The 2006 Increase in U.S. Motor Vehicle Imports from Japan

Congressional research reportMar 13, 2007

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Order Code RS22620

March 13, 2007

The 2006 Increase in U.S. Motor Vehicle

Imports from Japan

Stephen Cooney

Industry Specialist

Resources, Science, and Industry Division

Summary

Imports of motor vehicles (automobiles and light trucks) from Japan increased by

one-third in volume from 2005 to 2006, rising to more than two million units, the

highest yearly total since 1989. Some Members of Congress have expressed concern

that the export of cars from Japan to the U.S. market has been assisted by a policy of the

Japanese government to reduce the exchange rate of the yen. This could give producers

based in Japan a trade advantage when they export vehicles to the U.S. market, in

competition against those made in the United States. Alternative factors that may also

explain the 2006 import increase are rising sales of imported subcompact vehicles,

which are not built in the United States by any manufacturer, and a shortage of U.S.

manufacturing capacity by two leading Japanese-owned automotive manufacturers.

Toyota and Honda are now rapidly expanding their North American production, a

development that may reduce net imports, but could further increase the competitive

pressure on the Detroit-based “Big Three” manufacturers.

Automotive Imports from Japan Rebound in 2006

No trade issue in the last generation has likely been more sensitive than that of U.S.

automotive imports from Japan. But even though the products of Japanese-based

companies have continuously gained share in the U.S. domestic market, imports declined

to a lower level in the 1990s. A renewed surge of Japanese imports occurred in 2006, as

distinct from vehicles produced and assembled in North America by Japanese nameplate

manufacturers. This contributed to a renewal of concerns in Congress about the

competitiveness of the U.S.-based “Big Three” motor vehicle manufacturers, all of which

have been suffering serious financial losses.

With the investment of automotive assembly plants in North America by Japan’s

major motor vehicle manufacturing companies, the level of imports from Japan declined

substantially in the 1990s. From a peak of 3.6 million imported cars and trucks in 1986,

the total fell to just over 1.25 million – more than two million fewer units – ten years later

(see Figure 1). Thereafter, as Japanese companies continued to gain market share with

a wider range of products in the U.S. market, imports from Japan began to increase again,

CRS-2

albeit marginally. According to Commerce Department data, imports from Japan

averaged a little over 1.5 million units per year in 1996-2000, and close to 1.7 million

units during the next five year period, 2001-05. But even though the number of units

rose, Japan’s share of U.S. imports from countries other than Canada and Mexico

continued to decline. From a level as high as 93% in the early 1980s, Japan’s share of

such imports fell through the early 2000s, to less than 50% in 2003-05. In 2006, by

contrast, Commerce data show that imports from Japan jumped by 35% in one year to

about 2.2 million vehicles, and Japan’s share of imports from outside the North American

Free Trade Area (NAFTA) increased in that single year from 49% to 57% (Figure 1).

Figure 1. U.S. Imports of Cars and Trucks from Japan

100

4.0

3.0

2.0

1.0

19 9

19 0

19 2

19 3

19 5

19 7

19 8

19 9

19 0

19 2

19 3

19 5

19 6

19 8

20 9

20 1

20 2

20 3

20 5

0.0

Japan's % of Imported Cars and Trucks

Imports from Japan (millions of units)

Millions of Units

Japan's % of Imported Cars and Trucks

Note: Excludes vehicles imported from Canada and Mexico.

Sources: (1979-1995) Motor Vehicle Mfrs. Assn./American Automobile Mfrs. Assn. Motor Vehicle Facts

& Figures; (1996-2006) U.S. Dept. of Commerce Intl. Trade Adm., Office of Aerospace and Automotive

Industries.

Assertions That the Japanese Import Increase Is Linked to

Undervalued Yen

The Automotive Trade Policy Council (ATPC), an organization supported by the

Detroit-based Big Three (General Motors, Ford Motor Company, and the Chrysler Group

of DaimlerChrysler), has consistently maintained that the Japanese currency, the yen, has

been undervalued as an act of government policy to boost exports. Japan has carried out

this policy, according to ATPC’s analysis, by massive currency market intervention in

2000-04, by informal “guidance” to influence foreign currency markets since then, and

CRS-3

by a policy of exceptionally low interest rates.1 The president of the United Auto Workers

union, Ron Gettelfinger, estimates that, “The artificially low value of the Japanese yen

against the dollar puts U.S.-made cars and trucks at disadvantage of between $2,000 and

$9,000 per vehicle before a single sheet of metal is stamped or a single part is installed

on a vehicle chassis.”2

The allegedly undervalued yen exchange rate has been explicitly linked to the sharp

increase in 2006 motor vehicle imports from Japan.3 Four House committee and

subcommittee chairs with jurisdiction over trade, commerce and financial policies on

February 8, 2007, wrote Secretary of the Treasury Henry Paulson and noted that “from

2005 to 2006, imports of Japanese cars and trucks rose by more than 30 percent ... We are

certain that the weak yen is also boosting Japanese exports in other economic sectors and

is having a significant impact on many U.S. producers.”4 They urged that he “press” the

Japanese government to reverse the policy of maintaining a weak yen by raising interest

rates and selling some of the massive reserves of dollars and euros Japan has accumulated

through its market interventions.5

The yen has weakened since it reached a high point against the U.S. dollar in late

2004 and early 2005. At that time, the U.S. dollar only bought about about 103-104 yen.

For the whole of 2004, the average value of the dollar was 108 yen, compared to almost

116 yen in 2003 and 125 yen in 2002 ( Japan’s last major official intervention was early

in 2004). The dollar strengthened to 110 yen in 2005, and about another 5% to 116 yen

in 2006, for about an 11.5% overall gain above the post- 2000 low. In January-February

2007, the dollar did rise to more than 120 yen, but though this rise may affect the policy

debate today, it could not have influenced 2006 trade results.6 A rising dollar at these

levels would have an immediate windfall effect on Japanese companies’ profits, because

U.S. dollar sales translate into relatively more yen. But the effect on longer-term product

sourcing and planning may take longer to play out. There may have been more immediate

causes of the short-term rise in Japanese imported vehicle sales in 2006 than the rise in

the value of the yen. These notably may include capacity constraints on Japanese

companies in North America and shifts in consumer demand in 2006.

ATPC. The Economic Impact of Japanese Currency Manipulation (Sept. 2006). The position

of the U.S.-based automotive industry and this issue in general is discussed in CRS Report

RL33178, Japan’s Currency Intervention: Policy Issues, by Dick K. Nanto, especially p. 5.

William Cline of the Peterson Institute for International Economics calculated in 2005 that a

“reference rate” for the yen compatible with a “sustainable” level of the U.S. trade deficit would

be 82, as opposed to recent rates of 120¥/US$1.00. His colleague John Williamson has said that

the excuse that Japan cannot afford adjustment because of weak domestic growth, “no longer

looks compelling.” See the latter’s Reference Rates and the International Monetary System

(Washington: Peterson Institute, 2007), pp. 48-49.

Ron Gettelfinger, “Speculation Won’t Solve Pressing Auto Ills,” Detroit News (Mar. 2, 2007).

James B. Treece, “Japanese Exports to U.S. Soar” Automotive News (Feb. 5, 2007).

Letter from Reps. Charles B. Rangel, John D. Dingell, Barney Frank and Sander Levin to

Secretary of Treasury Paulson (Feb. 8, 2007).

Ibid.

Exchange rate data from Federal Reserve Statistical series G.5 and G.5A.

CRS-4

Capacity Constraints Affect Japanese Sourcing Decisions

As will be shown later in detail, Toyota and Honda together accounted for virtually

all of the net increase in U.S. motor vehicle imports from Japan. Figure 2 illustrates that

in 2005-06, these two companies were operating at or above their full North American

manufacturing capacity. Toyota, which alone accounted for three-quarters of the net

increase of more than 400,000 imports, operated at about 110% capacity in both 2005-06.

During this period, the company opened a new truck plant in Texas (whose initial

production runs began in late 2006, data not included in the figure), is building a second

plant in Woodstock, Ontario and in early 2007 announced a new plant to be built in

Tupelo, Mississippi. It has also bought Isuzu’s half of a joint-venture plant in Indiana

with Fuji Heavy Industries. Honda ran at 96% capacity in 2005, and 99% in 2006. As

in the case of Toyota, they were stretched too thin in North America to immediately meet

rising demand for certain products. Honda has announced a new assembly plant to be

built in Greensburg, Indiana, after having opened and expanded a new plant in Alabama

since 2001.

Figure 2. North American Automotive Assembly Capacity Utilization

*excludes Mercedes Benz

**excludes new San Antonio truck plant, incl. NUMMI joint venture, Fremont, CA.

Note: Based on "straight-time capacity" (two 8-hr. shifts/da., 235 da./yr.)

Source: Global Insight, North American Light Vehicle Industry Forecast Report (Nov. 2006), pp. A47-A50

for 2005 data; Jan. 2007, pp. A52-54 for 2006.

The third-largest Japanese motor vehicle company operating in the United States,

and the only other one with more than a million units in annual sales, is Nissan. But

Nissan’s sales declined by 5% in 2006, and its capacity utilization fell from 92% to 87%.

The company’s imports from Japan also declined by 11% (see Table 1 and Figure 2).

By comparison with Toyota and Honda, the two largest U.S.-based manufacturers,

Ford and General Motors (GM), have experienced sales declines in some product lines,

financial losses in 2005-06, much lower capacity utilization rates, and a need to close

permanently some of their assembly plants. Figure 2 illustrates that Ford operated at

about 70% of capacity for the past two years. GM’s rate actually increased slightly from

77% to 80% in 2006, but this was mainly due to a closure of plants with about 400,000

units of capacity, according to the source for the figure. The Chrysler Group’s capacity

utilization fell from 99% to 91%, but this was not enough to forestall a large inventory

build-up of some vehicles, and the need to announce major production cutbacks and

closures in early 2007.

CRS-5

Japanese Firms Meet Shifting Consumer Demand with Imports

Table 1 shows that the net increase in 2006 imports from Japan was mostly due to

strong U.S. demand for higher fuel economy models that could not be delivered by

Japanese companies from their North American plants. This is especially true of Toyota:

An increase of 81,000 imports of the RAV4, a “crossover” utility vehicle

(CUV), that is Toyota’s smallest vehicle of this type;

70,000 imported units of the subcompact Yaris, in its first year on the

U.S. market;

An increase of 42,000 imported units of the Corolla, Toyota’s basic

compact sedan, to supplement production in California;

An increase of 17,000 imported units of Toyota’s Scion brand, its entrylevel model.

Among Toyota’s larger vehicles, only two saw a large gain in imports. One was the

mid-size Camry sedan, of which about half of the net increase was the hybrid model that

was then only made in Japan. However, the iconic Prius hybrid model, all of which are

imported, by comparison showed no gain in sales at all. Also, Toyota introduced the

FJCruiser, an imported SUV-type niche product that sold 56,000 units in its first year.

All of Toyota’s other mid-size and larger vehicles, including the Lexus brand, saw much

smaller increases, or declines, in sales whether they were imported or produced in North

America. Toyota plans to continue its stated strategy of increased North American

sourcing. Besides the highly publicized new Tundra pickup truck now being built in

Texas, Toyota will also bring the RAV4 to its new plant in Woodstock, Ontario. The

Highlander SUV, currently imported, will be built at a new plant announced for

Mississippi.

Imports of Honda vehicles from Japan increased by 70,000, mostly because of the

introduction of the subcompact Fit (28,000 units) and the increased sales of the CR-V

CUV (39,000 increased imports). Honda has begun to produce this vehicle in Ohio. As

a Honda official stated, “Maintaining some level of imports gives Honda flexibility to

adjust to changing economic conditions in the United States, while assuring a sustainable

level of local [U.S.] employment.”7 Smaller, but significant, import gains were also

registered by Ford’s Japanese affiliate, Mazda (27,000), and by Suzuki (19,000). The

latter is Japan’s fourth-largest motor company and a specialist in subcompact vehicles.

In summary, subcompacts are likely to be imported in the U.S. market from countries

where they are sold in larger volumes. For example, GM’s subcompact Chevrolet Aveo

is imported from Korea, and Chrysler has negotiated a deal with Chery, a Chinese

company, to produce a subcompact for North America. Otherwise, the Japanese

companies’ strategies would still appear to be to increase production in North America,

while adding imports to supplement sales or to try out new products from Japan, where

there is excess capacity, because the market there has been stagnating since the 1990s.

Letter of Edward B. Cohen, Automotive News (Feb. 19, 2007).

CRS-6

Table 1. 2006 Changes in Japanese Motor Vehicle Imports

Note: “Imports” not

incl. vehicles from

Canada or Mexico.

U.S. Sales (000s)

2005

2006

Chg.

TOYOTA -Tot.

2,260

2,543

283

– Scion

156

173

– Yaris

– Corolla

Imports (000s)

2005

2006

Chg.

861

1,180

319

156

173

new

232

272

420

– Camry*

432

448

193

– FJCruiser

new

– RAV4

152

114

152

114

– Lexus

303

322

235

246

– Prius

108

107

-1

108

107

-1

– Avalon

-6

– 4Runner

104

103

-1

104

103

-1

– Highlander

137

130

-7

-5

137

130

-7

-5

N.Am.-made

SUVs, Trucks

503

500

-3

-1

HONDA-Tot.**

1,462

1,509

234

304

new

– Accord*

369

354

-15

-4

– Civic*

308

316

-2

-4

– CR-V**

150

170

127

– Acura

210

201

-9

-4

-7

-9

NISSAN

1,077

1,019

-58

-5

225

214

-11

-5

MAZDA

258

269

144

171

SUBARU

196

201

MITSUBISHI

124

119

-5

-4

-7

-16

SUZUKI

101

JAPAN TOTAL**

5,472

5,769

297

1,626

2,049

423

– Fit

*Imports include all hybrid types of this model.

**Honda excluding CR-V imports from UK.

Source: Automotive News, (Jan. 8, 2007).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.