Removal of national quotas on Japanese car imports will bring important benefits to EC consumers. But the European Commission may be making a political mistake in seeking their early abolition, Alasdair Smith told a lunchtime meeting on 14 December. Better to allow national restrictions to fade away than, by precipitate abolition, to stoke pressure for a new, EC-wide quota. Smith is Co-Director of CEPR's International Trade programme. His talk was held under the auspices of research on `The Consequences of 1992 for International Trade', funded by the UK Department of Trade and Industry and by the Foreign and Commonwealth Office.
Since 1977, the Japanese producers have agreed to hold their share of the UK market to 11%. In France, their share is fixed at 3% and in Italy, Spain and Portugal, Japanese car imports are held to even lower levels. Other EC markets have essentially no restrictions on Japanese car imports.
Such restrictions inevitably impose costs on consumers, because they raise prices. In `oligopolistic' markets with a few large producers, they have an additional effect on prices because they reduce competition. In his research, Smith estimated that restrictions on Japanese imports raised car prices in the French market by around 33%, costing consumers ECU 1.5 bn (£1.1 bn). In all, the restrictions cost consumers in France, Italy, the United Kingdom, Spain and Portugal ECU 6 bn a year more than 4% of total EC consumer expenditure on cars. Some of the benefits go to European producers (especially the `national champions' who have large shares of the most protected markets), but much of the benefit is actually obtained by the Japanese producers, since it is primarily their prices that are raised by the restrictions.
If there is to be a genuine single market for cars, Smith noted, such national restrictions will eventually have to disappear. Sudden exposure of the tightly restricted French, Italian, Spanish and Portuguese markets to Japanese competition could impose severe adjustment problems on the producers with the strongest positions in those markets: Fiat, Peugeot and Renault. It is natural to expect the governments of France and Italy to seek to mitigate these adjustment problems. So rather than simply letting the national restrictions disappear, pressure is mounting for an EC-wide restriction, perhaps set so as to hold the Japanese share of the whole EC market to its current 9%.
But an EC-wide restriction would be very unattractive, Smith argued. First, a Euro-quota will restrict sales in currently unrestricted markets: Belgium, Denmark, Germany, Greece, Ireland, Luxemburg and the Netherlands, pushing up prices. On the assumption that the Japanese share of the German market falls from 15% to 8%, causing a 20% increase in Japanese car prices, the costs to German consumers alone might be ECU 1&nbspbn a year. An EC-wide restriction holding the Japanese share of the EC market to around 9% might raise prices in the United Kingdom too. Second, an EC-wide restriction would not provide a very effective cushion to producers. Cars currently sold in unrestricted markets will be diverted to the more lucrative markets which formerly had higher national restrictions, so we might still see Japanese market shares in France, Italy, Spain and Portugal rise to 8-10%. This is better for the French and Italian producers than totally unrestricted access, but still very uncomfortable for them. Third, the Japanese producers will be among the biggest gainers from a Euro-quota. They could gain ECU 800 million a year by diverting cars from presently competitive, low-price markets like Belgium and Denmark to higher-price markets like Italy and Spain.
There is also considerable doubt about the effectiveness of import restrictions, Smith argued. Japanese car producers are rapidly creating production capacity within Europe, to the extent that Japanese sales in Europe could easily rise by over 50% even if imports do not increase at all. Since at least some of the Japanese-owned plants are installed precisely because of import restrictions, the quotas are self-defeating.
The ultimate objective of policy should be to narrow the vast productivity gap between European car producers and their competitors. In terms of the hours of worker input required to produce each unit, recent research shows that Japanese plants located in Japan are approximately twice as productive as European-owned and -located plants. European producers also lag far behind in terms of reliability and consumer satisfaction. Protection has failed to raise European competitiveness, Smith argued, and it is difficult to believe another seven or eight years of the same will do any better. It is much more plausible that open competition with the Japanese is the incentive the industry needs to improve its performance, as has happened in the United States since abolition of restrictions on car imports there.
But the adjustment problems likely to confront French and Italian producers may create pressure for the national restrictions to continue permanently. This would be a major political blow, implying the abandonment of 1992 in the single most important manufacturing industry. The best way out of this dilemma, Smith suggested, would actually be to let France, Italy, Spain and Portugal keep their national restrictions as long as they want, so long as other 1992 measures are pursued vigorously. EC countries should adopt the same regulatory standards and other measures to make it easy for consumers to buy cars in any country. If this were done, then by the mid-1990s the national restrictions would be ineffective. But they will not disappear overnight, giving French and Italian producers time to adjust.
On 6 December, the European Commission published proposals for transitional `monitoring' of Japanese car imports. The nature of the monitoring and the length of the transitional period were vague. If the monitoring is focused on presently restricted markets, if it really will be only transitional, and if there are accompanying measures to make the EC car market more competitive, then this may be the best achievable package, Smith argued. But if `transitional monitoring' evolves into firm management of Japanese imports, there is a clear danger that we are on our way to a new CAP: the Common Automobile Policy.