Trade Restrictions? Won't Help You

The administration, the managed-trade segment of the policy establishment, and the labor unions should consider the experience of the auto industry. General Motors, Ford and Chrysler strong-armed Japan’s auto industry to accept voluntary export restraints (VERs) in the mid-80s. The results of the VERs are named Lexus, Acura, and Infiniti. The Japanese motor industry drove up-market and developed an unassailable reputation for superior quality, not only in their luxury marques but across their full lines. Meanwhile the market share of U.S. motor nameplates dropped from 74% in 1985 to barely 60% in 2004 in spite of the VERs. Now it is worse, and one or more of Detroit’s former big three may not survive.

VERs made negligible difference to Detroit's rate of market share erosion. Take a look market share data from 1970 through 2004 (Sources - US Dept. of Commerce, Ward’s Automotive Yearbook, D H Smith):

Beat up trade partners over exchange rates? No!

American trading experience with Japan shows there’s much more to trade balances than just the exchange rate, and beating up trading partners over exchange rates is useless. In 1985, the Japanese yen traded at 250 to the dollar, and Japan ran a $46 billion surplus with America. In spite of billions wasted by the Bank of Japan in costly and ineffectual currency market intervention between 1985 and 2005, the value of the yen more than doubled to 109 per dollar. During the same two decades, Japanese industry suffered barriers against its motorcycles, semiconductors, and steel in the U.S. market, accepted voluntary export restraints on cars, and localized production in America through its investments of over $100 billion. Neither the huge currency appreciation, nor the restraints on trade, nor the transplanting of Japanese industry stateside prevented Japan’s trade surplus with the U.S. from rising to $75 billion by 2004.




(Source: US Dept. of Commerce, DH Smith)

Consider America’s trade deficit with China – it certainly is growing, having quadrupled between 1996 and 2004. Note that this was a period during which the dollar/renminbi exchange rate was stable to within 1.1%. During the exact same period, the Mexican peso declined by about one-third against the dollar. If the exchange rate were the principal factor in relative competitiveness, we might expect Mexico’s export performance in the United States market to be better than China’s. In fact, Mexico did increase its surplus by a factor of three — a strong performance, but not as strong as China’s.