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THE EUROPEAN COMMISSION

30 October, 2015 - 16:23

Ford executives believed that the European Commission was prepared to take some action on the automobile imports issue. In January 1983 the Commission had held discussions with the Japanese in Tokyo and had obtained a nonbinding commitment to moderate vehicle exports to the EEC. The Commission was currently monitoring the agreement. Beyond this it was unclear what action the European Commission was considering. In principle, the EEC should be expected to favor relatively free trade between its member countries and the rest of the world. The history of international trade since World War II-a history in which the EEC featured prominently-was one of declining tariffs (from an average of 20 percent on manufactured goods in the 1950s to 8 percent in the mid-1970s), dramatically growing trade volumes, and greater interdependence of national economies. Two other principles dear to the EEC were that all member countries ,maintain a common trade policy vis-a.-vis non EEC countries, and that there be no barriers to trade between member countries. Clearly, the existing set of nonuniform bilateral trade agreements with the Japanese offended these principles.

Although the principles underlying the EEC were relatively unambiguous, the EEC often resorted to protective policies, and it was not immune to pressures to maintain jobs in the automotive sector. But granted this observation, it was still not evident just how job preservation might best be achieved. Formal local content rules would be inconsistent with EEe law and would violate the GATT. Thus any local content measures would have to be informal such as those that currently existed between the Japanese and the British. Would the EEC prefer to see a uniform (albeit informal) external quota and internal production-based local content rule? Or would it rather see a uniform internal sales-based content rule and no quota? Would its preference in either case be less restrictive than the status quo, shaky though it might be? And was it realistic to expect that an informal negotiating process could create a common position among the different EEC member states? A weak, contentious, and nonuniform set of local content rules established and enforced by each EEe member country could be the worst of all the imaginable alternatives.

The Japanese, of course, would have some influence on EEC thinking on this matter. Any EEC action would probably come in the context of trade negotiations-not simply unilaterally imposed trade sanctions. And what position might the Japanese take? It is conceivable that they might agree to some reasonable export restraints into the EEC in return for open markets within the EEC. That would give them access to the two big markets from which they were currently virtually excluded-France and Italy. But would those two countries agree? Each would face greater Japanese competition in its home market but less in its export markets in other EEC countries.

The executives on the Management Committee considered their alternatives. If they were to have any role in determining the public policies that would undoubtedly have a significant impact on their company, they would have to act quickly.

ISSUES FOR DISCUSSION

  1. You are a consultant to the Management Committee of Ford of Europe. Make a case for local content legislation by showing that Japanese auto manufacturers do, in fact, threaten European companies. You might construct a table of the market shares and/ or production volumes of all auto manufacturing companies for the years 1973 through ,1983, to highlight Ford's "suffering" from Japanese competition.
  2. You are a consultant to the European Economic Community. In order to help the EEC's Commission answer the questions raised in the last section of the case, present a picture of how the rest of the world copes with the problems facing the EEe. You might make a list of what is allowed by the GATT and what is not allowed, as well as a list of the costs and benefits of the various alternatives mentioned in the final three paragraphs.
  3. You are a consultant to the governor of your state. A local manufacturer who is a substantial employer in your state followed Ford's example and filed an official request for local content legislation for Japanese car manufacturers. Advise the governor of the merits and/ or perils of the proposed legislation.