Unintended consequences


altJohn Baden of FREE – the Foundation for Research into Economics and the Environment – sends out a weekly column which is always worth reading. This week, he's talking about the counterintuitive nature of economics, and he gives an interesting example – and a very relevant one too, given the retreat into trade protectionism.

In 1981, he says, US carmakers and unions petitioned Congress, claiming that the growing tide of Japanese imports put their industry and jobs at stake. They requested a limit – 1,680,000 cars per year from Toyota, Nissan, Honda, and Mazda.

Bill Niskannen, chief economist of Ford, argued against this protectionism. He explained that if the number of cars was fixed, Japanese companies would simply increase their revenues anyway by selling Americans cars of higher quality, larger size, and bigger price.

Ford's management fired him. The Japanese could only build “rice burners", they said —tiny, tinny econo-boxes. They could never compete with Lincoln, Chrysler, or Cadillac. But Niskannan's counterintuitive argument was right. Faced with the threat of import restrictions, the Japanese did indeed take their products upmarket – to the point where they actually surpassed the quality of their American counterparts. Perhaps US carmakers would be in a better position today if they had actually had to square up to the competition and improve their own products too, instead of being featherbedded by legislators.