© University of Reading 2007 www.reading.ac.uk

Voluntary Export Restraints between Britain and Japan: The Case of the UK Car Market (1971-2002)

James Walker

VOLUNTARY EXPORT RESTRAINTS

• “New Trade Policy”

• Quota’s not new to the post-War UK: used during post-War reconstruction (Milward and Brennan, 1996).

• VERs had been applied to other industries (e.g. textiles, steel, VCRs….) and on cars in Italy (since 1960s), France (since 1977), US (1981-1994).

THE BIGGER PICTURE• Post-War decline in Second Industrial

Revolution industries: diverse set of industries chemicals, complex manufactures aerospace, cars, computing, and engineering.

• Car industry ultimate metaphor of the ‘British Disease’. BL’s fall from dominance.

• Car industry ultimate metaphor of the Japanese manufacturing excellence –1. dominance in new goods, 2. a transformation providing well equipped products, 3. dominance in process (JIT etc.)

WHAT MOTIVATED VERs?• Lobbying by SMMT (representing UK

manufacturers). Reflecting: 1. The rapid import penetration of Japanese

manufactures; 2. A 1st hand appreciation that Japanese

manufactures had a productivity lead. Government: To protect ‘nationalised’ BL (in

1975). Played active role in the early ‘industry-to-industry’ discussions.

ADMINISTERING THE POLICY

• 1977-1982: Bilateral industry agreement (SMMT and JAMA) from (9-11% Japanese market share).

• 1982-1992: EU takes a passive role: VER rates still banded by the market share (9-11%).

• 1993-: EU actively formulates VER rates: removed in December 1999 (numeric no proportional quota). No coverage of FDI.

VER IMPLEMENTATION BY THE COMMISSIONFrom 1993 Commission administered under the

“Elements of Consensus”.

EOC interpreted in different ways (Flam, 1994; vs. Mason, 1995; Turrini, 1999) - but the following is how it did work:

(1)Included: vehicles >5 tonnes; UK, France, Italy, Spain and Portugal; excluded FDI transplants.

(2)Forecast based formula: aim to aid restructuring of European manufactures.

FDI in the UK and US• Japanese approach in the US: screw

driver plants aggressive in the market: they were unconstrained in production (no local content issue).

• Honda makes links with the worlds weakest mass producer (Austin-Rover) from 1979; sells joint produce from 1985; independence from Rover when it is purchased by BMW. Uses own plants for ‘Honda’ cars from 1993.

Nissan UK sales begin in 1988.• Toyota UK sales begin in 1993.

Optimal Strategy (Producers)

FOR UK1st best: Allow FDI, but disallow sales growth in a

protected local market.2nd best: Allow for FDI, enforce local VER, but provide

other ‘incentives’ (that are costly: e.g. subsidies)

FOR JAPANESE FIRMS: 1st best if costs lower in Japan – export to Europe (no

FDI). 2nd best: produce in and sell throughout Europe

(Quota jumping). 3rd best: access as much of the market as possible

and receive compensation for not accessing a limited market.

DID THE VER BIND? FDI?

0

2

4

6

8

10

12

14

16

Including FDI

Excluding FDI

%

Source: SMMT data

FDI AND VERs• Little domestic control over VERs from 1983 –

they were maintained then reduced by the EC.• Considerable Government input into FDI.

Government Aims• 1. Protect nationalised industry (jobs) through

insulating domestic market.• 2. Encourage FDI, employment and efficiency

(Thatcher, 1993)

• However these goal conflict if imports and transplants are sold in the domestic market since they compete with domestic offerings.

INTERPRETATIONFigure 1: suggests that the UK succeeded in

attracting Japanese investment while maintaining internal restraints. What was in it for the Japanese?

(A) Thatcher support 4 (UK/European) cars.

(B) Incentives to Japanese investors: government (‘investment assistance’, land etc.).

WHERE WERE TRANSPLANTS SOLD?(IT, FR, ESP & POR)

0

0.5

1

1.5

2

2.5

3

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Nissan Honda

Toyota

Source: Comité des Constructeurs Français d'Automobile (CCFA)

%

LITERATURE

History: Secondary literature acknowledges VERs but does not analyse their importance (e.g. Foreman-Peck et al. 1995)

Theory: Falvey (1979), Rodriguez (1979), Flam (1994) etc. Linked to the controversial strategic trade debate (Irwin, 2002).

Implication of all models is that quality upgrading will occur. Sell less but at higher margins.

DATAInformation on sales, prices, 130+ car attributes,

location of production at the product version-level.

Rich set of product innovations that go beyond ‘performance’ features:

"the bias towards the inclusion of performance characteristics is reflecting the fact that engineering attributes are much easier to measure [than other non-technical features]; but they are certainly farther removed from the quality dimensions perceived by consumers" Raff and Trajtenberg (1997, p.11)

HOW TO UPGRADE?

• 1. More quality features.

• 2. Change product-mix (move to more profitable segments of the market).

QUALITY UPGRADING?

-4

-2

0

2

4

6

8

10

12

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

%

PRODUCT-MIX (Japan)

0

10

20

30

40

50

60

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Small Medium

Niche "New "

%

PRODUCT MIX (British Leyland)

Story with an ending

By 1999 when the policy ceased -

•European firms adjusted – all bar one at least.

• Japanese firms transformed into broad producers with dominance particularly in ‘new goods’.