Japan's wholly political decision to extend so-called "voluntary" quotas on auto exports to this country for a sixth year is understandable, but it was a very bad one. To be sure, it was greeted with a sigh of relief by protectionist-minded members of Congress, the United Auto Workers and by various elements within the American auto industry.
Even the Reagan administration, which philosophically is opposed to the quotas -- it did not ask Japan to extend them, although Japan pressed officials here for "guidance" -- silently appreciates the soothing effect continued quotas are having on Congress.
Nonetheless, the bottom line is that consumers, as usual, can be expected to pay heavily for the decision to continue quotas. And while the domestic industry may smirk over its short-time benefits, it ultimately will pay a price for this anticompetitive crutch.
Because of the recent dramatic increase in the value of the Japanese yen, which will force the price of Japanese-made cars sharply higher this year, the quota itself won't restrain the volume of Japanese unit sales here this year.
But the quotas serve as a price-maintenance device that will deprive consumers, for another year at least, of the benefits of competition.
Robert McElwaine, president of the American International Automobile Dealers Association, points out that, with the quotas still in effect, "You have the classic operation of a cartel. Each of the Japanese companies is allotted a percentage of the overall quota, and that ends the potential for price competition among the Japanese companies.
"There is no incentive, say, for Mitsubishi to cut prices to go after a piece of the Toyota market. And it ends the incentive of the Japanese, as a group, to cut prices to dig further into the domestic producers' share of the market in the United States."
McElwaine points out that, had the quotas been scrapped, General Motors Corp., Ford Motor Co. and Chrysler Corp. -- which have built large increases into their 1986 sticker prices (except for their dwindling volume of subcompacts) -- would have been forced to make concessions to sell cars. And the Japanese Big Three -- Toyota, Nissan and Honda -- would have had to do the same thing, despite the rise of the yen.
Now, with artificial limits on supply still in place, the Japanese will be able to maintain higher prices, especially for their "upscale" models, than otherwise would have been the case. And the American Big Three can stay close to their own stickers.
"It's great for GM, Ford and Chrysler shareholders," said McElwaine, "but for the rest of the country, not so good." Obviously, its a bonanza for the major Japanese exporters, as well, and helps take the sting out of the increased value of the yen.
On the other hand, as the Japanese move away from the low end of the market -- the average price of a Toyota is already $11,000, according to McElwaine -- consumers will get a break as the result of cheaper cars from other sources. For example, the arrival of the inexpensive Yugo, the expected popularity of the Korean Hyundai, and the prospect of a new, modest-priced Volkswagen already have forced Chrysler to shave prices on its Omni and Horizon subcompacts.
In terms of total volume, however, 1986 won't be a big year for the new foreign subcompacts -- that will come later.
The pity of it all is that the quota action almost assures that the total volume of imported and domestic car sales in the United States in 1986 will contract instead of expanding. Once again, we have been forced to settle on a policy of relative scarcity, which holds prices high, instead of a policy of abundance, which would allow prices to move down.
Robert Crandall of the Brookings Institution has noted that, with the quota system in effect, American consumers in 1984 had to pay an extra $2,500 for a Japanese car, and $500 to $1,000 extra for an American model.
If ever there was a propitious time to drop restraints on Japanese car shipments here, it was 1985. Last year was not an election year here or in Japan, and the trade deficit, although high, was less oppressive than it is now. Moreover, American industry was becoming more competitive and had achieved record profits. As Lee Iaccoca boasted, Chrysler profits in 1984 were more than the company's cumulative net profits over the prior 60 years.
Having passed up the real window of opportunity, it was more difficult for Prime Minister Yasuhiro Nakasone to be courageous this year. Faced with continued congressional hostility, the need to play host this May at the Tokyo Economic Summit, and an election contest in his own country, the last thing Nakasone wanted was to set up a new anti-Japanese wave in America by dumping the quotas. So he took the easy way out.
But if U.S. auto companies are permitted to benefit from these quotas even while profit and sales figures demonstrate a strong market, protection for autos is likely to become permanent, just as it has for steel and textiles.
The story of car quotas supports the fear expressed at the time they were imposed in 1981 under pressure from the U.S. industry, the UAW and Congress, that they would be addictive. Initially, the quotas were set for two years, with a possible third year. General Motors Chairman Roger B. Smith argued that "any voluntary restrictions should be short term, just to give U.S. auto makers turnaround time to get the domestic industry back on its feet."
The president of the UAW, Douglas Fraser, said that the U.S. industry only needed "breathing space." But two years became three, and three years became four. At that point, the Reagan administration, following the lead of U.S. Trade Representative William E. Brock, privately told Japan that it would be okay to drop the quotas after March 1985.
But Japan tried a middle path that angered everyone. It installed a fifth year of quotas, while boosting the numbers allowed from 1.85 million to 2.3 million. The Japanese saw this as a concession to the American industry, arguing that, with no quotas, their market penetration would be even higher. However, an outraged Congress viewed this decision with alarm. Perhaps more than any other event, the 24 percent boost in allowable Japanese sales hardened the anti-Japanese feeling in Congress.
This time around, Naksone was taking no chances, especially after a face-to-face warning from Sen. John C. Danforth (R-Mo.), who is influential on these matters in Congress, that if Japan didn't continue to restrict car sales, all hell would break loose.
At recent talks in San Diego, Michio Watanabe, Japanese minister of international trade and industry (MITI), approached U.S. Trade Representative Clayton Yeutter for guidance on U.S. policy. Despite an obvious effort by Watanabe to get Yeutter to hint that the United States would like the quotas continued, Yeutter reiterated that the United States believes in free markets and that its objective is to get Japan to open its markets, not to limit Japan's sales here.
"This was a Japanese government decision," Yeutter said in a telephone interview. "The U.S. government did not provide any guidance into their decision-making process."
Insiders here believe that Japan's final decision was made on the basis of a MITI canvass of the Japanese industry. When the question was put to Japanese companies whether the 30 percent appreciation of the yen in the past year would stabilize exports to the United States around the 1985 level, the answer was "no."
Said a U.S. official, "When MITI was told that, even with the yen well under 200 to the dollar, Japanese car exports would go up, they decided they had no option except to continue the quota system."
So when will the quotas come off? Privately, U.S. officials say "never," so long as the U.S. trade deficit with Japan stays in the present range.