**What are the Economic Effects on the Country that were involved in this Case** JAPANESE AUTOSFor much of the 1960s and 1970s, the U.S. auto industry was largely insulatedfrom import competition by the difference in the kinds of cars bought by U.S. andforeign consumers. U.S. buyers, living in a large country with low gasoline taxes,preferred much larger cars than Europeans and Japanese, and, by and large, for-eign firms had chosen not to challenge the United States in the large-car market.In 1979, however, sharp oil price increases and temporary gasoline shortagescaused the U.S. market to shift abruptly toward smaller cars. Japanese producers,whose costs had been falling relative to those of their U.S. competitors in anycase, moved in to fill the new demand. As the Japanese market share soared andU.S. output fell, strong political forces in the United States demanded protection13Wang F. (2011) Who bears the burden of voluntary export restrainis? Prague Economic Paper Vol. 3.,p. 216 231. DOI: 10.18267/j.pep. 397.for the U.S. industry. Rather than act unilaterally and risk creating a trade war, theU.S. government asked the Japanese government to limit its exports. The Japanese,fearing unilateral U.S. protectionist measures if they did not do so, agreed to limittheir sales. The first agreement, in 1981, limited Japanese exports to the UnitedStates to 1.68 million automobiles. A revision raised that total to 1.85 million in1984. In 1985, the agreement was allowed to lapse.The effects of this voluntary export restraint were complicated by several fac-tors. First, Japanese and U.S. cars were clearly not perfect substitutes. Second, theJapanese industry to some extent responded to the quota by upgrading its qualityand selling larger autos with more features. Third, the auto industry is clearly notperfectly competitive. Nonetheless, the basic results were what the discussion ofvoluntary export restraints earlier would have predicted: The price of Japanese carsin the United States rose, with the rent captured by Japanese firms. The U.S. gov-ernment estimates the total costs to the United States to be $3.2 billion in 1984,primarily in transfers to Japan rather than efficiency losses.

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What are the Economic Effects on the Country that were involved in this Case

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter24: Price-searcher Markets With High Entry Barriers

Section: Chapter Questions

Problem 9CQ

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For many years, the Justice Department has tried to break up large firms like IBM,Microsoft, and most recently Google, on the grounds that their large market share madethem essentially monopolies. In a global market, where U.S. firms compete with firms fromother countries, would this policy make the same sense as it might in a purely domesticcontext?
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