The Effects Of U.S. Trade Protection For Autos And Steel

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ROBERT W. CRANDALLBrookings InstitutionTheEffects ofU.S. TradeProtectionfor Autos and SteelTHE ROUGHLY60 percentappreciationin the real value of the U. S. dollarbetween 1979 and 1985 created an environmentthat was increasinglyconduciveto protectionistpolitics in the United States. Automobileandsteel quotaswere imposed. A textile quotabill was passed in the Houseof Representatives.Motorcycles were subjected to quotas and tariffs.And pressures mountedfor protection of the semiconductorand telecommunicationsequipmentmarkets.The 1981voluntaryexport restraintagreementwith Japanon automobiles markedthe first overt attemptto protect the U.S. automobileindustry from imports since World War II. The 1984 steel voluntaryrestraintagreements,on the other hand, representthe thirdepisode inprotection for the U.S. steel industry in two decades. The first steelrestraintsbeganin 1969andlasteduntil1974.Triggerpriceswereimposedin 1978and extended, erratically,into 1982.The currentsteel restraintshave been implementedwith twenty-five major steel exporting countries.'Each of these exercises in trade restraint has been advanced as"temporary,"designed to provide the U.S. producerswith breathingroom to adjust to the changes in world marketconditions.2But have1. A numberof steel exporters,includingCanada,Taiwan,Argentina,and Sweden,remainoutsidethe ingsmayexistwith some of them. Altogether,there are twenty-five countries exportingsteel to theUnitedStateswithouta formalagreement.2. For a review of the effects of past attemptsto provide industrieswith breathingroomthroughtemporarytradeprotection,see RobertZ. LawrenceandPaulaR. DeMasi,271

272Brookings Papers on Economic Activity, 1:1987they been successful in achievingthis goal?This reportseeks to provideat least a partialanswerto that question, beginningwith an examinationof the effectiveness of the restraintsin increasingdomestic prices andoutput.Restraining Steel and Automobile ImportsUnder the General Agreement on Tariffs and Trade, countries aremore likely to use quotas or voluntaryrestraintagreementsthan tariffsto protect favored or troubled industries. Country-by-countryagreements substitutefor formal tariff increases that could not be imposedunilaterallyunderthe GATT.Because of two majordifferencesin the steel and automobileindustries, voluntaryrestraintagreementsare likely to have quite differentresults in the two industries. First, steel is a producers' good whileautomobilesare finishedconsumer durables. Restrictionson steel imports unaccompaniedby restrictionson fabricatedproductsmadefromsteel are likely to induce a substitutionof machinery,equipment,andvehicle importsfor steel. Withouta "multimetalagreement,"therefore,steel quotas are likely to be relatively ineffective in the long run.Automobiles, on the other hand, have few ready substitutesother thancars alreadyon the road. Thus, universalautomobilequotas are likelyto be more effective thanuniversalsteel quotas.Second, steel is an almost ubiquitousindustrialproductwhile automobile productionis heavily concentratedin North America, Europe,and Japan. In the past decade, moreover, the Japanese have vaultedahead of the rest of the world, particularlyin smallercars. As a result,import restraints aimed solely at Japanese automobiles can be quiteeffective in Europe or in the United States because there are no readysubstitutesfor them from other parts of the world. Implicit quotas onJapanese cars in Europe and explicit quotas on Japanese automobileexportsto the United Stateshave not inducedlargediversionsof exportsin either directionacross the North Atlantic. On the other hand, quotas"Do Industrieswith a Self-IdentifiedLoss of ComparativeAdvantageEver Adjust?"inGary C. Hufbauer and Howard F. Rosen, eds., Domestic Adjustment and InternationalTrade(Washington,D.C.: Institutefor InternationalEconomics,forthcoming).

Robert W. Crandall273on steel from a limited number of steel exporters simply induce anexpansionof exportsfromother countries. Thereare more thana scoreof majorsteel exportersand perhapsanothertwenty to thirty who canincrease their exports to the United States when others are restrained.Limitingsteel importsfromcountriesin the EuropeanCommunity(EC)and from Japanwill predictablyincrease importsfrom Brazil, Taiwan,or Canada.3For these reasons, one would expect restraintson Japaneseautomobiles to be far more effective than those on steel, and in fact they havebeen.The Effectiveness of Steel Import RestraintsThe steel industryrestraintsdatefromthe closing days of the Johnsonadministration.Quotas were negotiatedfirst with Japanese, then withEuropean,producers. The limitationson exports to the United Statesbecame effective in 1969and were extended to 1974,but they appeartohave been bindingonly in 1971-72for most products. Earlierresearchshowed that these limits raised U.S. steel prices 1.2 to 3.5 percent in1971-72.4The next episode of U.S. steel protectioninvolved triggerprices, ora floor under importprices. Triggerprices, set equal to the estimatedcosts of productionin Japanplus importationcosts, were in effect in1978-80andthen sporadicallyin 1981-82.The triggerpriceprogramwaslaunchedduringa periodof a depreciatingU.S. dollar;hence, it hadonlya limited effect upon prices in the early stages, raising U.S. producerprices about 1 percentin 1979.5As the U.S. dollarrose in 1980,U.S. producersthreatenedand thenactuallyfileda numberof tradesuits againststeel exporters.These suitswere suspended,leadingto a reimpositionof the triggerprices, followed3. Diversionof a homogeneousproducers'goodcanalso occurthroughthirdcountries.A smallamountof steel is currentlyexportedto the UnitedStatesby a numberof countrieswith no steel mills. Such evasion of the automobilerestraintagreementwould obviouslybe impossiblebecausethe originof a Toyotaor Nissan cannotbe concealed.4. Robert W. Crandall, The U.S. Steel Industry in Recurrent Crisis: Policy Options ina Competitive World (Brookings, 1981), chap. 5.5. Ibid.

274Brookings Papers on Economic Activity, 1:1987by new filingsof tradesuits, and, finally,the abolitionof the triggerpricesystem. All these changes created enormous uncertaintyamong steelexporters.In 1982, the EC agreed to limit steel exports to the United States inorder to settle antidumpingand countervailingduty cases broughtbyU.S. steel producers. Finally, in 1984, PresidentReagan announcedanew set of voluntaryrestraintsto end the Section 201tradecase broughtby BethlehemSteel earlierin the year. These new restraints,which wereto include most steel exportingcountries, limitedfinishedsteel importsto 18.5 percent of the U.S. marketfor 1985-89 and allowed the importation of another 1.5 milliontons of semifinishedsteel. These restraintswere not actuallynegotiatedwith most countriesuntilmid-1985.To place these three episodes of tradeprotectionin perspective, it isuseful to examinethe trendin importpenetrationand to compareworldexport prices with realized U.S. prices during1970-86 (see table 1). Asthe dollar rose after 1980, the share of imports in U.S. apparentconsumption of steel rose with it. The sudden surge in 1984 wasundoubtedlycaused by exporters'anticipationthat quotasto be negotiated in 1984-85would be based on recent marketshares.The rising dollar and the EC settlement allowed U.S. producerprices to rise substantiallyabove Europeanspot prices in 1981-84, butthis price differencehas now begunto narrowwith the decliningdollar.The importsharehas fallenonly modestly,butit remainsat a historicallyhigh level despite the quotas. One may conclude, therefore,that threatof furthertraderestraintsandthe EC settlementallowedU. S. producersto keep their prices substantially above world levels through 1985,but the quotasnegotiatedin 1985may have a muchless restrictiveeffectat the currentlevel of exchangerates.The Effectiveness of the Automobile RestraintsThe automobilerestraintswere directedsolely at Japan.BeginninginApril 1981,the Japanesewere to limit theirexports of passengercars tothe United States to 1.68millionunits a year throughMarch31, 1984.In1984,the restraintswere extendedfor one year at 1.85millionpassengercars, and in 1985they were extended again for one year at 2.3 millionunits. In 1986, Japan's Ministry of InternationalTrade and Industry

Robert W. Crandall275Table 1. U.S. Steel Consumption, Imports, and Prices, 1970-86Dollars per metric ton unless otherwise indicatedYearApparentconsumptiona(millionsof tons)Imports(millionsof rpspotexportpricecU.S. .413.4149159169179238n.a.n.a.n.a.249354.-70- 20.526.4376412399376389382357332293296- 9359361dSources: Consumptionandimportsare fromAmericanIronandSteel Institute,AnnualStatisticalReport,variousyears. Averageprices are calculatedby the authorusing data from U.S. Departmentof Commerce,Bureauof theCensus,Steel 33B(GovernmentPrintingOffice,1986)andearlier issues; and Paine Webber, Inc., World Steel Dynamics: The Steel Strategist, various issues.n.a. Not available.a. Apparentconsumptionexcludeschangesin inventories.b. Weightedaverageof the pricesof six carbonsteel categories,using 1979shipmentsharesas weights.c. WeightedaverageFree on Board(FOB)spot exportpriceof six carbonsteel productsfromAntwerp.d. r extendingthem at 2.3 millionunitsa year-a decision reaffirmedthis year for 1987-88.The level of automobile imports in the 1980s suggests that theautomobile restraints were much more effective than those on steel(table2). Withthe dollarrisingsharplybetween 1980and 1984,the shareof U.S. automobilesales accounted for by Japanese importsfell from21.2percentto 18.3percent.The modestrecoveryin the Japaneseimportsharesince 1984reflectsthe increasein the quotain April 1985.Further evidence of the differences in effectiveness of the twovoluntary restraint regimes may be found in the prices of Japaneseimportsand domestic automobiles.A simplemodel of the determinantsof the priceof a standardizedmix of U. S. automobileimportsfromJapan

276Brookings Papers on Economic Activity, 1:1987Table 2. U.S. Automobile Sales and Import Shares, 1975-86YearTotalU.S. newcar sales(millions)Import share(percent)TotalFrom .7Associationof the UnitedStates, MVMAFacts & Figuires, '86 (Detroit:Sources: MotorVehicle ManufacturersMVMA,1986),p. 16. Datafor 1986are takenfromAutomotiveNews, January12, 1987,p. 42.underpredicts1984prices by about 2,400, an increase of 2,100 frommid-1981.6 A comparisonof the prices of two of the most popularsmallJapanesecarsin table 3). By 1984-85, it appears that the restraintshad become quiterestrictive because of the sharp rise in the value of the dollar and thegrowthin U.S. automobiledemand.A simplereactionfunctionsuggeststhat U.S. auto prices respondto importprices with an elasticity rangingfrom 0.3 to 0.4.7If this findingis correct, U.S. domestic car prices were 750to 1,000higherin 1984-85because of the quotas.Thisestimateof the effects of the restraintson importedanddomesticauto prices is substantially above others that have appeared in theliterature, primarilybecause it adjusts for the effect of the yen andextends through1984-85.RobertFeenstra,for example, has not explicitly allowedfor the effects of the strongdollarin his estimates.8 Michael6. The model uses Japanesewage rates, interestrates, steel prices, and the value ofthe yen to explain importedJapanese car prices over the period 1976-80. Robert W.Crandall,"The Effects of the VoluntaryExportAgreementon U.S. AutomobilePrices,1981-84," paperpresentedattheannualmeetingof the Societyof GovernmentEconomists(December1985).7. Crandall,"The Effects of the VoluntaryExportAgreement."8. See, for example, Robert C. Feenstra, "AutomobilePrices and Protection:TheU.S.-JapanTradeRestraint,"Journalof Policy Modelling,vol. 7 (Spring1985),pp. 4968.

Robert W. Crandall277Table 3. The Effects of Voluntary Restraint Agreements on U.S. List Prices of Imp irtedJapanese Automobiles, 1980-85Dollars per n - 2PricesSource: Author'scalculationsusingdatafrom WorldCars, variousissues.n.a. Not available.a. Averagelist priceof U.S. automobileimportsfromJapanstandardizedfor optionsloadingand vehicle mix.b. See text descriptionand footnote6.c. Averagedifferencebetween list prices for two leadingJapanesesubcompactcars in the United States andJapan.Bryanand Owen Humpageallow for currencyeffects, but theirresultsextend only through 1983.9The strong automobile marketin 1984-85allowedU. S. producersto realizepricesfarabove those they could havesustained if there had been an elastic supply of Japanese imports at aprice 2,500 lower than the realized import price in 1984-85. On theotherhand,hadthe U.S. industrybeen competitive,thepricesof importsand domestic cars would probablyhave risen far less in response to therestraintsunless a capacity constrainthad been binding. Because thedomestic marketis so concentrated,the restraintsappearto have beena "facilitating" instrumentin allowing output restraint among U.S.producers.10As the dollar has fallen, the effect of the automobilerestraintshasdiminished.The Japanesecontinueto limittheirexports of automobilesto the United States to 2.3 millionunits, but a stagnatingU.S. market,risingU.S. productionof Japanesecars, andthe 60 percentappreciationof the yen since 1984has made the restraintslargelyirrelevant.Indeed,a recent analysis of U.S. and Japaneseproductioncosts suggests that9. MichaelF. BryanandOwenF. Humpage,"VoluntaryExportRestraints:The Costof BuildingWalls," Economic Review (Federal Reserve Bank of Cleveland, Summer1984),pp. 17-37.10. KalaKrishna,"TradeRestrictionsas reauof EconomicResearch,January1985).

278Brookings Papers on Economic Activity, 1:1987Table 4. U.S. Steel Industry Profits and Investment, 1970-85Billions of 1967 8019811982198319840.771.16- 1.38- 1.48- 0.101.391.281.301.131.231985-0.461.43Sources: Total profits of U.S. steel companies are from AISI, Annuial Statistical Report, various years, adjustedby author for nonreporting companies and deflated by the overall consumer price index from the Ecotiomic Reportof the President, 1987, table B-55. Investment is new plant and equipment expenditures from Siurvey of CurrentBlisiness, vol. 66 (February 1986), deflated by the implicit price deflator for total private nonresidential investmentfrom Economic Report of the President, 1987, table B-3, rebased to 1967.unit costs are equalized in the auto industry at about 150 yen to thedollar,or very close to the dollar'svalue in early 1987.11The Impact of Import Restraints on Investment and ProfitsThe express rationaleof the traderestraintsfor both autos and steelis to give each industrybreathingroom to reassert its competitivenessthroughinvestmentand cost cutting.The 1970srestraintsand the 197880 trigger prices may have enhanced U.S. steel producers' profitsmarginallyand in so doing may have stimulatedinvestment either byincreasingexpected futureprofitabilityor throughincreasedcash flow.Real steel industryprofitsrose in 1978-81, aided by the fallingdollarin1978-79andby the triggerprices. Since 1981,however, the industryhasbeen earningnegative real profits(table4). Real investmentin steel has11. CliffordWinstonand Associates, Blind Intersection? Policy and the AutomobileIndustry(Brookings,1987),pp. 19-20.

279Robert W. CrandallTable5. Modernization,CapacityReductions,and the Returnon CommonEquitiesin the Steel CF&IBethlehemInlandNationalArmcoU.S. SteelInterlakeAnnualinvestment,1975-81,as a fractionof 1975market valueaMarket returnon 50.1600.1400.0920.0760.069-0.962- 0.746- 0.894Bankrupt-0.901-0.691- 0.093- 0.330-0.791-0.0810.449Percentage changein capacity,1981-86c- 30.6- 38.6-46.3- 100.0-68.4- 27.6-30.1-54.7- 28.7-23.0- 33.3Source: Author'scalculationsusingannualreportsof the abovelistedcompaniesandU.S. port),variousyears.a. Averageannualvalue of real plantand equipmentexpendituresin steel, 1975-81,dividedby value of firmonDecember31, 1975(definedas marketvalue of equityplus book value of long-termdebt).b. Cumulativereturnfromholdinga shareof equityin the firmfromJanuary1, 1982,throughDecember31, 1986.c. Percentagechangein raw steel capacity,1981to 1986.d. IncludesRepublicSteel.shown little trend since 1977despite the traderestraintsthat have beenin place for most of the period.But if protection had been effective in raising industry cash flowssubstantially,and if, for some reason, these additionalcash flows orenhanced profit margins had been successful in generating greaterinvestmentoutlays, the industrywould actuallybe worse off thanit is.Beginningin the early 1970s, the U.S. integratedindustrycould notprofitablyinvest in majorfacilities.12High constructioncosts, rapidlychangingminimilltechnology, and stagnatingsteel demandcreated anenvironmentin which the incrementalreturns to investment in hugeblastfurnaces,steel furnaces,androllingmillswere insufficientto coverthe cost of capital. Those firmsthat invested most intensively in modernizingandroundingout theirplantsduring1975-81,afterthe largerisein steel prices in 1974, generally suffered the largest losses in marketvalue duringthe next five years (table 5). Of the top five firms, rankedby investmentrate, four have begun bankruptcyproceedings, and one12. Crandall, The U.S. Steel Industry, chap. 4.

Brookings Papers on Economic Activity, 1:1987280Table 6. U.S. Motor Vehicle Factory Sales, Profits, and Investments, 1970-85Cash flowper vehicleb(1967 dollars)Realinvestmentc(billions of1967 .033.473.67198019811982198319848. 511.41854325.07Profit pervehiclea(1967 dollars)Sources: Basedon datafromthe followingsources:MVMA,MVMA Facts and Figures, '86; U.S. DepartmentofCommerce,Bureauof EconomicAnalysis,The National Income and Product Accounts of the United States, 192982 Statistical Tables (GPO, 1986);Survey of Current Business, vol. 66 (July 1986);and the Economic Report of thePresident, 1987.a. Profitsbeforetaxes, with inventoryvaluationadjustment,deflatedby the consumerpriceindex anddividedbytotal U.S. vehiclefactorysales.b. Profitsbefore taxes with inventoryvaluationadjustmentplus capitalconsumptionallowance,deflatedby theconsumerpriceindex and dividedby total U.S. vehiclefactorysales.c. Investmentexpendituresin standardindustrialclassification371 deflatedby the implicitprice deflatorfornonresidentialinvestment,rebasedto 1967.has abandonedall integratedsteel facilities. Of the bottom five, onlyArmco has shown a large loss in marketvalue-because it diversifiedu

Automobiles, on the other hand, have few ready substitutes other than cars already on the road. Thus, universal automobile quotas are

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