How would the imposition of tariffs on the import of Japanese-produced automobiles affect demand for General Motors products?
Tariffs are taxes placed on foreign-made products that are exported to the United States. When the United States, or any other country, imposes tariffs, or increases existing tariffs on foreign-manufactured goods, it makes the imported product more expensive for American consumers. Tariffs are historically a very common means employed by most countries to protect domestic industries from the pressures of foreign competition.
Prior to the energy crisis of the late 1970s, when gasoline prices in the United States began to rise at a greater than normal rate and gas stations were running out of inventory, causing long lines of automobiles to form waiting for their chance to fill-up their tanks, Japanese-made cars were small, light and generally poorly-made options for low-income American consumers. The American automobile manufacturers, General Motors, Ford and Chrysler (the less said about the now-defunct AMC line of cars, the better) enjoyed almost total control of the vast American market. Most of the cars produced and sold in the United States were large, family cars with inefficient engines that got poor gas mileage. The energy crisis, however, resulted in a massive increase in demand for smaller, more fuel-efficient automobiles, which were not being produced in the United States. Japanese automobile manufacturers like Toyota, Nissan (formerly Datsun), and Honda seized upon the opportunity to capture larger shares of the American market. Subsequently, the quality of Japanese-made cars, especially Toyota, improved tremendously. As a result, General Motors, Ford and Chrysler (which filed for bankruptcy in 1979 and received U.S. government financial backing to restructure itself) saw the market for their larger, less fuel-efficient cars shrink considerably.
The purpose of the above history of the American automotive industry’s descent and the rise of Japanese competitiveness is to place the issue of tariffs in the proper context. Japanese manufacturers were simply quicker and better at designing and building small, efficient light-weight cars that also incorporated the latest in driver and passenger safety technologies – all while keeping costs competitive in the U.S. market. In the event the United States imposed large tariffs on the import of Toyota automobiles, therefore, the result would be a significant increase in the cost of those cars to American consumers. The impact on General Motors would be to make its cars less expensive relative to the competition. Less expensive GM cars would presumably be a more attractive option to price-conscious American consumers, who continue to prefer larger, less fuel-efficient cars anyway. In short, tariffs on Toyotas would mean fewer Toyotas sold and more Chevrolets, Buicks, and Pontiacs sold.