In 1981, the US was suffering the effects of the second
OPEC oil price shock. Faced with higher gasoline prices, consumers began to
shift their demand from low fuel efficiency US autos to higher fuel
efficiency Japanese autos. This increase in auto imports contributed to lower
sales and profits of US automakers. Chrysler Corporation nearly went bankrupt
in 1981, and probably would have, if not for the US government bailout with
subsidized loans. The US auto industry filed an escape clause petition with
the International Trade Commision, but the ITC failed to find material injury
as a result of the Japanese imports. The US was suffering from a recession at
that time which also contributed to the decline in demand for US autos. The
Japanese, faced with continuing calls by the US auto industry for legislated
protection and following discussions with the US trade representative's
office, eventually announced VERs on auto exports. These VERs were renewed
regularly and lasted until the early 1990s.
The bilateral nature of VERs contributes to a series of
subsequent effects. Since a VER can raise the price of the product in the
importing country, there is an incentive created to circumvent the
restriction. In the case of the Japanese auto VERs, the circumvention took a
variety of forms. Since the quantity of auto trade between Japan and the US
was limited but the value of trade was not, Japanese automakers began
upgrading the quality of their exports to raise their profitability. By the
late 1980s, new higher quality auto lines such as Acura, Infiniti, and Lexus
made their debut. Alternatively, Japanese autos assembled in the US were not
counted as part of the export restriction, only complete autos exported from
Japan were restricted. Thus, after the VERs were implemented, Honda, Mazda,
Toyota, Mitsubishi, and Nissan all opened assembly plants in the US. A
quicker circumvention was accomplished by shipping knockdown sets
(unassembled autos) to Taiwan and South Korea where they were assembled and
exported to the US market.
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