Explaining Domestic Content: Evidence from Japanese and U.S. Auto Production in the U.S.

This paper studies the domestic content decisions of auto makers in the U.S. between 1984 and 1993 using foreign trade zone activity as a tool by which one can observe individual sourcing and production. The results show that although the domestic content of Japanese firms is rising, differences are not being eliminated completely. Also, the apparent elasticity of substitution is lower for Japanese than for U.S. firms. These results suggest that although transplant production may reduce the U.S. automotive deficit with Japan, transplant production will not cause its elimination.