US-Japan Automobile Trade Relations Essay, Research Paper

It is unfortunate that the U.S. chose to use automobiles as its wedge to open the alleged “closed” markets of Japan. One Japan-based managing executive of the Big Three has even admitted that they consider the Japanese automobile market to be open. Japan is not the island of protectionism in a sea of free trade that its critic allege. The problem for the U.S. auto-makers is not a lack of market access, but a lack of effort. The first step required for the U.S. auto makers to sell competitively in Japan is not to impose of ridiculous tariffs, but to have Detroit bring up the quality to Japanese standards. All in all, the U.S.’s decision to use automobiles as its wedge to open the Japanese market was surely a dangerous one. In addition, the utilization of unilateral actions by the U.S. is clearly a violation of international trade law. Not only is this decision a resemblance of managed trade but a policy which will weaken the leadership position of the U.S. in the world economy as well.

The U.S. needs to do what the Japanese did when they penetrated the American market; hard market research and heavy investment. The Japanese spent billions of dollars studying American taste and manufacturing models that suited them. The Big Three have generally confined their efforts to sending models that they have made specifically for Americans. Bill Duncan, the head of the Japan Automobile Manufacturers Assn. states that “it was the basic principals of competition that made the Japanese automobile industry strong.”

One example which reflects the short-sightedness of the Big Three is the insufficient number of right-hand models available in Japan. Since cars in Japan are driven on the left side, all domestic makers produce right-hand drives. It’s simple, the inconvenience of a left-hand drive, at tolls, parking lots or when overtaking another car is too dangerous. Naturally when the Japanese export their cars to the U.S., in each of the 190 versions sold, they provide American drivers with a steering wheel where they expect it; on the left side1. On the other hand U.S. exports have a grand total of 2 models which feature a right-hand drive. The Big Three sold a measly 22,000 left-hand models in 1994. Jeep sold 11,000 on their Cherokees alone, just because they remodeled it to a right-hand model2.

Another area in which Detroit must seek change is in car size. In Japan, the normal American cars are just too big. 80% of the cars in Japan are under 2000cc (2L.) Imagine yourself driving on the jammed packed, narrow streets of Tokyo. The Big Three exports not a single model which falls within these specifications. In comparison, the successful Europeans have 124 models under 2000cc and listen to this Detroit, a selection of over 100 models which are right-hand drive3. This clearly implies that efforts by the Big Three seem to be insufficient compared to that of Europeans.

An area of the Japanese car industry in which America showed tremendous dissatisfaction during the negotiation was the exclusive dealerships, or as Professor Morrison noted in his class, the “keiretsu.” It is true, each domestic manufacturer is closely linked with dealers, but as the New York Times (June 28, ‘95) reports, the dealership issue is largely beside the point: the Big Three already have twice as many outlets in Japan as all the European auto makers combined, yet they sell fewer cars. In the past, America succeeded in cracking the European market with GM and Ford, putting extra care and money over the decades into establishing dealer networks. This shows in the statistics; as the two companies occupy 25% of the European market4. This brings us to a question: Why doesn’t the U.S. after enjoying such a success in Europe, put in the same kind of effort into the Japanese market. Maybe U.S. companies should reconsider just what it takes to succeed. German auto-makers alone, who have commanded over 50% of the import market in Japan, have invested nearly $1 billion in Japan. “The massive investments helps. Dealers wonder how serious we are” says Volkswagen Japan manager Minoru Suzuki. Comparatively, American spending is estimated at $120 million, with Ford eating $100 million of the pie5.

Along with the complaint about the keiretsu, Americans plead that astronomical land costs makes it hard to set up their own dealerships. However the same applies to Japanese makers as well. A couple years ago, Mazda, who is considered a minor player in the Japanese market, established a new dealership network for its new model. The fact is they competed under the same harsh conditions as the American but with fewer resources and still succeeded in establishing a very stable and profitable network. There are many other examples as well. The U.S. should keep their mouth closed and intensify their efforts in the Japanese market.

As explained above, the reason for America’s continued failure in taking a strong hold on the Japanese car industry is mostly a lack of effort. For that reason, the U.S.’s complaining about a lack of market access, their blaming market shortcomings on Japan and their utilization of unilateral actions to pry open the Japanese market will endanger America’s position as an economic leader of the world. Automobiles is a large issue in trade negotiations, but a small part of the macro-economy. If the U.S. were to keep a stance similar to that which they held during the automobile negotiations in June and other nations retaliated to this stance, the world economy will head into a generation of managed trade.

Bibliographic Sources

“Big 3 and Japan.” New York Times, June 26, 1995.

Borrus, Amy with Bill Javetski. “Who’s Afraid of the World Trade Organization.” Business Week, June 5, 1995, p.35.

Borrus, Amy with John Templeman, Keith Naughton, Edith Updike and Bureau Report. “Good Deal? Yes. Great Deal? No.” Business Week, July 10, 1995, p.32-33.

“Clinton’s Phoney Peace.” The Economist, July 1, 1995, p.13.

Dornbusch, Rudi. “Sanctions against Japan: A Necessary Evil.” Business Week, July 3, 1995, p.20.

Hamilton, David. “Calmer Voices Amid the Trade Bluster.” Wall Street Journal, June 22, 1995.

“Ignorant Armies.” National Review, June 26, 1995, p.20.

Kelly, Kevin with Zachary Schiller and Edith Updike. “Buy Our Car Seats. Japan, or It’s War.” Business Week, June 26, 1995, p.42.

Kuttner, Robert. “You Could Drive a Lexus through the Holes in the WTO.” Business Week, June 12, 1995, p.24

“OK Mickey, Let’s Say You Won.” The Economist, July 1, 1995, p.65.

“The New Thirst for Imports in Japan.” Business Week, June 5, 1995, p.52.

Updike, Edith. “Roadblocks, Roadblocks Everywhere.” Business Week, June 19, 1995, p.58

Updike, Edith with Brian Bremner, Amy Borrus, David Woodruff and Larry Armstrong. “Japan’s Auto Shock.” Business Week, May 29, 1995, p.44.

The New Strategies to Expand by Big Three (as of Dec. ‘95)

GM

– together with Toyota, will unveil a right-hand model of subcompact Cavalier

– plans to offer U.S. built right-hand drive Saturn by 1997

– aims to sell right-hand drive Cadillacs in near future

Ford

– displayed right-hand version of new Taurus mid-size sedan and Explorer

– Taurus will be available in spring ‘96 and Explorer in fall ‘96

– aims to expand distribution outlets to 700 from 310 by year 2000

– aims to push sales to 200,000 annually by year 2000 from 56,000 this year

Chrysler

– displayed five right-hand drive model which will be available by fall ‘95

– aims to expand oulets to 200 by next yeat from 100 this year

– payed Seibu group $100 million to expand distribution network