Remember the good old days of U.S. car manufacturing in the late 1970s and 1980s? No? I don’t either. Those were perhaps the worst years for quality, value, and innovation in the industry’s history. Those years produced the boxy and very bad Chrysler K-car and, in the words of one automotive writer, a Ford Thunderbird that resembled “a living room on wheels.” It was bench seats, crushed velvet, floorboard dip switches, and a great expanse of American steel without much form or function. The “big 3” were complacent behemoths cranking out inferior products and charging more than they were worth. It was all done under the protection of the U.S. government’s enforced import restrictions.
The new president said he will tariff European cars at 35% if they are not built in the U.S. A tariff is meant to discourage industries from actions nations find objectionable. The unintended, but wholly predictable, consequences are that tariffs limit both the supply of goods and competition among firms. When supply shifts in response, prices rise. Where competition is lacking, there is no forcing function on quality improvement or innovation. Neither of the latter can affect prices, so consumers always end up paying more for inferior products. That is exactly what happened to the U.S. auto industry the last time the government tried to limit Americans’ choices of cars.
In the early eighties, Japan and the U.S. agreed to limit Japanese-made vehicle imports. The “voluntary export restraint,” or VER, had far-reaching effects. A Brookings Institution study by Robert Crandall found that in 1985, American-made cars cost $750-$1000 more than prior to and primarily because of the agreement. The study also found that profits by 1985 were 33-45% higher “despite sharply lower domestic sales” and were 40% higher than they were in 1974-76 when domestic output was similar (Crandall, 1987). Consumers paid more with no gain in quality, while superior products were kept from market, and domestic companies made significantly greater profits.
As the VER was expiring companies became wary. Japanese car companies did begin standing up factories in the U.S.—the desired effect of import restrictions—but U.S. companies feared competition on their own soil. A NY Times article noted some fears were alleviated by a belief that ultra-compact cars would not affect “big 3” sales, that they would not directly compete with U.S.-made cars (Holusha, NY Times, March 1st, 1985). In fact, Japanese companies upended the U.S. industry. After multiple bankruptcies, the competition set the U.S. auto industry on the road to continuous improvement and innovation and created a domestic product that competes well against carmakers around the world. It was not supply restrictions that drove that improvement; in fact, VER only delayed it.
Japanese cars were introduced in the U.S. in 1958. Had U.S. industry reacted then by competing directly—by energizing the strength of U.S. engineering and labor—instead of turning to protectionism, the consumer would never have had to suffer a “living room on wheels” that only lined the pockets of executives who felt no incentive to improve. History may not repeat itself, but it does play out in harmonics. If President Trump follows through with his protectionist threats, we can all look forward to paying more and getting less across every sector of the economy. That has never been a recipe for economic greatness.