Cost and Benefit of Import Quotas - Essay Example

An import quota is a trade restriction imposed by the government to limit the number of goods that individuals or companies can import into a country within a particular period. The import quotas imposed on foreign-produced vehicles especially from Japan in 1980 is an excellent example of an import quota that was imposed by the United States government.

The government imposed the importation quota which was referred to as the voluntary restraint agreement following the request from local automotive manufacturers who argued the restriction would give them time to grow the nation's automotive industry to be as competitive as that of foreign countries such as Japan, Germany, and Britain. The nation's citizens preferred buying Japanese cars to the ones made in the United States since they were cheaper and more fuel efficient (Crandall, 1984). The agreement which was supposed to last for three years was to end in April 1984. The state allowed a maximum of 1.68 million cars to be annually imported from Japan for the three years. The quota was initially extended by a year to 1985 before it was finally removed in 1994.

The government decision to extend was mainly instigated by local manufacturers who said they still required more time to make the industry more competitive. However, the government also amended the agreement by raising the importation limit cap to 1.85 million cars. Automotive manufacturing companies such as Union, Ford, and Chrysler were some of the firms that supported the continuation of the restriction. On the other hand, General Motors and the Reagan Administration were some of the leading parties that wanted the import quota to be removed (Rawlinson and Wells, 2016). They argued that the nation's automotive industry had extensively grown and thus could be able to compete with foreign firms.

The implementation of the restriction was not supported by the Japanese automotive companies who viewed the United States as one of their primary markets since the country had a large population of potential customers who were willing and able to buy their vehicles. In countering the effects of the import quota, some of the Japanese automobile companies established vehicle assembly plants in different regions within the nation. Most of those assembly plants were stationed in the Southern states that were governed by right-to-work laws as compared to the Rust Belt states which had strong labor unions. Manufacturing firms such as Mazda and Mitsubishi which had their plants in Rust Belt states set up their assembly plants under a joint venture with renowned companies such as Ford, Chrysler, and General Motors (Rothaermel, 2015). The Japanese automotive firms such as Toyota, Honda, and Nissan also started exporting more luxurious brands like Lexus, Infiniti, and Acura to the United States since they attracted more profits inconsideration of the set limits.

The imposition of the voluntary restraining agreement importation quota on foreign-produced vehicles had both positive and negative implications to the various stakeholders in the automotive industry. Some of the positive impacts of the quota were such as The imposition of the voluntary restraining agreement importation quota on foreign-produced vehicles had both positive and negative implications to the various stakeholders in the automotive industry. Some of the positive impacts of the quota were such as it enabled the country to promote the growth of its local its local automotive companies such as Ford, and Chrysler. This is because the quota reduced the competition that the local firms faced from established foreign companies such as Toyota and Mazda. According to Rothaermel (2015), the restriction led to the creation of more jobs since the demand for locally produced vehicles increased thus forcing the companies to employ more people to meet the growth in demand.

The import quota also encouraged local entrepreneurs to open various care dealerships that sold the different cars offered by the different dealerships. The entrepreneurs also opened auto repair garages which provided auto repair services to customers who bought the cars. The imposition of the import quota has allowed the nation to acquire more income from the taxes paid by firms in the automotive industry (Steers and Nardon, 2014). This is because the restriction has encouraged the setting up of new companies and increased the revenue earned from automotive enterprises that existed in the market. The quota has promoted the improvement in the quality of cars manufactured in the nation thus making the companies more competitive in the locally and internationally. The improvement in quality was mainly instigated by the assurance of a ready market from the numerous citizens of the country and the increase in the profits acquired by businesses after the quota issued.

The imposition of the quota caused negative implications such as the price exploitation of consumers. Most of the companies increased the prices of the vehicles after the government imposed the quota. This was because the competition they previously faced from Japanese automotive firms reduced (Steers and Nardon, 2014). The foreign income obtained by the nation through the taxation of imports from Japan decreased since most of the goods imported from the country were vehicles. In the year 1983 for example, the country lost close to 5 billion dollars from the tax they acquired from importation. The reduction in competition adversely affected the innovativeness of some of the companies. This was because the automotive companies experienced a decrease in competition and thus the firms were not motivated to improve the quality of their cars.

References

Crandall, R. W. (1984). Import quotas and the automobile industry: The costs ofprotectionism. The Brookings Review, 2(4), 8-16.

Rawlinson, M., & Wells, P. (2016). The new European automobile industry. Springer.Rothaermel, F. T. (2015). Strategic management. McGraw-Hill Education.Steers, R. M., & Nardon, L. (2014). Managing in the global economy. Routledge.