Trade Protection, Industrial Policy, and the Shaping of Local Preferences

Abstract

We conduct a retrospective analysis of the Spanish automobile industrial policy that overcomes many common empirical challenges: inconsistent enforcement of long-lived policies affecting not only domestic production but also welfare. The policy had four pillars: the state-sponsored creation of SEAT, the domestic manufacturer; a restrictive maximum share of foreign capital ownership; a stringent domestic minimum component requirement for foreign manufacturers to locate in Spain; and a de facto prohibition of imports until Spain joined the European Union in 1986. Spanish automobile production grew from non-existing in the 1950s to become the fifth largest in the world in the mid 1990s. We use historical province-level automobile registration data to highlight inefficiencies that are otherwise ignored when focusing on output growth alone. If given a chance, many Spaniards preferred cheaper, higher quality imports. Furthermore, entry of foreign manufacturers triggers a sudden but long-lasting increase in domestic sales of these brands, which is always more intense in the local market where the new assembly plant is located. Thirty years after import restrictions were abandoned, the strong preference for brands with a domestic production facility survives, resulting in a serious regional segmentation of the Spanish automobile market that softens competition despite being fully integrated in Europe. We show that intranational home bias accounts for the equivalent of a 5.5% import tariff, compared to a nominal import tariff into the European Union of 10.3%. Seventy years after its creation, SEAT is still the largest beneficiary of local biased preferences.