In 1982, the ITC instituted an investigation to determine if motorcycles having engines with displacement more than 700 cubic centimeters were being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or threat thereof, to domestic industry producing like or directly competitive articles. The investigation was in response to a petition for relief filed by Harley-Davidson Motor Co., a U.S. firm. The investigation showed that from 1977 to 1981, U.S. shipments of motorcycles grew by 17 percent, with domestic production capacity increasing by nearly 82 percent (largely as a result of American Honda's increased production in the United States). During that same period, the number of U.S. jobs increased by 30 percent. In 1982, however, consumption fell, domestic shipments declined, and employment dropped. In the first nine months of 1982, domestic shipments fell by 13 percent and inventories rose, leaving large numbers of unsold motorcycles. Production during that period showed a decline of 36 percent, profits were down by 20 percent, and employment was down by 12 percent. Inventories of imported motorcycles doubled in that period, representing a tremendous threat to Harley-Davidson. The country as a whole was in the midst of a recession, and demand for heavyweight motorcycles was depressed.
1. Assume that a domestic firm is not competitive in price and quality with foreign firms, but that competition by high tariffs protects it. What are the effects of the protection on the firm in the short term? How might it affect the firm's competitiveness in the long term?
2. President Reagan later rejected recommendations to place quotas on footwear because of estimates it would have cost American consumers $3 billion in increased tariffs, and because there was no indication it would have helped American manufacturers return to competitiveness. How important do you think cost is to a president's decision?