
In this part we consider a series of explanations that might account for the differing outcomes. These
might variously be attributed to (1) legal considerations (to what extent can the non-discriminatory
results of the second episode be attributed to the rules established in the Uruguay Round of
multilateral trade negotiations?), (2) political considerations (were there any respects in which the
Obama administration had a ‘stronger hand’ than its predecessor, or simply played it better?), (3)
short-term economic considerations (was the 1981 downturn qualitatively different from the more
recent one?), and (4) long-term considerations of political economy (is it the case that the
globalisation of ownership and supply chains has inhibited protectionist demands?). The evidence
presented here suggests that while each of these explanations may provide some part of the
answer, it is the fourth that seems to be the most persuasive.
A legal explanation: changes in WTO rules
One possibility is that international law constrained Obama more than Reagan. VERs were
controversial though not unambiguously GATT-illegal in 1981, but were outlawed by one of the
agreements reached in the Uruguay Round (1986–94). Just as the Reagan administration could not
legally have raised the US tariff on automobiles a generation earlier, the Obama administration
could not have requested or even acquiesced in the imposition of quotas in 2009 without violating
US obligations to its partners in the World Trade Organisation (WTO).
Putatively ‘voluntary’ restrictions on exports were, together with antidumping duties, the most
typical form of trade barrier among industrialised countries in the 1980s. The GATT Secretariat
identified 236 VERs in place in 1989, most of which were imposed during the 1980s, of which 17
covered the automotive sector.29 These ‘gray area’ measures occupied a realm of highly
questionable GATT-legality, which led one prominent legal scholar to stress ‘the need for a
negotiated rule discipline that will explicitly constrain the temptation to use export-restraint
arrangements frequently as an instrument of trade policy’.30 This goal was indeed achieved in the
Uruguay Round. The Safeguard Agreement prohibited new VERs, and provided that those in effect at
the time the WTO entered into force had to be phased out.
It could be argued that the VER-ban in the Agreement on Safeguards was indeed a critical
consideration in the administration’s calculations. That would be part of a broader pattern in Obama
trade policy that might be deemed ‘passive free trade’. On the one hand, the administration did
almost nothing in its first year to deal with the pending trade agreements and negotiations that it
inherited from its predecessor, attaching a very low priority to trade policy. On the other hand, the
administration sought to restrain whatever protectionist impulses arose in Congress, and was
especially eager to ensure that any measures enacted were consistent with US legal obligations
under existing trade agreements. That was demonstrated very early in the administration’s tenure
when it negotiated with Congress to ensure that the ‘Buy American’ provisions in the economic
stimulus package did not violate US obligations in either the WTO or the existing free trade
agreements.31 The administration was not always successful in these efforts to restrain Congress, as
29
Low (1993: 76–7).
Jackson (1988: 497).
31
See the Global Trade Alert description of this measure at http://www.globaltradealert.org/measure/united-statesamerica-buy-american-provisions-stimulus-package.
30
15
was shown by one provision that slipped past in blatant violation of the free trade agreement with
Mexico,32 but at least its overall intent was clear.
The chief weakness of the legal explanation is that it deals with only one form of protectionism. As
the 1981 episode demonstrated, industries or policymakers that seek to restrict imports can be quite
creative in finding a way around legal restrictions. If one path is blocked, of even if several of them
are, the demandeurs and their policymaking allies may find some other way to restrict import
competition if they wish to do so in the first place. One way that the Obama administration could
have restricted the US auto market, had it wanted to do so, would have been via a safeguards case.
President Obama proved that he was willing to go down this route in September 2009 when he
granted a safeguard request involving a small segment of the automotive industry (tyres imported
from China).33 One can only speculate on what the USITC might have ruled, and what President
Obama might have done in response, if a new safeguards petition had been filed for automobiles.
What is most notable in this instance is that there were no such efforts made by either the industry
or the administration.
A political explanation: the differing positions of the two administrations
What of the differing political conditions of the two administrations? There are at least three distinct
but related political matters that we should consider: the ideological differences between the two
presidents, the two presidents’ political capital, and the partisan differences between the
congressional Democrats and Republicans with whom they had to deal.
Apart from the fact that they were both newly elected, it is difficult to think of any pair of recent
American presidents who were less alike than Reagan and Obama. Focusing on just one of the
differences between them, to what extent can we attribute the results in these two episodes to their
respective political and economic ideologies? This question related to a recurring controversy in the
political economy of trade policy. Some political scientists argue that the post-1930 turn towards
free trade in the United States can be explained by the triumph of liberal economic ideas, and that
this victory can be attributed in large measure to the negative experience with protectionism during
the Great Depression of the 1930s.34 Policymakers, it is argued, remember the dire economic and
political consequences that followed upon the enactment of the highly protectionist Hawley–Smoot
Tariff Act 1930, which is widely associated not only with the transnational spread of protection but
indeed with the outbreak of the Second World War, and have since learned to restrain their own
worst impulses.
Whatever the merits of that explanation may be for the ‘big picture’ of postwar trade, it would
appear to be inapplicable to the present problem.35 There is no doubt that free trade ideas played
very different roles in the two presidents’ public personas: Reagan often expressed his faith in the
market in general and especially his devotion to free trade, while Obama is generally seen as more a
pragmatist than an ideologue and very rarely makes any mention of trade. In that respect their
32
See the Global Trade Alert description of this measure at http://www.globaltradealert.org/measure/united-statesamerica-access-mexican-trucks.
33
Like the 1980 auto case, the petition in this instance was filed by a labour union. See the Global Trade Alert description
of the measure at http://www.globaltradealert.org/measure/united-states-america-safeguards-against-imports-consumertires-china.
34
Judith Goldstein is the most prominent advocate of this view. In a detailed examination of US trade debates in the 19th
and 20th centuries she found evidence to support the contention that ‘ideas … become predictors of the direction of policy
at least as powerful as are simple calculations of interest’ (1993: 3).
35
One might even go farther to argue that the contrast between these two cases points to fundamental problems with the
ideological explanation in general. No one could seriously contend that the fundamental economic arguments in favour of
open markets changed significantly in the period between the Reagan and Obama administrations; the development of the
concepts first of absolute (Smith, 1776) and then comparative advantage (Ricardo, 1817) predate even the earlier of our
two episodes by over a century and half. And if it is indeed the case that it was the Great Depression that drove this lesson
home, we should expect that lesson to be more distant, and less influential, after the passage of 80 years than it was after
just 50. To put matters in personal terms, Reagan (born in 1911) was a young man during the Great Depression, while in
Obama’s case even his mother (born in 1942) knew that economic catastrophe only from history books.
16
positions adhere more or less to the popular perception that Republicans are free-traders and
Democrats are, at best, indifferent to free trade. In actual practice, however, their actions in the
automotive episodes demonstrated just the opposite attachments.
Nor is the contrast between these two presidents in this one sector a unique case. From Carter
through Obama, most of the significant concessions to protectionist demands have been made by
Republicans. Consider the case of steel, where the decisions of two successive administrations
followed the same pattern as we saw for autos in the Carter and Reagan administrations. President
Bill Clinton (a Democrat) rejected demands in his second term that he impose import restrictions on
steel, only to see his decision reversed by President George W. Bush (a Republican) in 2001.36
Similarly, the protection that Republican presidents Reagan and George H.W. Bush extended to the
steel industry in 1984 and 1989, respectively, was more thorough (in the form of global quotas) than
the protection that President Jimmy Carter extended to that industry via the ‘trigger price
mechanism’ for antidumping cases in 1978. His rhetoric notwithstanding, Ronald Reagan made the
most compromises of all. In addition to the deals he made with the steel and auto industries, these
included apparel, sugar and softwood lumber. This is not to say that he always yielded to such
demands, or did so without purpose. Most of these concessions were made in a ‘one step back, two
steps forward’ approach in which the administration was willing to cut deals when it sought to win
congressional approval for major initiatives such as a new round of multilateral trade negotiations
and a free trade agreement with Canada. In that sense one might argue that Obama has not yet
been obliged to make the ‘one step back’ of a major protectionist concession because he has also
not attempted ‘two steps forward’ in the form of, for example, a new request of negotiating
authority in order to complete the Doha Round.
The question nevertheless remains, why did the Reagan administration feel compelled to ‘cave’ on
this one demand so early in its tenure? Why did it not oppose the auto industry as strenuously as,
for example, it did the apparel and footwear industries when congressional majorities – including
key members of the president’s own party – demanded even stricter quotas? Those fights went
down to the wire, with the president having to veto bills twice, and coming uncomfortably close to
seeing his vetoes overridden by Congress.
The answer to that question does not seem to be a function of that somewhat amorphous thing we
call ‘political capital’. Though not strictly measurable, there are some indicators that we can use to
gauge it roughly. As can be seen in Table 2, there are several grounds for concluding that Reagan
started his presidency with at least as much, and arguably more, political capital than did Obama.
First, Reagan had won a more decisive victory in the presidential election, as measured both by his
share of the electoral votes and by his share of the popular vote. Second, although Reagan’s
popularity was lower at the very start of his term vis-à-vis Obama’s, he saw that figure rise
throughout his first six months in office. Obama’s fell during the same timeframe. The only respect in
which Obama was better off than Reagan was in the fact that he enjoyed fully unified government,
with Democrats controlling the House, the Senate and the White House. Reagan’s Republican allies
held a majority in the Senate, but not the House.
This then leads us to the role of Congress. Trade is ultimately a congressional responsibility, as
provided under the US Constitution, and presidents can accomplish little in this field without the
approval of the legislature. Republicans have long enjoyed the reputation of being more devoted to
free trade than Democrats, and there is substantial evidence in both rhetoric and voting patterns to
support that contention. In the 1980–1 episode, however, those differences were not so evident. It
is notable that when both the House and the Senate went on record in late 1980 in favour of import
restrictions the proposal received majority support from both parties. When the House voted on 2
December 1980 the measure was favoured by 214 of the 230 Democrats (ie 93.0%), and by 103 of
the 144 Republicans (ie 71.5%). The motion in the Senate to table (ie defeat) a similar measure was
opposed by (and thus the measure itself was supported by) all but three of the 42 Democrats (ie
36
For a detailed examination of this case study see Rosegrant (2002).
17
92.9%), and by all but nine of the 35 Republicans (ie 74.3%).37 These results suggest that the
partisan differences in 1980–1 were matters not of kind but of degree, and those degrees were not
very great.
Table 2: Comparative political positions of Presidents Reagan and Obama, 1981 and 2009
Electoral votes won in 1980/2008
Share of two-party vote won in 1980/2008
Gallup poll ratings in 1981/2009:
January
February
March
April
May
June
Number of Democrats in 1981/2009:
House of Representatives
Senate
Reagan
Obama
489 (91.4%)
55.4%
365 (67.8%)
53.7%
51%
55%
60%
67%
68%
59%
67%
62%
63%
62%
64%
59%
242 (55.6%)
46 (46.0%)
257 (59.1%)
59 (59.0%)
Notes: The number of Democrats in the Senate in 2008 is the number produced by the election, counting two
independents who vote with the Democrats but not counting the results of later events in the 111th Congress that caused
that number to rise and then fall (one party switch, one death and one special election). Note also that one of the
Democrats elected in 2008 did not actually take office until July 2009, after all legal challenges to the election were
exhausted.
Sources:
Election
results
from
Wikipedia.
Gallup
poll
ratings
from
the
Roper
Center
(http://webapps.ropercenter.uconn.edu) and the Gallup poll (http://www.gallup.com), using in each case the poll done
closest to the fifteenth day of the month in question.
The widespread and only semi-partisan support for automotive restrictions undoubtedly weighed
heavily in the Reagan administration’s decision. There is no doubt that the president could have
vetoed any bill that Congress enacted to restrict the market, and that it would prevail in any efforts
to override such a veto. The decision to restrict the market was, in brief, even more ‘voluntary’ for
the Reagan administration than the VERs were for Japan: This was a fight that it could have won, had
it chosen to do battle, but it decided instead to accommodate the protectionist demands.
Trade policy has grown more partisan since the early 1980s, but that does not mean that it has
become more restrictive. To the contrary, partisan conflict has increasingly been devoted less to the
core commercial issues of trade policy (open versus closed markets) and has instead been deflected
to matters that have become politically tied to trade. That is especially true for labour rights and the
environment, with Democrats often demanding that further liberalisation be conditioned upon
achievements in these areas and Republicans objecting to links between trade and ancillary matters.
The 9 June 2009 vote in the House of Representatives on the CARS Act can be seen within that
context, as it did not directly involve a question of trade per se (the discriminatory provisions having
already been removed) but instead was seen as an effort to promote both the environment and
economic recovery. Involving as it did some basic differences between the two parties’ economic
and environmental policies, the resulting pattern of votes was highly partisan. The measure received
overwhelming approval (97.5%) from Democrats representing the 20 states with automotive
assembly plants,38 and an almost identical level of support (95.2%) from Democrats representing the
other 30 states. The level of support among Republicans from the automotive states (29.7%) was
actually below the level for Republicans from non-automotive states (36.8%), but not by much. Like
37
38
Congressional Quarterly (1981).
These states are enumerated in Table 3, below.
18
many other trade-related votes of the past two decades, this measure was thus seen more through
partisan and ideological lenses than as a particularistic benefit for a specific industry.
It is reasonable to conclude that the broad and bipartisan support for import restrictions was a
decisive factor for the Reagan administration. That nevertheless leaves open the question as to why
this option was so popular in Congress at the time, especially by comparison with the more recent
episode. To answer that question we now turn to both short- and long-term economic factors.
A short-term economic explanation: qualitatively different downturns
These two episodes offer contradictory evidence in support of the proposition that economic hard
times breed demands for protection from imports. The association between downturns and
protectionism is at least as old as the panic of the 1890s, and was solidified by the role that the
Hawley–Smoot Tariff Act 1930 played in deepening and spreading the Great Depression. It was with
that latter experience in mind that economists were quick to warn early in the financial crisis that
the ‘political pressures demanding import protection to protect employment are surfacing with
increasing intensity around the world’39 and that ‘the risk of a devastating resurgence of
protectionism is real’.40 Subsequent events have confounded those expectations, however, with the
lack of protectionism in the US auto industry being just one of many dogs that have not barked.
One possibility worth considering is that not all recessions, depressions, or crises are alike in their
causes and symptoms, and that different types of downturns may be more or less likely to produce
demands for import protection. While it is well beyond the limited scope of the present paper to
suggest anything like a taxonomy of recession types, we can at least ask how the differing economic
conditions of the 1980–1 and 2008–9 episodes might have affected the outcomes. There are two
principal distinctions that we can draw here: the severity of the two downturns, and the differing
ways that trade flows responded.
Let us consider first the question of a recession’s severity. One might speculate that a run-of-the-mill
recession may produce only a slight up-tick in the demand for protectionism, but that a bona fide
financial crisis that threatens to descend into a real depression will produce much higher demands.
The twin episodes reviewed here, however, run precisely counter to that speculation. The economic
downturn that the Reagan administration experienced during its first six months in office was not
even a recession, though policymakers could not be sure of that fact at the time. The only certainty
was that the NBER had announced in mid-1980 that the US economy entered a recession in January
of that year. NBER did get around to declaring that this recession had ended in July 1980 until July
1981.41 By contrast, the recession of 2008–9 lasted much longer (though we do not yet know
precisely by how much) than the seven-month recession of 1980, and was far more devastating to
the economy. This observation tends to deepen rather than resolve the conundrum as to why the
auto industry received import protection in 1981 but not in 2009.
A second possibility is that a downturn will produce protectionist demands only if imports are
perceived to be an essential part of the problem. The data shown in Figure 6 highlight the fact that a
merchandise trade deficit was still a relatively new phenomenon at the time of the 1980–1 episode,
with the account having been in balance as recently as the start of 1976. Though the deficits that the
United States ran in the late 1970s and early 1980s were much smaller in both absolute and relative
terms than those of the early 21st century (see Figure 7), they were seen at the time with great
alarm. And while the overall deficit came close to disappearing in the recession of 1980, with
imports dropping at a time when exports continued to rise, that was not the case for automobiles.
The ever-larger imports of Japanese vehicles, and the resulting increase in the US automotive trade
deficit, definitely made trade appear to be a significant part of the overall economic problem.
39
Gamberoni and Newfarmer (2009).
Dadush (2009: 1).
41
Ironically, that July 1981 announcement coincided with the start of a new recession. The recession of July 1981 would
not be declared until January 1982.
40
19
Figure 6: Quarterly US merchandise trade ($ billion), 1976–1984
$350
Imports
Recessions
$300
$250
$200
Exports
$150
Deficit
$100
$50
.
.
19
84
.
19
83
.
19
82
.
19
81
.
19
80
.
19
79
.
19
78
.
19
77
19
76
$0
Figure 7: Quarterly US merchandise trade ($ billion), 2001–2009
$2,500
Recession
Recession
Imports
$2,000
$1,500
Exports
$1,000
Deficit
$500
.
20
09
.
20
08
.
.
20
07
.
20
06
.
20
05
.
20
04
.
20
03
.
20
02
20
01
$0
Source: Calculated from US Department of Commerce data at http://www.bea.gov/national/nipaweb/index.asp. Note that
the end date for the 2007–9 recession is speculative; no official determination has yet been reached.
20
By contrast, one of the first effects of the outbreak of the financial crisis in late 2008 was a rapid
decline in imports. Exports also fell, as can be seen in Figure 7, but not by a lesser degree. The result
was an approximate halving of the trade deficit in the space of just a few months. This is one reason
why policymakers in Washington devoted so little attention to trade, as compared to other aspects
of the economy, in the last months of the Bush administration and the first months of the Obama
administration. The trade deficit was something of a ‘self-licking ice cream cone’, and neither the
administration nor Congress felt compelled to devote much time to a problem that appeared to be
solving itself. It was not until his second year in office that President Obama began to stress the
importance of trade as a means of promoting economic recovery, and then did so only by stressing
export-promotion rather than efforts to cut imports.
The qualitative differences between these two recessions thus appears to supply part of the answer.
The changes in the trade were seen to be one of the causes in the first case, and merely a symptom
in the second.
A long-term political economy explanation: the consequences of globalisation
That short-term economic explanation seems persuasive, but also incomplete. For a more
comprehensive understanding of the differing results we need to examine longer-term changes in
the structure of the US automotive industry and the impact of these changes on the politics of trade.
The final explanation presented here, and the one for which the evidence seems strongest, is that
the differing outcomes of these two episodes can be understood as the consequence of long-term
changes in the composition and interests of the US automotive industry. That industry has
undergone four changes major changes over the past few decades: (1) greater globalisation through
the outsourcing of parts manufacture and strategic partnership with Japanese and other foreign
firms; (2) the rise of ‘transplants’ in US parts and vehicle manufacturing; (3) reduced influence of the
unions, both through declining production in the United States and the migration of production to
states with lower levels of unionisation; and (4) the increasing strength of automobile dealers,
especially those who sell imported vehicles. The net result has been a decrease in the number and
influence of those who perceive a benefit from import protection, and a concomitant rise in the size
and power of those who favour an open market. Put another way, the differences between 1980–1
and 2008–9 can be best understood not by looking at the decisions of those policymakers who
choose whether or not to supply protection, but instead at those private sector interests who
demand it. There is no reason to expect a commodity to be supplied if there is little or no demand.
From the 1930s through the 1950s the US automotive industry and its associated labour unions were
key members of the domestic coalition in favour of a liberal trade policy. There was no irony
intended when the authors of one of the classic studies of trade politics at mid-century entitled a
chapter ‘Detroit: Hotbed of Free Trade’.42 Nor was the pro-trade sentiment confined to the firms.
Many forget that from the mid-1930s through the early 1960s the labour movement formed part of
the backbone of the pro-trade coalition in the United States, and that this was due in large measure
to the interests and influence of the United Auto Workers. This posture in support of open markets
began to change in the 1960s and 1970s, when competition first from German and then Japanese
producers led to a gradual upturn in import penetration. Since that time the Big Three have
gravitated back towards a more pro-trade posture, at least when it is managed to their liking (eg, in
free trade agreements with accommodating rules of origin),43 but the labour unions have left the
pro-trade coalition for good.
42
Bauer et al (1963).
Space does not permit an exhaustive examination of the more favourable view that the Big Three take of discriminatory
free trade agreements (FTAs) than they do of multilateral liberalisation. Suffice it to cite two facts in support of this
contention: The US negotiators in the Uruguay Round made no concessions on the 2.5% and 25% tariffs on passenger cars
and pickup trucks, and from the US-Canada FTA of 1988 to the North American FTA of 1992 the two agreements’ rules of
origin expanded greatly in length and complexity.
43
21
The first change that separates the 2008–9 episode from its 1980–1 predecessor is the greater
globalisation of the Big Three. In that earlier incident the globalisation of these firms’ operations was
limited primarily to the sourcing of some parts overseas, and ‘captive imports’ (ie, imports of
vehicles purchased from foreign partners). At that time all three firms imported pickup trucks made
by partners in Japan, and Chrysler also imported Japanese-made passenger cars.44 Apart from their
own investments in Canada, most of the Big Three production in foreign plants was devoted to sales
in the host countries or the surrounding region. Moreover, the Big Three’s captive imports were
falling in relative terms: Whereas these transactions accounted for 40.5% of all vehicle imports in
1975, by the first half of 1980 they had fallen to 26.6%.45 So while the outsourcing of parts had
reached a sufficiently high level in 1980 for the Big Three to prefer VERs over domestic-content
legislation as the chief form of import protection, the industry’s overall level of globalisation was still
low enough that the firms favoured a closed US market for finished automobiles over an open one.
Since that time their dependence on global supply chains has grown considerably.
The second major change over the past generation is the domestication of Japanese automotive
firms, including transplant assembly operations as well as Japanese investments in the US auto parts
sector. The decision to invest in the US market was not taken by the Japanese firms, nor indeed by
one of their predecessors, solely on the basis of economic considerations.46 The Askew-Yasukawa
Agreement of 1980, in which the US and Japanese governments agreed to promote Japanese firms’
investment in US parts and vehicle production, was intended to defuse tensions between
Washington and Tokyo. Honda was the first Japanese automobile company to announce its plans to
establish a production facility in the United States, with its first US-made vehicles entering the
market in 1982 (ie, the first full year in which the VERs were in effect). Most other companies
established facilities within a few years, including Nissan (1982), Mitsubishi (1985), Toyota (1985)
and Mazda (1987). The relationship between the major Japanese producers and their US rivals also
grew closer with the forging of strategic alliances. Each one of the Big Three paired up with a
Japanese partner for activities ranging from collaborative R&D to joint production facilities: Chrysler
with Mitsubishi, Ford with Mazda, and General Motors with Toyota. Chrysler was even more
globalised during 1998–2007, when it was the junior partner in the ill-starred DaimlerChrysler
venture.47 These alliances have all served to restore, at least in part, the US firms’ support for more
open trade in automobiles.
A great deal of scholarship,48 not to mention popular culture,49 has focused on the social or
economic issues surrounding the transplant of Japanese production, managerial styles and even
culture to US communities. Less attention has been paid to the impact that these transplants have
had on the political interests and activities of people in those communities, and on those who
represent them in Congress. As can be seen in Table 3, however, the raw numbers suggest that
those states with transplant facilities (with or without Big Three facilities as well) now outnumber
the few states in which the Big Three are the only producers. That latter group wields only 15.0% of
the voting power in Congress, while the states in which transplants account for at least some of the
automotive production have 32.8%.
It is notable that the transplants tend to aggregate in the ‘right to work’ (aka anti-union) states of
the south, a point that relates to the third major change in the US automotive industry since the
early 1980s. Employment in the automotive manufacturing sector has fallen, and unionised
44
GM’s partner was Isuzu, Ford’s was Toyo Kogyo, and Chrysler’s was Mitsubishi. See USITC (1980: A-17).
USITC (1980: A-25).
46
Volkswagen began production in the United States of the subcompact Rabbit in 1978, having purchased a plant that
Chrysler owned but never used. Some observers believe it is no coincidence that this investment came at a time when
protectionist legislation was under consideration in the United States.
47
Following Chrysler’s bankruptcy in 2009, it is now owned by the United Auto Workers, Fiat and the governments of the
United States and Canada.
48
See, for example, Perrucci (1994).
49
See, for example, the 1986 film Gung Ho, a comedy about a Japanese transplant in the Midwest.
45
22
employment has plummeted at an even faster rate. This has diminished the political influence of the
one segment of the US industry that has an unambiguous interest in restricting import competition.
Table 3: Political strength of states by automotive production mix, 2008a
No automotive
production
Transplant production
only
Big Three and
transplant production
Big Three production
only
30 states
Alabama
California
Delaware
Mississippi
Illinois
Georgia
South Carolina
Indiana
Kansas
West Virginia
Kentucky
Louisiana
Michigan
Minnesota
Ohio
Missouri
Tennessee
Virginia
Texas
Wisconsin
House seats:
193
House seats:
20
House seats:
161
House seats:
61
Senate seats:
60
Senate seats:
8
Senate seats:
16
Senate seats:
16
Share:
52.2%
Share:
6.3%
Share:
26.5%
Share:
15.0%
Notes: All states have two senators; seats in the House of Representatives are distributed according to population.
Shares of total take into account the differing sizes of the House of Representatives and the Senate, such that each Senate
seat receives 4.35 times as much weight as each House seat.
a
Congressional representation of states hosting automotive assembly plants that were in production in 2008; transplants
include Japanese, German and Korean automobile companies.
Source: Company websites and other sources.
Employment in the manufacturing side of the automotive industry has declined sharply over the past
few decades. As recently as 1995 there were 251,300 persons employed in the manufacture of
automobiles and light trucks in the United States, but this figure fell to 119,500 in 2009. During the
same period the number of persons employed in the manufacture of motor vehicle parts fell from
786,900 to 418,700. By way of comparison, in 2009 there were 316,200 persons employed in motor
vehicle and parts wholesale trade, 482,200 in auto parts and accessories stores, 806,100 in
automotive repair and maintenance, 827,000 worked in gasoline stations, and 912,600 were
employed in new car dealerships.50 In short, the service-related segments of the automotive sector
(broadly defined) now employ far more people than the manufacturing segment, and we should not
be surprised if this leads to a corresponding shift in the relative power of the different segments to
influence public policy.
Parts production in the United States has shifted in two important respects over the past generation.
First, the traditional Midwestern core of the US industry now accounts for a smaller share of the
total, and forms just one part of a geographic region that is sometimes called Auto Alley. This is a
North–South corridor that starts in the Midwest but extends far south into states that
manufacturers seem to prefer in order to minimise the likelihood of a unionised workforce. The
second change is that ‘[t]he percentages of parts made outside the United States and inside the
United States by foreign-owned companies have increased’.51 While the first of these trends might
appear to strengthen the overall political power of the automotive industry, insofar as it has diffused
that industry among a wider range of states and congressional districts, the second one may make
the representatives of those auto-dependent districts less inclined to favour initiatives that
discriminate against foreign-owned firms.
50
All figures from the Bureau of Labor Statistics (BLS). Note that comparable data are not available for 1980–1 in most
sectors (other than new car dealerships) due to changes in the BLS nomenclature.
51
Klier and Rubinstein (2008: 358).
23
Several factors have contributed to the decline in UAW membership, including some that are
economic (downsizing and automation in the industry) and others that are at least partly political
(the rise of employment in right-to-work states). The net result is that membership in the union,
which broke the million-member level in 1950 and peaked at 1,527,858 in 1979, declined to 468,096
members in 2008 and 392,166 in 2009.52 Membership in the UAW is not a precise measurement of
unionisation in the automotive industry, insofar as there are many auto workers who are not
members of the union (especially those who work in transplant operations and/or in factories
located in the southern states) and also many UAW members who are not part of this industry. The
union also represents workers in some other industries that are closely related (eg, aerospace and
defence, heavy trucks and farm equipment) as well as others that bear no apparent relationship to
automobiles or parts.53 The membership numbers nevertheless offer a rough-and-ready gauge not
of the size of the automotive labour force per se, but of its more organised and politically influential
members. And those numbers are down.
That shift can be contrasted with the fourth and final change in the structure of the US industry,
which is the rise in relative power of automotive dealers in general and especially those who deal in
Japanese and other imports. At the time of the 1981 policy debate, the ‘dealers who sold Japanese
cars’ were the only ‘domestic actors with a vested interest in the established liberal policy’.54 Their
numbers, however, were limited. As of 1980 there were 23,379 dealerships in the United States that
sold vehicles made in the United States and Canada, and 16,967 that sold imported vehicles, but
only 4,407 dealerships that sold Japanese cars.55 That number grew by more than 50% over the next
few decades, such that by 2008 there were 6,811 dealer franchises selling Japanese brand vehicles in
the United States, employing 310,575 people.56 That amounted to 32.8% of all new automobile
dealerships in the United States.57
Dealers of imported automobiles did have a voice in 1980, which marked the tenth anniversary of
the founding of the American International Automobile Dealers Association (AIADA). That group was
originally formed in response to proposals that would have established quotas on cars and other
imported products. Volkswagen was then the leading source of imported cars, and US Volkswagen
dealers feared that their livelihoods were being threatened and that the National Auto Dealers
Association refused to take a stand against protectionism. AIADA’s numbers were nevertheless too
small in 1980–1 to form an effective counterweight to the combined position of the Big Three and
the UAW.
The data in Figure 8 illustrate just how much the world has changed since then. Whereas in 1981
there were 1.8 UAW members for every person employed in new car dealerships, by 2009 there
were 2.4 persons employed in those dealerships for every UAW member. When one further
considers the fact that auto dealerships are widely distributed, and that there are probably very few
congressional districts without at least one of them, it is obvious that this group is in a better
position than the UAW to exercise influence over members of Congress.
52
Data for UAW membership supplied to the author by the UAW Research Library; figures are thousands of average
annual dues-paying members.
53
Included in the wide range of UAW members are workers in other manufacturing industries (eg, household appliances,
brewing, lawn and garden equipment, etc), as well as technical, office, and professional workers (eg, draftsmen, industrial
designers, engineers, etc).
54
Reich (1992: 7).
55
USITC (1980: A-22).
56
Figure provided to the author by the Japan Automobile Manufacturers Association.
57
Author’s calculation, based on the fact that (according to the National Automobile Dealers Association) there were
20,770 new car dealerships in the United States in 2008.
24
Figure 8: Employment in two segments of the US automotive industry (1000s), 1975–2010
1600
Members of the
United Auto Workers
1400
1200
Employees in New
Car Dealerships
1000
800
600
400
200
0
1975
1980
1985
1990
1995
2000
2005
2010
Source: Data for new car dealerships calculated from US Bureau of Labor Statistics data; figures are thousands of persons in
January of each year, and numbers for 2010 are preliminary. Data for UAW membership supplied to the author by the
UAW Research Library; figures are thousands of average annual dues-paying members.
Conclusions and Implications
‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner’,
according to Adam Smith, ‘but from their regard to their own interest’.58 That same observation
offers useful guidance in assessing the demands that segments of the US auto industry made, and
the responses they received from policymakers in the two branches of government, in the two
episodes reviewed above. Knowing their interests and positions helps us to understand why
protection was granted in the first case and not in the second. The different results in the two cases
reviewed here can be understood as natural consequences of the changes in the structure, and
hence the interests, of the industry itself.
This analysis has drilled down through a series of possible explanations for the differing outcomes in
the 1980–1 and 2008–9 cases. None of these explanations is entirely wrong, but a few seem to tell
only a part of the answer. The legal explanation tells us why the Obama administration did not opt
for precisely the same form of import protection that the Reagan administration did, but does not
help us to understand why other means were not employed to restrict imports. The political
explanation is also of limited assistance: The actions of these two presidents run counter to what
one might expect from their respective ideological and partisan attachments, and Reagan’s
somewhat larger reserve of political capital should have made it possible for him to fend off
congressional demands. His administration nevertheless chose to give in to those demands, in part
because they were made by majorities in both parties. This then begs the question, why was
protection so much more popular in Congress a generation ago? Part of the answer comes from the
differences between the two economic downturns, with trade having been more economically
significant and politically controversial in 1980–1 than in 2008–9. We can get a more complete
answer by looking beyond those short-term differences between the two episodes, and looking to
the political consequences of processes that were put in march in the earlier case. The globalisation
of the US automotive industry has greatly shifted the interests and levels of influence for different
players, such that the Big Three firms have less interest in restricting imports, labour remains
interested but has a fraction of the influence it once wielded, and both the Japanese producers and
58
Smith (1776: Book 1, Chapter 2).
25
the dealers who sell their cars are in a much stronger position to influence US policymakers now
than they were a generation ago.
What does this comparison tell us about the relationship between economic downturns and
protectionism? The simplest lesson is that the link is not so simple, and that we should not assume
that association observed between these two phenomena in the 1930s was the manifestation of a
universal rule. Policymakers will indeed be under pressure to provide relief in economic hard times,
but it does not necessarily follow that restrictions on trade will be a prominent part of the relief
packages. They are unlikely to supply protectionism if it is not demanded, and in this instance we see
how the processes of globalisation have reduced the likelihood that such demands will be made in
the first place.
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27
This paper presents a structured comparison of policy responses by the United
States to competition with Japan in the automotive sector in two difference
administrations. It will examine one case in which the United States chose to
impose protectionist measures and another in which it did not, in order to
consider the effects of economic downturns on both the demand and supply of
protection. After reviewing the facts of the two cases, this paper will evaluate
four possible explanations that are variously legal, political and economic in
nature. While these explanations are not mutually exclusive, and each may offer
some part of the answer, the evidence suggests that the most persuasive case is
based on long-term changes in the structure of the US automotive industry.
Centre for Economic Policy Research
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