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AUTOMOBILES IMPORTED FROH JAPAN

ISSUE BRIEF NUMBER IB80030

AUTHOR:
Nanto, K . Dick

Economics Division

THE LIBRARY OF CONGRESS
CONGRESSIONAL RESEARCH SERVICE

MAJOR ISSUES SYSTEH

DATE OBIGINATED Qggggggg
DATE UPDATED gggggggg

FOR ADDITIONAL INFORMATION CALL 287-5700

0114

CR5‘ 1 IB80030 UPDATE-O1/O9/81

l§§Q§-2§El!£IlQE

In recent years, 0.5. automotive imports from Japan have been increasing
at an unusually rapid pace. During 1980, sales of automobiles from Japan
totalled 1,907,987 cars for an increase over 1979 of 7.8% and over 1978 of
00.7%. In 1980, Japanese imports accounted for 79.8% of the total sales of
imported cars which, in turn, averaged 26.7% of the American new car market
in that year. U.S. automobile makers argue that this increase in competition
from Japan has contributed to the financial distress of the Ford and Chrysler
Corporations and to the large number of unemployed in the automobile industry

and its suppliers. In August 1980, indefinite layoffs among auto workers.

peaked at nearly 250,000 persons. By December, however, such layoffs had
declined to 186,000. ~ m 1

Congress is considering measures to alleviate the situation and  in June
1980 concurrently resolved to promote the competitiveness of U.S. industry in
world automobile and truck markets. A bipartisan "Auto Task Force” was
formed in the House on July 31 to focus attention on and seek solutions to
the problems of the auto industry. On June 12, 1980, the United Auto workers
Union also petitioned the U.S. International Trade Commission for relief
under the Trade Act of 1974. On August 5, 1980, the Ford Motor Co. submitted
7 similar petition to the Commission requesting restrictions on shipments of
Japanese-built cars and trucks to the U.S. The Commission shortened its
investigation by about three weeks and on Nov. 10, determined that while
imports were important in causing the problems of the auto industry, they
were not as important as the recession and other factors. Hence, according
to the Trade Act, import restrictions are not justified. Subsequent to the
Commission's decision, efforts by Congress have shifted toward authorizing
the President to negotiate a voluntary restraint agreement with Japan.

§A§§§BQQE2-A§Q-£QLl§X-§EALX§l§

The Japanese automobile industry is privately owned ywith the Big Two,
Toyota and Nissan (Datsun), each producing sore than 2 million units. Toyo
Kogyo (Mazda), Hitsubishi (Arrow, Colt, Champ, Sapporo,  Challenger), and
Honda each produce about 1 million units, while Isuzu (Opel, LUV), and Fuji
(Subaru) each produce less than a half million units. This $40

~billion-a-year industry is the world's largest exporter of cars and during

1980 surpassed the United States in terms of total auto production. It
exports approximately half of its total output, with 05% of the exports going
to the U.S. and 21% to Europe. American corporate ownership of Japanese
automobile producers includes Ford with 25% of Toyo Kogyo, General Motors
with 3u% of Isuzu, and Chrysler with 15% of uitsuibishi.

hany Japanese view their country's automobile exports as important in
generating the foreign exchange necessary to pay for their imports of food,
nergy, and raw materials.

During the 1950s and 1960s, the Japanese automobile industry received
considerable protection as well as government subsidies and loans.
Currently, however, the industry receives no special governmental financial
assistance, although Toyo Kogyo (Mazda) was saved from bankruptcy in 1975 by
a wide-ranging effort on the part of banks and both local and central
governments. Japan has temporarily eliminated the tariff on’ imported

cns-= 2 IB80030 UPDATE‘-O1/09/8'1

passenger cars, although other taxes, handling costs, and alterations push up
the prices on 0.5. cars in Japan by 50 to 100% or more over 0.5. effectii
retail prices.

A major criticism voiced by the U.S. automobile industry is that while
Japan is able to export freely to the open U.S. market, her own market is
still severely restricted. In 1979, Japan sold more than 100' times more
passenger cars in the United States than the 0.5. was able to sell in Japan.
The poor sales record of American cars in Japan (16,705 units in 1979) stems
largely from special taxes, government inspection procedures, homologation
(adaptation to Japanese requirements) costs, a poor distribution system, and
their unsuitability to the Japanese market; a

Japan's commodity tax is levied on all automobiles sold in Japan. It

‘discriminates against larger imported cars, however, in two ways. The tax is
15% for cars with engines under 2000 cc, narrower than 1700 mm, and with ya.

wheelbase less than 2700 mm but 20% for all other cars (including most

:American). It is applied to the factory price of Japanese cars but to

iaported cars after including transportation costs. Hence, imported cars
generally pay the higher 20% rate on a larger base. The commodity tax is
rebated on Japanese cars that are exported. with the rebate, therefore,
exported Japanes cars carry a lower wholesale price than those sold in
Japan's market. This is the major reason Japanese cars sell for about the
same price in the United States as in Japan.w

other Japanese taxes that favor smaller cars are the biannual road tax
which is levied according to weight at the rate of $120 per ton and an annue‘
road tax which ranges from $90 to $125 per year for cars with engines unde
2000 cc and $337 to $613 per year for those over 2000 cc. Since most U.S.
cars currently are relatively heavy and have engines over 2000 cc, the yearly
taxes on them are greater than for smaller Japanese cars.

Japanese safety and environmental standards differ from those in the
United States, so 0.5. cars must undergo modifications (referred to as
homologation) after they reach Japan. These changes, sore minor but others
quite extensive, include exhaust heat shielding, low current overnight park
lamps, overspeed warning devices, and a metric speedometer with a red ban at
100 km per hour. In 1979 this process cost between $110 and $535 for 0.3.
subcompact and compact cars.

The Japanese Ministry of Transportation requires extensive documentation
to insure compliance with safety and environmental standards plus, for
foreign imports, an inspection of gggh automobile imported. This inspection
normally takes a full day. Together with the documentation, this approval
process adds about $200 to the price of each car.

American auto producers face severe problems of distribution in Japan
because of the high price of land (prime real estate in Tokyo can cost $50
million per acre) and the system of exclusive dealerships, whereby importers
cannot "piggyback" on the dealer networks of the major Japanese producers.
The Japanese Government, however, is challenging the policy of exclusive
dealerships.

The unsuitability of American cars to Japanese driving conditions, is due
to their left-hand drive and generally larger size which makes them difficult
to handle on Japan's narrower streets. American cars, however, because of
their high price are considered to be a luxury and have some snob appeal.

CRS- 3 IB80030 UPDATE-01/O9/81

For the American automobile industry, however, even if some of the above
barriers to sales in Japan were to be eliminated, large scale penetration of

iythe Japanese market would still not be an immediate prospect. American

producers, therefore, are focusing on the 0.3. market where‘ they have the
advantage over the Japanese. It is obvious to Detroit that” even increasing
exports to Japan by many fold will not generate the increase in sales that
could be gained by recapturing some of the U.S. market.’ While the issue of
Japanese barriers to imports of American automobiles will continue to be
raised, it most likely will be used as a type of ggid pgg ggg justification
for restricting automobile imports from Japan.) U.S. policy makers are
focusing more on measures to. reduce the Japanese share of the American
automobile market rather than ways to increase the U.S. share of the Japanese
market.

Bali 1 Anelxeie

The legislative measures directed toward the automobile import problem
take the following three forms: (1) to place quantitative restrictions on
imported automobiles, (2) to encourage foreign automobile producers to locate
in the United States through local content or other requirements, and (3) to
provide incentives for consumers to buy domestically-produced automobiles.

other 3.3. Government actions include negotiations with the Japanese
government to reduce impediments to sales of American automobiles in Japan
and to encourage Japanese manufacturers to increase the use of U.S. parts in
Japanese cars, to voluntarily curb automotive exports, and to locate assembly
plants in the United States.  x

The major arguments in favor of assisting the domestic automobile industry
through protection or other measures are that (1) the economic, social, and
financial costs of rising unemployment in the domestic automobile industry
are great; (2) the loss in market share to imports could be permanent; (3)
Japanese producers could be taking unfair advantage of a shift in consumer
buying patterns that perhaps was not foreseen by the domestic industry; (4)
the domestic industry appears to need only temporary protection while
converting its production to smaller cars; (5) import sales are draining away
potential profits that are needed by the domestic industry in its extensive
retooling as well as research and development programs; and (6) the imbalance
in automotive trade with Japan is a large component in the overall U.S. trade
deficit and a possible source of weakness for the value of the dollar.

The major arguments opposed to protecting the domestic industry through
import restrictions include the following: (1) import restrictions would
invite retaliation by other countries; (2) restrictions would deny the
consumer freedom of choice; (3) restrictions would tend to raise the price of
all automobiles, domestic as well as foreign; (H) they would encourage the
purchase of less fuel-efficient automobiles thereby increasing the oil import
hill; (5) they might not stimulate domestic production much, since a certain

:oportion of the consumers who would not be able to purchase an imported car

1 under the restrictions would either drop out of the market or wait until the

import became available; "(6) they could be unnecessary, since domestic
manufacturers will be able to compete directly with imports once —their
downsizing programs are complete; and (7) the major beneficiary of the
restrictions would most likely he General Motors with its large market share
and wider selection of fuel-efficient passenger cars, even though ~Ford and
Chrysler appear to be the companies that have suffered the greatest financial

CRS— Q IB80030 UPDATE-O1/O9/8‘

losses because of import competition.

while curbing imports will assist domestic producers financially, it will
not eliminate current auto unemployment. As a rule of thumb, producing 10-17
vehicles generates one job in the auto and supplier industries. To create
jobs for the 186,000 workers currently on indefinite layoff, therefore, would
require increasing output of passenger cars by between 2.6 and 3.1 million
units per year. This is clearly not feasible.

Reducing automobile imports by as much as 800,000 units to the 1.7 million
level, under the most generous assumptions, would generate a maximum of
50,000 jobs in the auto and supplier industries. This assumes that all
consumers unable to buy an import would switch to domestically produced autos
and that Detroit could actually increase production of modern, fuel-efficient
cars to meet the increased demand. If only half of the persons unable to buy
imports because of restrictions switched to doaestic cars, the 800,000 unit
reduction in imports would generate about 625,000 jobs in the auto and

?@ supplier industries.

finch of the decline in U.S. new car sales in 1980 appears to have been la
result of the recession, high interest rates, credit controls, and a switch
by consumers from large to small cars along with increased imports. The bulk
of the increase in the market share for imports can also be attributed to a
shrinking of the total new car market and not to an expansion in the volume
of imports. During 1980, import sales of passenger cars rose by 64,131 units
(2.8%) over 1973. Sales by domestic producers, however, dropped by 1,667,01
units (-20.3%), mainly because of the fall of 1,705,823 units (-16.0%) in
total U.S. sales.

Local content requirements which state that a certain percentage of a
product must originate from the domestic economy are in violation of the
General Agreement on Trade and Tariffs (GATT), but, nevertheless, are used by
many countries to encourage foreign firms to produce domestically. Their
major advantage is that if phased in over a reasonable period of time, they
generate domestic employment and industrial activity-albeit at the final
processing or assembly stage of production. Their major disadvantages are
that they must be enforced by import restrictions and the country imposing
the requirements can find itself with a high-cost industry too small to
capitalize on the economies of large-scale production and unable to take
advantage of lower labor costs abroad. One method to avoid this problem is
to apply local content requirements only to large importers who are most able
to achieve the economies of scale required for efficient production. If
other countries retaliate with their own local content requirements,
moreover, the sales of the “world car" now being produced by American
manufacturers could be hindered.

The major Japanese automobile manufacturers have been reluctant to locate
car assembly plants in the United States because of higher labor costs
($13.67 per hour in the 0.3. as compared to $6.97 in Japan), the difficulty
of obtaining parts, and the danger that when the plants reach full
production, there will be excess capacity for manufacturing small cars in t1
United States. A major factor in Volkswagen's decision to establish plants
in the United States was the high cost of labor in Germany ($13.66 per hour).

some of the Japanese producers, however, have already begun to invest in
nanufacturing or assembly plants in the United States. Honda has announced a
$200 million car plant in flarysville, Ohio, initially to produce 10,000 units
monthly, beginning in 1983. Toyota plans to invest $16 million in ‘expanding

CBS-- 5 ‘ IB80030 UPDATE-01/09/81

its existing truck bed production plant in Long Beach,  Calitornia to boost
production from the present 8,000 to 13,000 units per month. It has also

"icommissioned a feasibility study of 0.5. car production. Toyota and Ford are,

discussing joint production in the 0.5. Nissan has begun construction on a
$300 million plant in Tennessee to assemble 10,000 small trucks Per month.

Table 1 shows total sales of Japanese cars and light pickup trucks in the
United States for 1978 and 1979. Note that large gains have been made by

’i virtually all imports with the exception of a few of the captive imports sold

under American brandnanes.

Toyota

UCSC

Datsun (Nissan)

Honda 2

Hazda (Toyo Kogyo)

Subaru

Dodge Colt/D-50
(nitsubishi)
Dodge Challenger
(Hitsubishi)

Plymouth Arrow
(Mitsubishi)
Plymouth Sapporo
(Mitsubishi)

Buick Opel (Isuzu)

Total Imports
from Japan
Total U.S.

% of

Captive Imports,
.from Japan(h)

Total Imports

% of Total 0.5.

Total 0.3.

Sal es

IB80030 UPDATE-0]/O9/31 ‘

Passenger Cars From Japan

cns- 6
Table91
sales of Imported

1979-80

12.2 l2§Q
507,816 $82,20fl
072,252 516,890
353,291 375,888
156,533  161,169
127,871 1u2,968
62,705 50,689
14,166 12,902
48,860 55,u7u
12,322 10,263

13,815 --
1,769,631 1,907,982
16.6% 21.0%
151,368 129,368
2,325,077 2,389,608
21.9% 26.7%
10,641,099 8,935,276

(a) Includes vans and four—uheel drive recreational vehicles.
(b) Captive imports are sold under American nameplates.

SOURCE:

Automotive News, Jan.
Journal, Jan. 8, 1981.

1980, p.
17.

34 and Wall Street

CRS- 7

Table 2

IB80030

UPDATE-O1/O9/81

Number of New Passenger Cars Sold, Percentage Change
and Market Shares in the U.S. by Country
1979-80

Total U.S. Sales

Domestic Sales

"FY03

From

From

From

From

From

SOUICG2

Share

Import Sales

Share

Japan
Share

Germany
Share

Swefien/Norway
Share

Italy
Share

France
Share

United Kingdom
Share

.129

10,641,099

8,315,622”

78.1%

2,325,477
21.9%

91,769,631
16.6%

347,076
3.3%
71,169
0.7%

64,547
0.6%

30,550
0.3%

42,504

Based on Automotive News, Jan.

Wall Street Journal, Jan. 8,

J.2§Q
8,935,276

6,545,668


2,389,608
26.7%

1,907,987
21.4

299,ouu
3.u
59,9u2
0.8
42,284
0.5

38,172
0.4%

32,179
0.4%

1980. p.

p. 17.

Percent
Change
= W

-16.0

-21.3
2.a 
7.3

-13.3

-1.?

-34.5

24.9

-24.3

34 and

035- 8 ~ IB80030 UPDATE-01/09/81

Lsgrgiarrgy
H.J. Res. 5 (Albosta)

Joint Resolution authorizing the President to enter into negotiations with
foreign governments to limit the importation of automobiles and trucks into
the United States. Introduced Jan. 6, 1981. Referred to the Committee on
Ways and Means. I * ’

S.J. Res. 5 (Rieg1e, et al.)
Joint Resolution authorizing the President to enter into negotiations with

foreign governments to limit the importation of automobiles and  trucks into
the United States. Introduced Jan. 5, 1981. Referred to the Committee on

«.Finance.

HEARINGS

0.5. Congress. House. Committee on Ways and Means. Subcommittee
on Trade. World Auto Trade: Current Trends and Structural
Problems. Hearings, 96th Congress, 2nd session, mar. 27, 1980.
Washington, 0.3. Govt. Print. Off., 1980. 363 p-

0.5. Congress. Senate. Committee on Banking, Housing, and Urban
Affairs. Subcommittee on Economic Stabilization. The Effect
of Expanding Japanese Automobile Imports on the Domestic Economy.
Hearings, 96th Congress, 2nd session, Apr. 3, 1980.
Washington, 0.5. Govt- Print. Off., 1980. 110 p.

----- Select Committee on Small Business. Small Business
Automobile Dealers: Their Status and the Impact of Foreign
Auto Imports on Then. Hearings, 96th Congress, 2d session,
Apr. 3 and 21, 1930. Washington, U.S. Govt. Print. Off.,
1980. 290 p.

----- Subcommittee on International Finance and the Subcommittee on
Economic Stabilization. The automobile Industry and World
Economy. Joint Hearing. 96th Congress, 2d Session, June 18,
,1980. Washington, U.S. Govt. Print. Off., 1980. 80 p.

U.S. Congress. Joint Economic Committee. 0.5. Trade and
Investment Policy: Imports and the Future of the American
Automobile Industry Hearing. 96th Congress, 2d sessio,
March 19, 1980. Washington. 0.5. Govt. Print. Off., 1980.
108 p.

§§2Q§l§_A!D-QQfl§B§§§LQEAL-2Q§Q£§§$§

0.5. Congress. House. Committee on Ways and means. Subcommittee
Von Trade. Auto Situation: 1980. Committee Print. 096th
Congress, 2d session. June 6, 1980. Washington, 0.5. Govt.
Print. Off., 1980. 103 p.

CRS- 9 IB80030 DPDATE*01/09/81

U.S. Library of Congress. Congressional Research Service. Local’
Content Requirements for Automobile Imports. Typed Report,
by Dick K. Nanto, June 17, 1980. Washington, 1980, H p.

The Auto Industry: The 0.5. Situation in 1980. Mini Brief
No. flB80208, by Gwenell Bass, Mar. 24, 1980 periodically
updated. Washington, 1980. 5 p. »

---- Imported Automobiles in the United States: their rising market
Share and the Macroeconomic Impact of a Proposed Import Restriction.
CBS Report no. 80-157E, by Dick K. Hanto, and Craig Elwell y
Sept. 15, 1980. Washington, 1980.- 59 p.

Trade Adjustment Assistance for Workers. Program Growth and
Possible Changes. Issue Brief No. IB80082, by Richard

Hobbie Aug. 22, 1980 periodically updated. Washington, 1980.
21 p.

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