4/85 AUTO TRADE--EXPORT CONTROLS TO BE CONTINUED

Following the decision by the US government in early March 1985 not to request the Japanese government to extend their voluntary controls on auto exports to the US, the Japanese found themselves in a bit of a quandary. Although happy on the one hand to have the controls dropped, on the other hand they were concerned about irritating the Americans if Japanese auto makers unleashed torrential auto exports to the US. In addition, the Japanese have never officially recognized the connection between dropping the controls on auto exports to the US and the opening of Japanese markets as the Americans have been seeking.

Following the announcement of the US decision, Keindanren (Federation of Economic Organizations) Chairman Inayama asked the government to maintain some kind of controls to avoid torrential exports and recommended the use of an exports cartel similar to that used by the steel industry. Although the US administration had dropped the controls a number of US congressmen wrote to Prime Minister Nakasone warning that if exports grew too much they would likely enact protectionist legislation. The US Senate Finance Committee started studying the problem in early March 1985.

The Japanese auto industry, led by Nissan President Ishihara demands that as the US wanted no further controls the Japanese government should also stay out of the field. He noted that the industry was likely to use prudence to not unleash torrential exports to the US, expecting that exports would be on the level of 2.5 million. The Japanese government was indeed initially inclined to leave the matter up to the discretion of the industry.

MITI initially took the view that it would maintain unofficial controls by asking each of the auto companies on their export forecasts monthly, and then use administrative guidance to control any sudden surges.

The biggest problem presented was by the smaller auto firms. As the initial controls were based on levels in proportion to previous actual sales, the smaller firms, latecomers as exporters, were severely restricted in their ability to get larger export quotas. Thus, out of concern that the controls would be imposed once again at a later date, the smaller firms are eager to establish substantial bases, for us in later controls. For example, Suzuki plans to increase its sales from 17,000 to 84,000. Isuzu plans to increase its US sales from 30,000 to 150,000. Mitsubishi Motors plans to increase its US sales from 87,000 to 200,000 cars. In fact Toyota, the largest Japanese auto maker, has announced hat it planned to limit its auto exports to the US to 10% increase. Thus it was not the large firms but the smaller firms which were expected to present potential problems. Notably, much of these increases would be due to contractual commitments to American auto makers, such as GM in the case of Isuzu and Suzuki, and Chrysler in the case of Mitsubishi. Thus many in the Japanese auto industry requested that if some framework for increased auto exports to the US were established, that portion for supplying US auto makers should be excluded, as benefiting primarily American auto firms.

In late March 1985, the Japanese government officially decided to limit Japanese auto exports to the US to 2.3 million autos per year. This will be based on the Export Trade Control Order. These controls would also apply to the contracts to supply US makers.

There were a number of reasons for the US decision to apply the controls. First of all, Prime Minister Nakasone had repeatedly expressed concern to MITI that uncontrolled auto exports could exacerbate US-Japan trade figures, already expected to approach $40 billion this year. . Another factor was MITI’s determination that despite proclamations from the auto industry that it would be limiting auto exports to the US to the 2.4 - 2.5 million vehicle level, upon close inquiries of each firms plans, total Japanese exports to the US could exceed even 2.7 million autos, compared to 1.85 million under the controls.

Another factor was American antitrust law applications. There were concerns that if Japanese auto firms maintained controls on their own, they could be subjected to antitrust suits within the US. By making the controls based on Japanese government actions, theoretically this problem would be avoided.

Even with the controls continued, but at a level 24% higher than before, Japanese auto firms were expected to be able to reap massive profits. Japanese auto firms truly love US auto sales, with their fat profit margins. The Japanese estimated they enjoy on the average a $1000 profit on each car sold in the US compared to razor thin margins elsewhere. The Japanese foreign Ministry estimates that with each 100,000 increase in auto exports to the US, the trade surplus with the US grows by $500 million. On that basis, under the new Japanese "controls" Japanese firms will enjoy increased auto sales of $2.25 billion dollars and increased profits of $450 million.

The US Congress was outraged by controls that resulted in a 24% increase. Senator Dansforth said they amounted to no controls at all. The decision also resulted in overwhelming resolutions by the US Congress demanding increased market access in the Japanese market.

Following the announcement of the continuation of the controls the White House announced that it did not consider the decision to be a substitute for market opening measures that the US is seeking from Japan. Nevertheless MITI indicated that the decision was indeed made in part to help stem criticism against Japan’s market opening packages. Prime Minister Nakasone had indeed requested MITI to limit auto exports in order to ease overall trade relations. (In short Japan does not expect the US to be satisfied with its domestic market opening package, so it is seeking to ease relations on the export front.)

The increase in auto exports is, however, expected to greatly ease price markups by dealers of Japanese cars as the supply situation greatly eases.

In this respect, GM and Toyota dedicated their California joint venture to produce cars in early April. The plant is expected to employ 2500 workers and produce 250,000 cars per year.

In Japanese-Canadian auto talks, the Canadian government has decided to let restraints, which ended in early April 1985, expire without new controls while it continues negotiations with Japan. The government said it had assurances from the Japanese that they would not flood the market while negotiations continued. Under the previous agreement the Japanese limited their exports to 170,400 cars or 18% of the Canadian market.

JAPAN LAWLETTER. April 1985. By Roderick Seeman