The Extent and Sources of Cost and Efficiency Differences Between U.S. and Japanese Automobile Producers

In this paper we present for the first time estimates of cost and efficiency differences between U.S. and Japanese producers based on an econometric cost function methodology rather than the accounting frameworks previously used. We demonstrate that the cost difference estimates for 1979 which were influential in the debate that resulted in the Voluntary Restraints Agreements of 1981-85 were substantial over estimates of the Japanese advantage. While our estimate of the Japanese cost advantage for 1980 is similar to previous estimates, we attribute most of this advantage to short-run phenomena -underutilization of U.S. production capacity and an undervalued yen. In a previous paper we have shown that the Japanese TFP growth rate was much faster than the U.S. rate during the 1970's. However we estimate the long-run underlying Japanese efficiency advantage as of 1980 to have been only 1-2%, much less than previously estimated. This results from the fact that Japan began the 1970's with a long-run efficiency disadvantage of over 20%, and the decade of the 1970's represented a catch-up period for Japanese producers.