Modelling and Forecasting Imported Japanese Parts Content of US Transplants: An Error Correction and State Space Approach

Abstract

This paper provides a sectoral examination of the impact of trade policies and custom valuation procedures on estimating time varying import content of Japanese transplant automobiles. Using monthly data from 1985 to 1992, we introduce an error correction model (ECM) and a state space VAR model to purify trade data of measurement errors induced by unobserveable prices and customs valuation procedures. Data show that US import of Japanese auto parts are elastic to the fleet of active Japanese automobiles in the U.S., inelastic to transplant production and that disequilibrium adjustments relative to transplant production are corrected in one period. Further, changes in imports are responsive to the cyclical behavior of Big 3 production and the debt burden of automobile consumers. Moreover, we find that productivity trends in the automotive industry are not a significant determinant of imported parts. The model predicts that Japanese manufacturers will shift more production to the US in response to yen appreciation against the dollar. We show that whereas import content decreased following the Fair Trade in Parts Act and the Omnibus Trade and Competitiveness Act of 1988, it increased shortly thereafter and predictions are that it will continue to increase. Therefore the empirical evidence suggests that direct trade policies designed to reduce import content and increase domestic sourcing of auto parts are not effective in the long run.