Implementing Results-Oriented Trade Policies : The Case of the U.S.-Japanese Auto Parts Dispute

This paper addresses the following two questions: 1) Is the threat of punitive tariffs on Japanese auto manufacturers (who purchase auto parts in Japan) sufficient to implement the market share target in auto parts, and 2)What policy or set of policies should the U.S. adopt to achieve the target (in auto parts) without the influence of the Japanese government? The model developed in this paper highlights linkages between markets and shows when a credible threat of punitive tariffs on automobile producers who purchase goods in the auto parts market is sufficient to implement the market share policy. The advantages of using such a mechanism as punitive threats are substantial. In the parlance of international trade, the market share or quantity targets represent a results-oriented trade policy; one which favors desired outcome or result, over the power of the tools used to produce implementation. A results-oriented trade policy specifies the market share target only, leaving the implementation to the discretion of the countries entering into agreement. The details of implementation significantly impact the distribution of gains and losses among those affected. There is a threefold advantage to the use of threats to linked markets. First, such threats result in self-enforcing agreements, second, they encourage competition, and finally, they do not allow the implementation procedure to be chosen in a way which facilitates (in this case, Japanese) interests at the expense of U.S. firms. In contrast to current papers which mainly examine how imposition of market share targets might be achieved through tariffs, subsidies and the like, which affect the targeted market directly, this paper examines imposition via threats in a linked market, such as the affect of threats to impose tariffs in the automobile market on the behavior of firms in the auto parts market. The threat of tariffs in the auto market is shown to sufficiently induce competitors to adhere to market share requirement. The two crucial elements affecting this result are linked markets and threats of sufficient import to induce the desired result