Rather than needing more government ‘help,’ U.S. automakers are threatened by government intervention.
P oliticians love to talk about cars, but they usually do so with few facts. Free trade has hollowed out the U.S. auto industry, and it needs protectionism to bring back good manufacturing jobs, the story goes. Did the jobs leave in the first place? If so, where did they go? Has trade actually hurt the industry?
Adam Ozimek of the Economic Innovation Group has written a lengthy article going through the data and the history of the U.S. automotive sector. What he finds is that far from being hollowed out, the sector is holding its own on employment and cars produced while adding more value to the U.S. economy than ever. And past ventures of protectionism haven’t helped the industry, which has benefited from increased global trade.
The U.S. produced 10.5 million cars last year, which is roughly the average going back to 1967, the first year with consistent data available. In the 58 years from 1967 to 2024, the U.S. produced over 10 million cars in 42 of them. More of the exceptions came before NAFTA (1967, 1970, 1975, 1980–1983, 1990–1992) than after, and the only ones that came after were due to economy-wide recessions (2008–2011 and 2020–2021).
Immediately after the enactment of NAFTA, the domestic auto industry thrived, with U.S. car production around 12 million per year from 1994 to 2005, and surging to an all-time high of 13 million in 1999. After an enormous V-shape in the graph for the Great Recession, production again cleared 12 million in 2015. There is simply no evidence of long-term erosion in the U.S. capacity to produce cars.
On the contrary, Ozimek points out that the value of those cars has been rising for decades and is currently at an all-time high. Real value-added for the motor vehicle industry in 1971, when the U.S. produced about the same number of cars as it did in 2024, was $58.2 billion. In 2024, real value-added was $213.9 billion. And yes, “real” means “adjusted for inflation.” So not only has capacity not declined, value has improved by leaps and bounds. This shouldn’t be a surprise to anyone who remembers the average quality of 1970s U.S.-made cars.
Automated production has been part of the increase in quality, but the number of people employed in the motor vehicle industry in 2023, 1.02 million, is very close to the 1.1 million average from 1950 until NAFTA in 1994. In fact, immediately after NAFTA, U.S. autoworker employment rose, from 1.19 million in 1994 to 1.32 million in 2000. Again, it was the recession in 2001 and then especially the Great Recession that contributed to declines in autoworker employment, not greater international trade.
But how can this be when compared with the obvious decline of Detroit and its auto sector? Ozimek finds that the peak of autoworker employment in Detroit was actually around 1950, way before the Japanese automakers entered the market significantly, and way, way before NAFTA. Ford had already closed its last assembly plant in the city of Detroit by 1956. The jobs in Detroit mostly did not move to other countries. They moved to other U.S. states.
“By the mid-1960s, Ford had made major investments not just in the southern states of Alabama, Tennessee, and Georgia, but also in New York and New Jersey,” Ozimek writes. “GM made investments in Indiana, Ohio, Illinois, New Jersey, Mississippi, and California, while Chrysler invested in New York, Delaware, Indiana, and Ohio — all by the late 1950s.”
One of the reasons Ford gave for moving production out of Michigan was the militancy of the United Auto Workers Local 600, which called hundreds of strikes at the company’s River Rouge complex in the 1940s. That complex employed 90,000 workers in 1941 and only one-third as many in 1960, but UAW president Walter Reuther was hailed as a hero of the working man anyway. By the time foreign automakers started investing in major plants in the 1980s, they knew to build in right-to-work states.
The U.S. auto industry’s crisis came suddenly in the late ‘70s, but competition from imports had risen gradually over the previous two decades. Imports’ share of U.S. car sales tripled from 4 percent to 12 percent between 1957 and 1967, with no discernible effect on the U.S. industry. By 1974, Japanese cars accounted for over a million U.S. car sales, and imports were around 20 percent of the total. Yet, 1978, which set a new record for imports at over 3 million, also set a new record for U.S. production, at 12.9 million.
What happened the next year was more due to general consumer trends and the 1979 oil shock than anything related to trade. Total U.S. car sales cratered between 1978 and 1982 (high unemployment will do that), and Chrysler was bailed out by the federal government. Ford probably would have needed a bailout, too, but it was still making enough money from its foreign operations to get by (thanks, globalization!).
Imports didn’t make up the difference. They rose slightly: 3.1 million in 1978 to 3.3 million in 1982. But because domestic sales had dropped by 5 million, imports became a much larger percentage of the total, and the domestic automakers used them as a scapegoat.
Ozimek demonstrates that they were indeed a scapegoat by comparing cars with trucks. Truck imports increased by only 5 percent between 1978 and 1982, compared with 11 percent for cars. But domestic truck sales fell by slightly more than domestic car sales did. It was just a bad time to sell vehicles in the U.S.
Over the long run, Ozimek found that there is no correlation between domestic sales and imports. There is a very strong correlation between domestic sales and total sales, though, which shows that U.S. consumer demand, not trade, is the primary force determining the fate of the U.S. auto industry. That’s just one more reason why the government shouldn’t be working against consumer demand by subsidizing the overproduction of electric vehicles today.
The scapegoating in the late ’70s worked, though, and in 1981, the Reagan administration, against Reagan’s better judgment, pressured the Japanese government to limit its car exports to the U.S. under the Voluntary Export Restraint (VER). The recession was over by 1982, and so was the car industry’s crisis. As people went back to work and GDP growth soared to 5 percent and then 7 percent, vehicle sales surged in 1983 and hit an all-time high in 1984.
The VER didn’t even start to raise the price of Japanese cars in the U.S. — the mechanism by which it would protect domestic industry — until 1984, and the increase wasn’t statistically significant until 1986. The government’s own estimate was that the VER only increased domestic production by 1 percent in 1981 and 1982. With the economy roaring again, the original justification for the VER was gone, but it stayed in place all the way until 1994, needlessly limiting American car buyers’ choices for over a decade
Protectionists have tried to claim the VER was a success ex post facto by saying it encouraged foreign automakers to build factories in the U.S. to avoid the trade restrictions. But Ozimek points out that that has more to do with the economies of scale inherent to car production. It only begins to pay off for a company to build a new factory in a country, rather than importing finished cars, if the country has demonstrated sustained high demand for those cars. The VER never applied to Korean cars or European cars, and automakers from those places also built U.S. factories as U.S. demand for their vehicles reached the critical mass where the economics made sense.
Car companies don’t need more government to help them today. In fact, two of the largest threats to their success come from the government: green mandates and tariffs. The myths peddled by politicians will certainly live on, but it’s best that policymakers ignore them if the car industry is to thrive.