International Trade Theory and Policy
by Steven M. Suranovic

Trade 10-3A

US-Japan Automobile VERs

In 1981, the US was suffering the effects of the second OPEC oil price shock. Faced with higher gasoline prices, consumers began to shift their demand from low fuel efficiency US autos to higher fuel efficiency Japanese autos. This increase in auto imports contributed to lower sales and profits of US automakers. Chrysler Corporation nearly went bankrupt in 1981, and probably would have, if the US government had not bailed it out with subsidized loans. The US auto industry filed an escape clause petition with the International Trade Commision, but the ITC failed to find material injury as a result of the Japanese imports. The US was suffering from a recession at that time which also contributed to the decline in demand for US autos. The Japanese, faced with continuing calls by the US auto industry for legislated protection and following discussions with the US trade representative's office, eventually announced VERs on auto exports. These VERs were renewed regularly and lasted until the early 1990s.

The bilateral nature of VERs contributes to a series of subsequent effects. Since a VER can raise the price of the product in the importing country, there is an incentive created to circumvent the restriction. In the case of the Japanese auto VERs, the circumvention took a variety of forms. Since the quantity of auto trade between Japan and the US was limited but the value of trade was not, Japanese automakers began upgrading the quality of their exports to raise their profitability. By the late 1980s, new higher-quality auto lines such as Acura, Infiniti, and Lexus made their debut. Alternatively, Japanese autos assembled in the US were not counted as part of the export restriction - only complete autos exported from Japan were restricted. Thus, after the VERs were implemented, Honda, Mazda, Toyota, Mitsubishi, and Nissan all opened assembly plants in the US. A quicker circumvention was accomplished by shipping knockdown sets (unassembled autos) to Taiwan and South Korea, where they were assembled and exported to the US market.

International Trade Theory and Policy - Chapter 10-3A: Last Updated on 6/13/06