The Automobile Industry

The growing internationalization of the automobile industry is symbolized by the advent of the “world car,†a car designed for consumers across the world and typically assembled from parts produced in diverse locations. Insofar as the associated dispersion of parts production reflects efficient specialization, it is just one more illustration—albeit a very dramatic one—of the gainful division of labor across national boundaries that is permitted by international trade. The intensity of worldwide competition in the automobile industry may well produce a “shakeout†of the less profitable firms. In an attempt to meet their foreign competition, U.S. automakers plan massive investments to modernize their facilities. By 1985, they expect to spend $70 billion, the largest privately funded investment program on record. One important reason for the recent decline in U.S. auto production was the abrupt rise in the price of gasoline, which shifted purchases away from large U.S. cars toward small cars offering higher mileage per gallon. Since foreign producers were already making such cars for their own markets, they were able to expand their exports to the U.S. market quickly. Thus the recent gains of foreign auto producers in the U.S. market resulted primarily from sharp gasoline price increases rather than from sudden, ingenious innovations.