International trade in used vehicles as an “alternative” cash for clunkers programme: Evidence from NAFTA

Lucas W. Davis, Matthew E. Kahn, 18 August 2009

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The US “cash for clunkers” programme is enjoying widespread Congressional support. Billions of dollars are being allocated to pay owners of old, fuel-guzzling “clunkers” cash to trade up and purchase a new vehicle. A new car buyer whose new vehicle achieves more than ten miles per gallon over the original vehicle is eligible to receive $4,500.

This programme has an unusual collection of supporters. Vehicle manufacturers celebrate that households who trade in their “clunkers” will now demand a new vehicle. Both Detroit and Japan’s major automakers predict increased sales. Environmentalists relish the possibility of using incentives to raise the fleet’s overall fuel economy. The programme is expected to lower US gasoline consumption and greenhouse gas emissions. Based on standard Keynesian logic, the Obama White House argues that this incentive programme will stimulate new durables demand, thereby helping curtail the steep recession.

When an owner of a used vehicle chooses to participate in this programme, he or she receives cash and transfers his vehicle. This vehicle is presumably crushed, and its resources recycled. Is this the best use of this vehicle? The opportunity cost of selling this vehicle to Uncle Sam is that the vehicle could have been sold to another driver in the US or in another nation. Or the vehicle could have been transferred to a needy household in the US.1

International trade in used durables acts as a substitute for explicit “cash for clunkers” programmes. In developing nations, there is significant demand to drive such “clunkers”. Over the last two decades, an unprecedented increase in private vehicle ownership has taken place in the developing world. The total number of registered vehicles in non-OECD countries increased from 110 million to 210 million between 1990 and 2005 and, by some estimates, is forecast to increase to 1.2 billion by 2030 (Dargay, Gately, and Sommer 2008). Rising income explains a large share of this growth. Another important but rarely discussed factor is international trade in used vehicles. High-income countries export large quantities of used vehicles to low-income countries. The scope for continued expansion of trade is enormous. For example, in 2007 there were 768 total vehicles per 1000 people in the US compared to 30 per 1000 in China and only 12 per 1000 in India.

The private gains from international trade in used vehicles in which richer exporting nations send their “clunkers” to poorer importing nations come from differences in operating costs and willingness-to-pay for quality. The rise of the US cash for clunkers programme will reduce this trade and lead to a loss in private consumer surplus in importing nations.
While there are private benefits from international trade in used durables, there are also social environmental costs. Vehicles play a central role in the production of local and global pollutants. Perhaps most importantly, vehicles are a major source of carbon dioxide, the principal greenhouse gas associated with climate change. Trade in used vehicles raises policy issues at the intersection of international free trade and global efforts to mitigate the production of greenhouse gas emissions.

“Cash for clunkers” programmes can reduce carbon emissions both in the US and abroad, though at a high cost to consumers in developing countries. Because retirement rates are lower in low-income countries, imported vehicles may be driven for years while such vehicles would be scrapped under the cash for clunkers programme. This programme effectively raises the price of used vehicles in developing countries. In addition to affecting greenhouse gas production, the “cash for clunkers” programme also affects average vehicle emissions in importing countries. If the exported vehicles are dirtier than the average vehicle registered in the exporting nation but they are cleaner than the average vehicle registered in the importing nation, then trade in used vehicles will reduce average vehicle emissions in both countries.

In our new paper (Davis and Kahn 2009), we document evidence of this trading pattern. We focus on the deregulation of US-Mexico trade in used cars and trucks following NAFTA. In accordance with the conditions of NAFTA, in August 2005 Mexico issued a decree allowing 10-15 year-old vehicles to be imported from the US and Canada. Virtually overnight a vigorous trade flow emerged, and we document that between 2005 and 2008 over 2.5 million used vehicles were exported from the US to Mexico.

To evaluate the environmental consequences of this trade pattern, we assemble the most comprehensive dataset ever compiled on North American trade in used vehicles and vehicle emissions. Our dataset allows us to identify the vehicles traded using vehicle identification numbers (VIN). The results show that traded vehicles are higher-emitting per mile than the stock of vehicles in the US but lower-emitting per mile than the stock of vehicles in Mexico. As a result, trade has led to a decrease in average vehicle emissions per mile in both countries.

Such trade has led to an increase in total greenhouse gas emissions. We show that trade led to no discernible decrease in the number of vehicles in circulation in the US and considerably increased the number of vehicles in Mexico. Over the long run, this direct effect is exacerbated by differences in vehicle retirement rates between the two countries. Vehicle retirement rates are substantially lower in Mexico, which can have a large impact on lifetime carbon emissions from vehicles.

The US “cash for clunkers” programme is likely to displace international trade in used vehicles. While US households and new vehicle manufacturers benefit from this programme, households in the developing world who demand low-quality, cheap vehicles are made worse off.

The social environmental consequences of such incentive programmes hinge on several behavioural parameters. Our NAFTA research has documented that the US is exporting relatively high-polluting vehicles to Mexico but that these vehicles are cleaner than the average vehicle currently registered in Mexico. This suggests that trade lowers the average vehicle emissions in both countries. Since Mexico’s total base of registered vehicles is much smaller than the US, the composition shift is much more quantitatively important for Mexico than it is for the US.

Climate change depends on the total amount of global greenhouse gas emissions. Consequently, the aggregate impact of cash for clunkers will depend on how it changes behaviour both in the US and countries that import used vehicles from the US. Cash for clunkers will affect behaviour in importing countries by increasing the price of used vehicles. What will drivers in these countries do without the supply of cheap clunkers from the US? Will they continue to drive even older vehicles? If so, "cash for clunkers" may slow vehicle retirement rates abroad, aging the stock of vehicles in countries that import used vehicles from the US at the same time the vehicle stock in the US becomes younger.

Footnotes

1 As the San Francisco Chronicle reported: “The cheers accompanying Thursday's $2 billion extension of the ‘cash for clunkers’ program are not shared by Point Richmond's Vehicle Donation to Any Charity. It's seen a 20 percent drop in donations since Cash for Clunkers began last month. That's a big dent in the $3 million the company usually raises from reselling donated old cars and distributes annually among 4,500 charities nationwide.”

References

Dargay, Joyce, Dermot Gately and Martin Sommer. “Vehicle Ownership and Income Growth, Worldwide: 1960-2030,” The Energy Journal, 2007, 28(4): 143-171..

Davis, Lucas W. and Matthew E. Kahn. “International Trade in Used Vehicles: The Environmental Consequences of NAFTA”, 2009, previously NBER Working Paper 14565.

Topics: Environment, International trade
Tags: Cash for clunkers, NAFTA, trade in used vehicles

Comments

Trash is bad?

There seems to be a lot of discrepancies in the program. Crushing the cars does not make any sense since we are being told that "trash is bad" and then there are millions of people without vehicles that could use them. Online-Casino

Assistant Professor at the Haas School of Business at the University of California, Berkeley
Professor at the UCLA Institute of the Environment, the UCLA Department of Economics and the UCLA Department of Public Policy