GM's Price Hike Confirms Need to Abolish Car Import Quotas
Samuelson, Robert J., American Banker
GM's Price Hike Confirms Need To Abolish Can Import Quotas
EVEN GENERAL MOTORS IS NOT powerful enough to overrule the laws of supply and demand. Its recent announcement of a 2.9% price increase -- following last fall's 3% increase and in the face of declining sales -- simply confirms that the U.S. car market remains fundamentally uncompetitive. What GM has done is to provide a reason for eliminating the basic cause of the problem: quotas on Japanese imports.
It's madness. GM raises prices while shutting factories to reduce excess inventories. The action can only be a desperate attempt to increase profits. But sales have been so slow that the auto companies may be forced to adopt new "incentives" -- possibly low-interest loans -- to revive them. GM apparently hopes that this calculated confusion, raising prices with the left hand and lowering them with the right, will create higher overall prices. It's a contemptuous attitude that assumes car buyers are morons.
What gives it a slim chance of success is the artificial ceiling (2.3 million units annually) on Japanese imports. In competitive markets, excessive prices result in lost sales. But the Japanese cannot respond by increasing their own sales. Indeed, because each Japanese company has a quota, no individual company can increase its market share against the others by shaving prices. Although Ford and Chrysler might exploit GM's price increase, they usually follow GM's price leadership.
Import Quotas Should Be Scrapped
The perfect place to undo the auto quotas is the Tokyo "economic summit" of the major industrial countries in May. The United States and Japan would have to act together, because Japan -- under American pressure -- adopted the restrictions "voluntarily" to minimize U.S. protectionism. But it's doubtful the Japanese would keep the limits if asked by the Reagan administration to drop them. The President ought to exact additional concession from Japan to open its market, while pledging to veto any future congressional quotas.
Anyone who has watched the administration on this issue cannot be optimistic. Despite embracing free trade, the White House pushed Japan to impose the quotas in 1981. It has never completely reversed itself, even though the reasons for the "temporary" restrictions -- to allow U.S. companies to convet to fuel-efficient cars and to soften the effects of a slumping economy -- have disappeared. Since 1983, profits of the "Big Three" U.S. producers (GM, Ford, and Chrysler) total $24 billion.
Ending the restrictions is not a favor for Japan. Rather, their continuation poses twin threads to the U.S. economy. By encouraging GM to raise prices, they hamper economic expansion and abet inflation. Although inflation is low, the depreciation of the dollar -- which raises the prices of imports -- is one remaining problem. And Japanese car and light truck imports ($19.6 billion in 1985) are a significant part of that problem, accounting for 8% of manufactured imports. …