By the end of the 1920s, the U.S. had more than 120 automobiles per 1,000 people, transforming where Americans lived, worked and traveled. The rest of the world, however, struggled to keep up, as the median level of automobile adoption outside the U.S. never surpassed four per 1,000 people over the same time period. What factors drove this stark contrast in the adoption of the automobile, and what can they reveal about how new technologies spread internationally today?
Purdue economist seeks to answer this question in his research paper, “Early 20th century American exceptionalism: Production, trade and diffusion of the automobile” recently published in the Journal of International Economics. Crucini and coauthors Dong Cheng, Hyunseung Oh and Hakan Yilmazkuday investigate why the U.S. automobile stock per capita was consistently 50 times higher than the median across other countries even with innovations in production and declining prices.
To start, the researchers unearthed historical archives on the international production and trade of automobiles, estimating the stock of automobiles in use by individuals in 23 countries between 1913 and 1940. Crucini next augmented U.S. automobile price data with comprehensive measures of international trade frictions. These frictions drove up the price of automobiles in foreign countries relative to the U.S., resulting in fewer foreign purchases.
These trade frictions were significant, varying by type and across nations. For example, the median tariff imposed on U.S. automobile exports was 20%. This tax on imports combined with other costs such as export markups, shipping costs, as well as retail and distribution costs, often doubled the cost of an automobile internationally relative to the U.S. market.
Further, the cost of operating an automobile is often overlooked, with gasoline being the most obvious expense. The U.S. was a dominant producer of oil and gas during this period of history, benefiting from relatively inexpensive gasoline and low excise taxes. Other countries often imposed tariffs and higher excise taxes that made fueling automobiles significantly more expensive. Crucini and his coauthors show that the user cost of an automobile would have been about twice as high abroad. This made owning and operating an automobile significantly more expensive outside the U.S.
The researchers also estimated the price and income elasticity of demand for automobiles, studying how changes in price, income, taxes and trade costs contributed to the greatly diminished foreign adoption levels.
They found that eliminating income differences reduces the adoption gap from a factor of 46 to a factor of seven. In other words, if income levels were the same across countries, the gap in automobile ownership would shrink from 46 times lower outside the U.S. to only seven times lower. This means income differences played a major role in limiting automobile ownership, effectively making automobiles a luxury good abroad.
Additionally, if foreign gas taxes were comparable to U.S. levels, the adoption gap would reduce to a factor of about three. The researchers found that even without export markups, tariffs, shipping costs and differences in retail and distribution costs, the U.S. still had a relatively high adoption factor of about two.
Put simply, even without these added costs, car ownership in the U.S. remained significantly higher than in other countries. This is possibly due to complementary infrastructure such as roads, gas stations and repair shops, which would have advanced at a higher rate and to a higher level in the U.S. Although reliable measures of these economic factors are available in the U.S., they are mostly unavailable in foreign countries for this period.
Today, the transition to electric vehicle (EV) technology is well underway, and trade policy is taking center stage in legislative discussions. This begs the question: how can these findings be applied to the diffusion of new technologies in modern economies?
“While EV production and automobile supply chains are far more evenly distributed among industrialized countries than was the case of the combustion-power automobile in the early 20th century, the parallels are worth stressing,” says Crucini.
“Ford’s goal was to make the automobile affordable to the average worker, while European manufacturers and most U.S. rivals targeted the higher-income end of the consumer market. This put Ford in position to dominate the market, and foreign tariffs on Ford and other rival U.S. producers greatly impaired international diffusion of this key innovation.”
Today, China is the largest producer of EVs. Moreover, protectionist U.S. trade policies like tariffs are starting to mirror the legislative environments of the other countries studied in Crucini’s research.
According to Crucini, “China, partly out of necessity to sell into its own market of low-income consumers, is in a similar global market segment to Ford of the 1920s. China now faces comparable or larger tariffs, some yet to be determined, on its exports. In contrast, Tesla and other U.S.-made EVs are relatively expensive. Consequently, the diffusion of the EV and the transition to a lower carbon footprint is slowed in a similar fashion to what happened in the early 20th century.”
Through their research, Crucini and his coauthors provide valuable insights, highlighting lessons from history that can help us understand how new technologies spread globally today.
