Here’s a letter that I sent on July 13th to the New York Times; it was not published.
Editor:
In your interview with economist Pietra Rivoli, she conveys much-needed wisdom about trade and tariffs (“Policy or Cudgel? A Trade Economist on Trump’s Hardball Tariffs.” July 13). But she’s mistaken to say – obviously referring to the Voluntary Export Restraints on Japanese automobiles negotiated by Pres. Reagan – that “the reason we have Japanese auto manufacturing plants in the United States is because of the actual or the threat of trade barriers, quotas, tariffs and so forth. Ronald Reagan scared the Japanese manufacturers.”
As economists David Hebert and Marcus Witcher explain,
Volkswagen began building manufacturing plants in Pennsylvania in 1978 and Honda built its first plant in Ohio in 1979, two years before the VER, building motorcycles. Seeing their successes, Honda then announced more plants being built in 1980, which began opening from 1982 to 1986…. In fact, if we look at the data, we see about $652 million of foreign direct investment in 1981 versus $5.3 billion in 1994 when the VER ended. In other words, a 700 percent increase in foreign investment. That sounds like a lot until we see that from the increase from 1994-1999: a 770 percent increase in just five years as compared to the fourteen years of the VER, increasing foreign investment in the US auto sector from $5.3 billion to a staggering $46.1 billion.
Also worth noting is the fact that, even if the threat of trade restrictions was the chief driver of most foreign automobile manufacturing in the U.S., it’s doubtful that this development was good for the U.S. economy as a whole. The workers and inputs in those automobile factories were drawn from other firms and industries. There’s good reason to believe that resources used in facilities that are profitable only because of tariffs generate less economic value than those resources would have generated in their pre-tariff uses.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
