Clifton B. Luttrell

English

Research Papers in Economics

CLIFTON B. LUTfltELL
HE signing of‘‘voluntary’’ agreements to reduce
imnports has made considerahle headway in recent
years. The recent accord! tolimitautomobile imports
from Japan is an example ofsuchan agreement. Ship-
ments ofJapnmese automohiles to the United States
in the first year folloxving the agreement (April 1981
through March 1982)are tohe held to 1,680,000cars,
compared with 1,820,000 in 1980 — an 8 percent re-
d
1uction.~
The rationale given for this agreement is similar td)
that traditionally offered! to support protectionist
policies.2 For example, economist Marina v. N.Whit-
man argued! that the agreement was necessary to
help the auto industry adijust to sharply changed!cir-
cumstances and consumer preferences. In her view,
the U.S. automobile ind!ustrv is similar to an ‘‘infant
industry,” one that needs time and massive invest-
ment to adijust fully to new circumstances.3
Gbni stophen Conte and Urban C. Lebncr, “Can Import Lii nit
Eases LI ,S- — Japan Trade Rift: Domestic Makers Gain Leewayto
iic,ost Prices,’’ The Wall Street journal, Max- •4, 1981.
2
Ron example, see Cimanhes P. Kindlehergen and Peter U - Lindem’t
in Iutc-rnatiaoal Economics, 6th ccl- (Richard I). Irwin, Inc.,
1978), pp. 130-47.
~Wi1Imm II - Kester, ‘‘Eccamonmist OutI inc s Ai toWoes, St. Louis
Post—Dispatch, April 8, 1981. The iohsat industry argument is
tvpi calIv ii sed to jostiiv temponary tanCs on cith en protectic, n
measuirs tImat cut down on impoifs I nosit moden, iiianufactuners
while the infant clonicstiemd ustnv lean, s how toproduce at low
en 051gil cc) sts to ennips te without the he Ip of protc-cti on.
“Voluntary” Import Controls — Who
Gains? Who Loses?
The purpose of ‘voluntary trade agreements be-
comes clear when one analyzes the recent agreement
withJapan, The agreement was madleafter months of
discussion over the rising volume of Japanese auto—
mohile sales in the United! States. As a consequence
of these rising imports, U.S. legislation had been
proposed to limit such imports td) 1.6 million ve-
hicles per year forthree years. The proposed! legis-
lation was more stringent than the provisions of
the so—called voluntary agreement. One government
spokesman was reported to have demanded! ‘~that
the Japanese restrict car sales (to the United! States)
to hetxveen 1.4 and 1.6 million for more than one
vear.’’~It is likely that the Japanese participated!
in the agreement to avoic! the imposition of even
more stringent protectionist measures hy the United!
States.5
4
Sccictu~of St itc \lcx mdci 11 ug is iepottc d in Rob tnt Ross ul
‘‘Tlie Japanese Car Charade.’’ Washingtosi Post. May 7, 1981.
tm
The agreement was notvoluntanyhasccioil the tic, al scsi seof the
word - The action did not pniceccl Ironm the free cItnice of each
panty in tbc- absence of’ cc,erefon on legal obligation -
The Voluntary Automobile Import
Agreement withJapan More Protectionism
25
Some groups in the
U.S. auto workers and
mobile manufhcturers,
ment. Presumahlv the
United! States, specifically
stockholders of U.S. auto—
henefited! from the agree—
agreement will lead! to anFEDERAL RESERVE BANK OF ST. LOWS NOVEMBER 1981
increase in sales of U.S.—manuficctured! cars. Ilow—
ever, the current Japanese voluntary import control
represents simply a protectionist action. As such, its
impact on national and consumer well—heing is no
less harmful than that from higher tariffii, import
quotas, or other devices designed to curtail foreign
competition in the domestic automohile market.
Thirty Years ofExpanding Trade
The major impetus for the protection of American
industries from foreign competition has heen rising
imports in a few industries. These represent, in part,
the consequences ofred!uced! tariffs and!other moses
toward! free international tradle that began in the
195Os. These moves followed!aperiod! ofhighly pro-
tective tariffs authorized in the Smoot—Hawlev Tariff
Act of 1930. With the tariff reductions, trade with
othernations hegan to increase. Exports ofU.S. mer-
chandisegrew, risingannually ata 6.8 percent rate in
the 1950s and! at an 8 percent rate in the 1960s.
Imports ofmerchandise rose annuallyata 5.0 percent
rate during the 1950sand at a 10.4 percent rate during
the l96Os. These imports generated increased com-
petition for some U.S—produced! gooc!s, such as
shoes, clothing and steel prod!ucts.
In the 1970s, the volume of U.S. international
trade spurted and other industries hegan to experi-
ence competition from imports. During this d!ecad!e,
imports anc! exports grewat 20 percent annual rates.
What Happened to Automobile Imports?
Automohiles were a major factor in the accelera-
tion of import growth. In the l970s, the U.S. auto-
mohile industry hegan to experience greater com-
petition from imports, just as the shoe, clothing and
steel industries had in the previous d!ecade. In the
automohile case, sharply higher gasoline prices,
escalating wage rates and mandatory environmental
and! safety regulations increased the cost of Ameri-
can—manufactured automohiles relative to foreign—
produced cars. These factors contrihutedi to sales
reductions and increased unemployment in the U.S.
automobile ind!ustry.
The almost douhling of real gasoline prices in
1979 and 1980 Icc! to 1)0th a sizahle reduction in die—
mandi for larger automobiles manuft~cturedin the
United States and asharp increase in demand! fbr the
smaller cars produced hy foreign manufacturers.
26
Total automohile sales leveled off in the early
i97Os, andi the percent imported held! fhirly stable
until 1979, when it jumpedl sharply, rising from 17.7
percent in 1978 to 21.8 percent in 1979 to 26.7 per-
cent in 1980. Most ofthe increase in imports came
from Japan. The Japanese penetration of the Ameri-
can market had! heen rising steadily since 1970,
reaching 15.2 percent of total sales in 1979. These
imports then spurted in 1980 to 22.2 percent of
total sales.
Contrihutingto the highercost ofU.S. automohiles
have been the more liberal wage settlements ofthe
automobile manubicturers since 1970. Prior to 1970,
hourly earnings of proc!uction and non-supervisory
workers in the manuflicture ofmotor vehicles and car
bodies-averaged 30 to 32 percent more than in all
manufacturing ind!ustries combined!. By’ 1975, how-
ever, the automobile workers’ hourly earnings
exceeded the earnings of all workers in inanufac-
Consequentl~-,the sales of foreign—built cars, espe-
cially those mad!e in Japan, accelerated (table 1).FEDERAL RESERVE BANK OF ST. LOUIS NOVEMBER 1981
4
~ _~_~S.
turing by 41 percent. By 1980 this differential had
risen to 48 percent (table 2).~
Increased Imports
Not Hannful to Economy,
Because of the employment consequences of ris-
ing automobile imports, the claim is often made that
the U.S. automobile market niust not he opened!
wide to foreign automobile manufacturers. This,
however, is--a short-sighted view of the impact
that such imports have on the U.S. economy. There
are two general conclusions that follow from an un—
dierstandling of the economic consequences of trac!—
ing among nations. First, foreign trade (imports and!
exports) in the longer run are neutral with respect to
total employment; that is, employment gains insome
ind!ustries will offset employment losses in other in-
dustries. Second!, all nations participating in trade
will experience gains arising from an increase in the
value of’ production. They- will all have inore real
goodls for consumption and investment. This occurs
because tradle serves toallocate production tc) lower—
cost manufacturers, and final goods to higher—valued
uses.7
RisingImports Lead toRisingExports,...
Changes in U.S. imports ofgood!s andl services-are
closely associated with changes in exports. Nations
sell goods andservices toother nations because they
wish to import good!s or purchase capital assets from
them. Either directly or indirectly, U.S. imports of
Japanese automobiles will create income abroad that
will be spent on U.S. good!s and services or U.S. fi-
nancial assets. Imports do not cause general unem-
ployment; they create job opportunities in some
industries as part of the very process by which they
reduce others.8 Export industries will increase total
sales and!employment; industries facing increasing
imports (such as automobile manufacturing) will
realize red!ucedi sales--and employment.~
Hence, Employment Gains Offset
Employment Losses
Offsetting the observed! employment losses in
automohile maniafhcturing are the sizable gains in
sales and employment in a number of other indus-
tries resulting from the gain in purchasing power
abroad and! the rising exports. Major employment
gains haye occurred! since 1964—65 in anumber ofin-
d!ustries as a result of rising exports. Among those
industries with major employment gains from exports
are machinery, transport ec~uipment(including auto-
mobiles), chemicals, and farm products. Exports have
risen in these ind!ustries both absolutely andi relative
to domestic production. Exports of machinery- and
transport equipment, for example, rose from an an-
nual average of $12.5 billion in 1964-65 to $37.5 bil-
lion (constant dollars) in 1979—80. As--ri percent of
domestic prod!uction, such exports rose from 7.3per-
cent in 1964-65 to 15.8 percent in 1979-80 (table 3).
~It could be angued that s (‘cli ftmctcins as greater productivity on
mc, ne ove i-time 55-ni-k can exj~ lamn the more rap mci wage growth
ni atito nmohiici niantiiactiiring - Incteased prod m ictivity of auto-
,],cii mile workers (ss-li mcli nose at a 1 penceut fitsten i-ate tI~ an plc,—
cluetivity in all mann fad-tnring) coolci aces)nil t Ion pantof timis ni Sc -
II owe Sen. an tcimdii) i he “cirke r, amid mdl mannfactoring workers
‘ccsnkecl cI s sentiallv the same number of hours per week ill 1970
as in 1980 - Ifence, the fimsten gnowth in sourly earnings of anto-
nb
1
) iie 550 nkers does ncit appeamtohave an sent Inn nm longer wcsrk
w ec~k 5 in Emiltomobil ci iiiLIIIii factnring -
T
Foc a ciiscu ssion of the gains from ti-acie, see C hi an(is P. Kin cihe—
bergen LIIId Peter Fl. Lind cii, lit tc i-na/lot, a IFco no ii, ic’s (II cli arc
1
D. Irwin Inc., 1978) chapter 3 and Armaeo A AleIi ian and
Wi himan m R - Allen. Un Ic ensitq Fc-a,to mu ic-s -icc? c-cl- (Word sn-csrth
Publishing Conspanv lime., 1972). elsapters 35—37.
°CcoffneyE. \Vcsocl and’ Dot gias R. Mucici. - lbe Recent U.S -
Trade Deficit — No Cause 1cm Panic,’’ this Reticic mApnil 1978).
“See Cl iftcsn B. LuttrelI, ‘‘Impcmnts and Jobs — ihie Ohsc-n-ed and
the LIncthsenvecl.’ this Re cIc’ Ic (June 1978).
27FEDERAL RESERVE BANK OF ST. LOUIS NOVEMBER 1981
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Exports in the agricultural sector have achieved
even greater gains relative toproduction than in the
niachinery and transport equipment sector. Exports
of famm products rose from an average $8.0 billion
per year in 1964-65 to $18.6 billion in 1979-80. As a
percent of d!omestic production, such exports rose
from 14.1 percent in 1964-65 to 25.3 percent in
1979-80.
The impact oftradle on five selected categories of
farm proc!tmcts is shown iii table 4. In the case oftwo
groups, wheat and rice, almost t\vo—third!s of the crop
is exported. Furthermore, majorgains inexports since
1964—65 has-c occurred both in real tenns -and as a
percent ofproduction for corn, soybeans and cotton.
Estimated employment gains attributed to export
increases in the three selected industries with rapid!
increases in exports--are shown in tableS. More than
130,000 workers in agriculture alone were required
to produce the increased! quantity offarm products
exported in 1979-80, and over one million were
requiredl to prod!uce that portion of farm production
which was exported! (table 6). Export gains in
machinery and! transport equipment accountedl for
over 650,000 employees Altogether, rising exports
in these industrial groups — machinery aui trans—
port edlu ipment, chemicals, ~u)d! agriculture
recjumred! almost one million ad!d!itional workers.
28FEDERAL RESERVE BANK OF ST. LOUIS NOVEMBER 1981
Restrictions
Just as rising imports were a major factor in the
expandlimig market for farm prod!ucts, so a reduction
in foreign imports will contribute to a reduction in
exports of U.S-produced! goods. For example, in
1980—81, exports to Japan alone accounted! fUr 7
percent of all U.S. coarse grain production (corn,
grain sorghum, barley and oats), 10 percent of soy-
bean production, 5 percent of wheat production
and more than 12 percent of cotton production. 10 A
redluction in Japanese earnings on automobile ex-
ports will reduce their demand! fUr these products .‘~
Ofcourse, in U.S. exports toJapan, the loss will not
equal exactly the dollar amount of the red!uction in
ift 5 Dep mifnient of Aymcuibmrc lots m~n %~, mc ,,Itura? T,acls
(May-June 1981), p. 10 and .Agcicmml Ot cal Outlook (June 1981),
pp. 34-35.
‘A rcducticsn in Impo its of ancnmcmbmles from Japan tends to
reduce the supply of antoniohi les on the Anic’nican market
(shifts the supply elm rye to the left). Hence, the pm-ice csf mits—
mobiles will he higher and automobile manufacturers in West
Gem-many and other nations will ten cito expcsrt morn cars to the
United States. Thus, the dcci inc in dollar earnings by the J apa—
wilh he partially offset l)~--an increase in ciohlar earn mugs in
other natiotis, and partofthis increase will he used to ptmrchase
U.S. farm prodinus. Such bilateral comparisons overstate
the decline In automobile imporrs horn all nations combined,
and, thins, overstate the foreigmi earnings losses and farm export
losses t’esuhting fi-om the restrictions.
- .7
7-1 -
A -
.5
ii-. -
_/j~ SSr2.x
Virtually Eceryone Loses From Import
29FEDERAL RESERVE BANK OF ST. LOUIS NOVEMBER 1981
Japanese automobile sales in the United States.
Japan willhe able topurchase U.S.products with her
earnings from exports to Western Europe or other
nations. However, to put the potential losses in
perspective, from 1969to 1979, U.S. exports to Japan
totaled about 80 percent of U.S. imports from Japan.
Aloreocer, Japanese anports from the United States-
increased at approximateltj the -same rate as exports-
to the United States. Thus, all ind!ustries with net
exports to the Japanese — especially the farm sector
— will suffar losses
The greatest losses from protectionism, however,
are not those employment and export losses experi-
enced by specific indiustries, The greatest losses
occur in the reduction in real goods available
to both nations for consumption and investment.
With trade restrictions there will he fewer auto-
mobiles available for consumers in the United States,
and consumers will pay a higher price for each ear
purchased.
Similarly, there will he a smaller quantity of farm
products available for the Japanese, and food prices
willbe higherthere. Whilefood and fann commodity
prices in the United States will be slightly loweras a
result of the restrictions, consumers would prefer
the larger nimmberofautomobiles and! smaller quan-
tity of farm commodities. Othemwise, the prior trade
pattern would not have been profitable.
The gains from trading occurheeause thejapanese
have a comparative advantage in the prodluction of
smaller automobiles relative to the United! States,
while we have a comparative advantage in the pro-
duction of other goods, such as farm products. With
each nation specializing in the production ofthose
goods in which ithas a comparative advantageand ex-
changing these goodswith other nations, all nations
will benefit. Flenee, the real gains from trade are the
greater output and wealth that occur thrommgh greater
specialization and exchange. These gains will not he
fully realized if protectionist policies are ad!opted!.
SUMMARY
The Japanese “voluntary” automobile import
agreement is not only involuntary, hut represents
another form of protectionism. Like all such mea-
sures, it is predlicated on specious logic and faulty
economics
Althoughthe major impetus for this agreement has
been the observed decline in employment in the
U.S. automobile industry, evidence suggests that
trade among nations has no impact on total domestic
employment over the long run. Rising employment
in industries with rising exports will offset employ-
mnent losses in those industries that experience
increased competition from imports. Reduced em-
ployrnent has occurred in some U.S. industries due
to increased inaports, but the decline has been offset
by employment increases in other industries such as
agricultmmre, machinery and transport equipment,
and chemicals, where sharp increases in exports
were realized!.
The greatest loss from such agreements, however,
is the reduced wealth and well-being of the pop-
ulation at large. These losses occur because tradle is
productive. Each nation gains by specializing in the
production ofthose goods in which it has a compara-
tive advantage and by exchanging these for other
goodsproduced atlowercostelsewhere. This results
in more wealth for all nations. Protectionist policies
reduce these gains, and, consequently, reduce the
wealth ofU.S. citizens as well.
30

The voluntary automobile import agreement with Japan - more protectionism

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The voluntary automobile import agreement with Japan - more protectionism

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