The US auto industry, 1960-2025:
A costly but successful trade-based industrial policy
Opening of Kennedy Round of GATT - Geneva, 1964
When I was growing up in the 1960s, my Father leased Ford Galaxies every year through his company. A traveling salesman, he was wise to lease new cars every year, since he could depreciate them and reduce our taxes. More important - to me at least - we got a new car every year. This made sense because their quality was fair at best. While we never owned a Corvair, a target of Ralph Nader’s book Unsafe at Any Speed, our cars experienced frequent mechanical problems requiring short stays in the local garage. Bias-belted tires were no better. When we drove West, we carried a second spare tire in case we had more than one flat on the way. Years of cozy relationships between the “Big 3” automakers and the unions had increased the size and raised the prices of American cars without improving quality, creating a tempting target for foreign auto manufacturers, especially the Japanese.
In 1964, the US agreed to the sixth “Kennedy Round” of the General Agreement on Tariffs and Trade (GATT), the multilateral negotiation that reduced tariffs and liberalized trade around the world.1 In 1960, the US tariff on foreign cars was 10%, but by 1972 this had dropped to 3%, on its way to 2.5% in 1987, where it remained until now. The tariff on light trucks dropped to 8.5% for one year (1963) before being raised to 25% by President Lyndon Johnson, who imposed this tariff (commonly called the “chicken tax”) to reciprocate for high French and German tariffs on imported chicken parts and other farm products. The “chicken tax” has never gone away.
The Japanese Invasion
The combination of high demand for cars and low tariffs stimulated auto manufacturers in Japan and Europe to export cars to the US market. The first mass-produced Japanese cars were imported in 1958, but Japanese companies struggled to gain traction, and the Toyotapet Crown and other early imports remained West coast curiosities through the 1960s. When OPEC instituted an oil embargo in 1973, however, latent demand for small, reliable cars that guzzled less gas caused sales of Japanese imports to take off.
Besides good gas mileage, Japanese cars also had precision engineering and innovative manufacturing, which enabled them to produce cost-effective, reliable cars that broke down less often. Japanese auto manufacturing like the Toyota Production System (TPS) was organized around continuous improvement (Kaizen), just-in-time inventory management (JIT), and LEAN manufacturing that eliminates waste (Muda), and was demonstrably superior to American auto manufacturing, which had changed little since Henry Ford introduced the assembly line in 1913. America’s “Big 3” (later “Detroit 3”) companies were more focused on marketing “brands” than on producing and marketing quality, and Japanese car companies gained market share rapidly.
The following chart shows how share of sales in the US market has evolved since 1961:
In 2023, foreign manufacturers sold 36% more cars in the US than US manufacturers.
Protectionist Pressures
During the 1970s, politicians from both parties threatened Japanese car-makers with import quotas and higher tariffs, but no new barriers were erected until 1981, when newly elected President Reagan negotiated a three-year “voluntary export restraint (VER)” on imports with Japan’s Ministry of Trade and Industry (MITI). The VER limited Japanese imports to 1.68 million cars per year in 1981, a cap that was raised to 1.85 million in 1984 and 2.30 million in 1986 before the program was terminated in 1994.
Reagan’s VER was successful in motivating foreign manufacturers to build auto assembly plants in the US that employed American workers. In 1982, Honda built a million-square-foot assembly plant in Marysville, Ohio and started producing Accords. Nissan followed in 1983 with an assembly plant in Smyrna, Tennessee that initially produced Nissan pickup trucks. In 1984, Toyota formed a JV with General Motors called New United Motor Manufacturing, Inc (NUMMI) at the former GM plant in Fremont, California and produced its first Corolla there in 1986. (GM and Toyota disbanded NUMMI in 2009, and the plant was sold to Tesla in 2010.) Since auto parts and accessories were subject to the same low 2.5% tariff as assembled autos and didn’t fall under the VER, Japanese assembly plants could import Japanese parts initially and develop US supply chains over time, facilitating the transition.
Foreign companies now operate 21 auto assembly plants in the US, with more under construction:
In 2023, these plants produced a total of 4.9 million vehicles, more than the 4.6 million produced in the US by the Detroit 3. Importantly, only one of these 21 plants (Volkswagen’s Chattanooga Tennessee plant) is unionized, making the United Auto Workers (UAW) the biggest loser in this industrial transition.
While Japanese manufacturers were expanding production in the US, US manufacturers were expanding production in Canada and Mexico.2 Chrysler opened an assembly plant in Windsor, Ontario in 1928, and GM and Ford also built plants in Canada in the early 1950s. Production at these plants expanded in the 1970s and 1980s, and Chrysler and GM opened second plants in 1987 and 1989, respectively. As in Canada, Chrysler was first off the block in Mexico, building an assembly plant in Toluca, near Mexico City, in 1968. Ford and GM both opened Mexican assembly plants in the 1980s, and GM built a second plant in 1995 and a third in 2009.
The following table shows US-related vehicle flows for US and foreign manufacturers in 2023:
Foreign manufacturers produced almost as many cars in the US as domestic manufacturers in 2023 and imported 56% more cars to the US. One significant difference between US and foreign manufacturers is UAW representation. Most US manufacturers are unionized, while most foreign manufacturers aren’t.
What About Quality?
Consumer Report (CR) has conducted annual road tests on new cars since it was founded in 1936, and auto reliability surveys since 1972. The company operates a 327-acre testing facility in Connecticut and employs a team of analysts who evaluate autos year round. While other publications review auto quality (e.g., Car and Driver magazine), many US consumers rely on CR ratings to guide their buying decisions. Since no Chinese-branded cars are currently sold in the US, CR does not review them, but several US-branded vehicles are manufactured in China and are included in their ratings.
With occasional exceptions, such as problems with Mazda’s Wankel rotary engine in the 1970s and 1980s, CR has documented consistently higher reliability for cars produced by Asian and German manufacturers than cars produced by US manufacturers. Here are CR’s Predicted Reliability scores by brand for 2025, color-coded by country:
Japanese car brands dominate the high reliability end of the list, interspersed with German and Korean companies. The US brand with the highest predicted reliability is Buick, but three of four Buick models are manufactured in Asia - the Envista and Encore in South Korea and the Envision in Shanghai, China. (The large Enclave SUV is manufactured in Detroit.) US brands dominate the bottom half of the distribution.
In addition to reliability predictions, CR computes a composite score for each make and model of car based on road-test performance, predicted reliability, owner satisfaction, and other factors. The trend in scores by country reveals an interesting pattern:
Japanese, Korean, and German manufacturers consistently have the highest scores, Sweden, US, and UK manufacturers are in the middle, and Italian manufacturers are the lowest-rated, although they have improved significantly since the Fiats of the early 2010s. (CR does not rate Ferraris.) Most of the change in scores over time are due to the introduction of new models and retirement of old ones.
Price-Performance
The following chart shows the relationship between CR composite scores and price:
Overall, according to CR, and surprisingly, there is no relationship between price and performance. The bottom right quadrant (high scores, low prices) is dominated by Japanese and South Korean brands, while the upper left quadrant (low scores, high prices) contains mainly US, UK, and Italian brands.
Trade as Industrial Policy
The evolution of the US auto industry provides an instructive example of how trade was used successfully to implement industrial policy, though not without cost. In response to the rapid growth of Japanese imports in the 1970s, the US adopted a policy to protect the American auto industry and workers by imposing a “voluntary” import quota on Japanese autos (Reagan’s VER). This accelerated the growth of foreign-owned auto manufacturing in the US. In 2023, according to Autos Drive America, the American International Automobile Dealers Association, foreign auto companies directly employed 156,000 workers and indirectly generated another 2+ million jobs in the US.
Led by the Japanese, foreign companies imported their advanced engineering and manufacturing technologies, forcing American manufacturers to adapt in order to compete. A study of used vehicle resale values published in 2015 found only a 1% difference in resale value between Japanese cars produced in Japan and the same models produced in the US, indicating that Japanese production methods now work almost as well in the US as in Japan. But none of this happened quickly. The study found it took US-based plants two decades to attain competitive levels of quality. The legacy manufacturers - the Detroit 3 - lost significant market share to foreign companies during this period but retained 38% of a larger US market in 2024, albeit with a significant export of American jobs to Mexico and Canada.
Consumers benefitted from this trade-based industrial policy by having many more choices of higher quality cars sold by more global manufacturers at lower cost. The transition, however, was costly. According to one analysis, the first three years of VER cost US consumers more than $15 billion in 2023 $ by restricting the supply of Japanese cars and inflating their prices. Another observer noted that it transferred $ billions from US consumers into US auto company profits and autoworker wages but failed to open Japanese markets to American cars.
Several elements of this trade-based industrial policy were responsible for its success. It was targeted to a specific problem (Japanese auto exports). It was negotiated with a responsible party able to coordinate the Japanese response (MITI). It was temporary, although the VER ceiling was raised twice to reflect new market realities. It was flexible, allowing the Reagan administration to adjust the VER ceiling without going back to Congress for another potentially divisive round of negotiations. And, it was allowed to work over time, a requirement for any fundamental industrial alignment.
The Role of Tariffs
Tariffs played an interesting role in this realignment. The basic tariff on imported autos and auto parts remained at 2.5% throughout the transition. Maintaining stable tariffs probably facilitated VER negotiations with MITI, and any change in this would have opened up GATT agreements, with unpredictable results.
President Johnson’s 25% “chicken tax” on light trucks was imposed early on and remains in place today. It is difficult to gauge its precise effects, but it undoubtedly provided a degree of protection to the Detroit 3 and is probably responsible for their relative strength in the light truck market.
Tariff protection, however, has a dark side. Most of the vehicles the Detroit 3 manufacturers produce today in the US, Canada, and Mexico are SUVs or light trucks. To a large degree, they have ceded the sedan market to foreign manufacturers - and recently to Tesla. The relative safety of the light truck market has probably discouraged them from dealing with their fundamental cost problem - their UAW contracts. The UAW seems content to let their membership decline as long as they can keep wages and benefits high for current workers. It’s not clear this twentieth century strategy will work for employers like the Detroit 3 in the twenty-first century.
President Trump’s Trade War
The success of Reagan’s VER strategy contrasts sharply with President Trump’s current tariff policies. His tariffs are shotgun blasts, not targeted rifle shots, and they raise costs for consumers across the board. They are being imposed unilaterally rather than negotiated. They are probably temporary, but who knows? They are certainly flexible - almost arbitrary - but this simply adds uncertainty and undermines business decision-making. The President apparently expects them to have quick results in reestablishing the US industrial base. This is wishful thinking. Finally, like all tariffs, they are unfair. They impose costs on businesses that produce goods and services consumers want and run efficient operations that did nothing to warrant this imposition of government power.
In his rhetoric about trade deficits, President Trump seems to think countries trade with each other. With few exceptions, they don’t. Businesses trade with each other, and countries can play only a limited number of roles. They can use state power to grant monopolies that make a few people rich by preventing trade by their competitors. This was a dominant intervention in the Middle Ages and the Age of Sail. Alternately, they can hinder trade by restricting imports or exports or imposing tariffs on them. This is typically done for specific goods and services for specific reasons, such as a sudden invasion of low-cost Japanese autos or a national interest in protecting intellectual property rights or a response to political pressure from powerful constituents like farmers. The GATT Harmonized Tariff Schedule (HTS) is hundreds of pages long, reflecting thousands of hours of lobbying by specific groups to gain protection from imports.
The only economic rationale for a uniform blanket tariff across all goods is the same as for a tax - to raise revenue for the state - and some small countries still use it for this. For large countries like the US, however, the amount of revenue raised through tariffs is dwarfed by the burden they place on profitable trade, which can be taxed directly.
But blanket tariffs can also be used as negotiating tactics, and President Trump is undoubtedly using them this way. Apparently, he believes that the thousands of hours of negotiations that produced the HTS was fundamentally biased against US companies and that we need to “reset” future trade negotiations. Given our traditional support for free trade, the US may have capitulated too early in some of these negotiations - with French and Japanese farmers, for example. But it strains credulity to believe we were “rolled” in GATT negotiations for 80 years.
President Trump also distrusts multilateral negotiations, preferring bilateral negotiations where he can use US power to force other countries to force their companies to comply. This is a lot of forcing, and while it may work for small countries, success with large countries seems unlikely. One positive outcome would be convincing other countries to lower their trade barriers, and this may be possible in some cases - e.g., with Israel, which is dependent on US military support.
The more likely outcome is for the Trump administration to broker exceptions to blanket tariffs. This creates innumerable opportunities for his administration to reward friends and punish enemies, similar to the way the Biden administration operated in many spheres.
The sixth round was named the “Kennedy round,” in honor of President John F. Kennedy, who had signed the Trade Expansion of Act of 1962, enabling the President to reduce tariffs up to 50%.
Like their US counterparts, Japanese auto manufacturers also expanded aggressively into Canada and especially Mexico. Toyota and Honda both built auto assembly plants in Ontario in the 1980s. Toyota, Honda, and Nissan each own two assembly plants in Mexico, Mazda owns one, and Isuzu assembles trucks there. In the era of NAFTA and the United States-Mexico-Canada Agreement (USMCA), all these plants export vehicles into the US.