Introduction
During the early 1980s, the US auto industry was dominated by three domestic players, Ford, GM, and Chrysler. The import of cars into the US market was relatively less. The market penetration was relatively high in the car market. However, things started changing when the Japanese companies started exporting cars to the US market. In the first half of the 1980s, the market share of Japanese cars in the US market increased manifold. The market share from 17% in 1980 grew to 25% within a few years. Due to the increase in demand for Japanese cars, the demand for the American cars went down. Due to this, a large number of United Auto Workers lost their jobs became unemployed. All the three big auto manufacturers of the USA announced huge losses. In order to compete with the Japanese auto manufacturers, the US automobile companies requested the International Trade Commission (ITC) to create an import quota on Japanese cars. This essay will discuss the US auto market, do a demand analysis using different elasticity models, and finally, will touch upon how different stakeholders view the situation differently in this market condition.
Till 1970s and the early 1980s, the US auto market was dominated by a few numbers of players. The market penetration of automobiles was very high. The price of the American cars and the customer demands were at equilibrium as there was not much variation in price. However, with the appearance of the Japanese cars into the US market, customers got an option to get cars at low cost. In a perfectly elastic market, as the price of a product goes down, the demand for that product goes up (Hofstrand, 2007). This was not the case, however, in the US car market at that time. In fact, the US car market was extremely inelastic with the total demand for cars being stagnant. In a perfectly elastic market, the introduction of Japanese cars would have increased the overall demand of cars in the US market, which did not happen in the USA. Rather, the Japanese cars replaced the demand for the American cars. As the input cost of producing a car for the US manufacturer was higher than that of the Japanese manufacturers, even if both sold their cars at the same price, the US manufacturers would have been on the loss. If this condition lingered little longer, then the US manufacturers would have gone out of the business. However, the overall demand for cars increased in the latter half of the 1980s, making the price elasticity more elastic.
Market Dynamics and Regulations
In a perfect market condition, the US cars in the 1980s were unable to compete with Japanese products. Japanese cars were not only cheap, but they were also perceived as high-quality and high-performance products. Therefore, the market demand shifted from the American cars to the Japanese cars within no time. This created financial distress to the US auto manufacturers and increased the unemployment rate. The only way the US auto manufacturers could have survived that market was by creating a barrier of entry either through an import duty or through an import quota. The introduction of an import quota would have ensured that the market share of the Japanese cars would not go up beyond a certain percentage, and the customers would have no other choice but to buy cars made in the USA. In this scenario, only a few customers would have benefited by buying the Japanese cars, which were of high quality but low cost. However, most of the customers would have felt forced to buy high-priced low-performing US made cars. In this scenario, the manufacturers would have gained, but the customers would have suffered.
Imposing an import tariff on the Japanese cars would have created parity between the price of the US and the Japanese manufacturers. In that case, the US manufacturers would not have lost their market share easily. However, this situation is non-beneficial for the customers. Even if the Japanese cars were actually available at lower prices, because of the imposition of this import tariff, customers needed to pay more for buying that car. In this scenario too, the US manufacturers would have gained at the expense of the customers.
Import Quota and Price Fluctuations
The introduction of mechanisms like import quota and import tariff creates inefficiencies in the market equilibrium due to which some of the players remain in a more advantageous position than the others (Copeland, Dunn and Hall, 2005). In this case, when ITC introduced an import quota of 1.68 million units for the Japanese cars a year, it provided the American automobile companies with an unfair advantage in the US market. The Japanese companies agreed to this quota arrangement because of political reasons, but ultimately, it is the consumers who suffered. The US government created a demand ceiling for the Japanese cars by introducing import quota. As we know from the standard market equilibrium theory that whenever there is a demand ceiling on the market, the price goes up due to more unmet demands in the market. The price, in this situation, increases till that point when the total quantity demanded for the Japanese cars becomes equal to the demand ceiling, or in other words, equal to the import quota. This phenomenon was observed in the US car market after the imposition of the import quota on the Japanese cars. The Japanese auto manufacturers started selling cars with better features at a higher price point. During the three years of quota regime in the USA, the average price of the Japanese cars increased by $1,000 due to the imposition of quotas.
Import Quota versus Unemployment
The decision of introducing quota by the US government was not an easy process. It was estimated that because of the entrance of the Japanese cars into the US market, 193,000 UAW employees lost their jobs. On the other hand, imposing a quota on the Japanese cars would have made the consumers pay thousands of dollars more for the same kind product. Also, because of the appearance of the Japanese cars into the US market, the US auto companies started making huge losses as the sales of their cars plummeted. Before arriving at a decision, the US government had to take into account the sufferings of the American auto workers and the auto companies and economic impact of the quota measure on the customers.
In a separate study, it was found that the cost impact of per job saved by the quota measure was $160,000. Assuming that the imposition of quota made sure that the 193,000 workers, who lost their jobs, got their jobs back, the total economic impact is calculated to be $23 billion. On the contrary, the quota of 1.68 million cars would have ensured that the US manufacturers were able to sell almost 7 million cars annually. On an average, the customers were shelling out $1,000 more for the US cars than the Japanese cars. The total economic impact on the customers was calculated to be close to $7 billion annually. Therefore, it seems that the imposition of quota for a temporary period (3 years) was a rightful decision by the US government at that time.
Stakeholders Analysis
In this market condition, there are four main stakeholders; the government, the US Auto manufacturers, the US Auto Workers (UAW) and the Japanese car manufacturers. In this market scenario, Japanese car manufacturers, despite creating the main market equilibrium shift, were the players who had no voice in changing the market equilibrium conditions.
The US auto workers were only concerned about their jobs. Imposing quota would have protected their jobs. However, the UAW knew that importing quota was not a long term solution and they would eventually lose their jobs. Therefore, they wanted the government to introduce policies to ensure that more manufacturing was done on the US soil. One of the ways to do it was to introduce a law that more than 70% of the parts assembled in a car should be manufactured in the US. If that was introduced, then even the Japanese manufacturers would have been forced to establish manufacturing sites in the US soil for the cars and car parts. This would have ensured the creation of many jobs.
However, introducing a law like the above would have increased the input cost for the US manufacturers. All the US manufacturers were manufacturing or procuring parts from different parts of the globe. Therefore, the US automakers were keener on other measures like the import quota or import tariff for a temporary period, which would have given them enough time to improve their production process so that they could compete better with the Japanese cars when the quota would be lifted. For example, the Dearborn plant of Ford with a heavy investment could have improved the productivity and quality significantly within the next few years.
The US government and ITC were more interested in fair trade practices and balancing between different stakeholders in the market. The US government was in a dilemma between introducing a quota arrangement (for protecting manufacturers), a law on producing 70% of the parts on US soil (protecting the UAW) and the increased cost for the customers. Finally, they introduced a 3 year volume quota on Japanese car import. This helped the car manufacturers directly, and since the Japanese car manufacturers started creating manufacturing plants in the USA, it also helped the UAW.
Conclusion
The US auto market in the early 1980s was a perfect example of market equilibrium and the effects of product substitute and regulations on the price and quantity demanded. In a perfect market in the early 1980s, Japanese players were selling a better product at a cheaper price. Therefore, they were substituting the US auto products. However, after the introduction of quota by the US government, the US car makers were able to sell their cars at a higher price as the total demand was relatively inelastic at that time. Also, it helped the UAW as the unemployment level was contained at a low level. However, due to the quota introduction (demand ceiling), the price of the product (the price of the imported cars) went up. This case shows clearly how the market equilibrium shifts due to changes in different market parameters.
Work Cited
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