The original “cash for clunkers”: International trade in used vehicles

Lucas Davis and Matthew Kahn on cash for clunkers:

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 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.