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How Japanese Fuel-Economy Subsidies Affected Cars Sold in America

08/01/2026

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This figure is a line chart titled "Effect of Japanese Fuel-Economy Subsidies on Vehicles Sold in the US," showing how a Japanese fuel-economy subsidy affected the fuel efficiency of Japanese vehicles sold in the US. The y-axis is labeled "Log point change in average miles per gallon, relative to 2009" and ranges from 0.00 to 0.25. The x-axis is labeled "Model year" and spans from 2003 to 2019. The chart includes two labeled lines, "Japanese vehicles sold in both Japan and the US" in blue and "Japanese vehicles sold only in the US" in gray, along with a vertical dashed line marking 2009, annotated with the text "Fuel-economy subsidy introduced in Japan." Both groups of vehicles show similar fuel-economy trends before 2009, rising slightly from about 0.06–0.07 in 2003 to a peak around 0.10 in 2007, then dropping to near 0 by 2009; after the subsidy's introduction in 2009, vehicles sold in both Japan and the US show a steady, pronounced increase in fuel economy, reaching about 0.22 by 2019, while vehicles sold only in the US show a much smaller and more uneven increase, fluctuating between about 0.02 and 0.09 and ending around 0.07 in 2019, indicating that the Japanese subsidy had a substantially larger effect on the fuel economy of vehicles also sold in Japan. A note on the figure reads: Starting in 2009, the Japanese government offered subsidies for purchasing new cars that exceeded fuel-economy targets. The source line reads: Researchers' calculations using data from Car Sensor, WardsAuto, and MarkLines.

Multinational firms often sell nearly identical products across global markets. This raises the question of what happens when a government regulates a product in one country: Does that change propagate to the same product sold elsewhere? In Global Policy Spillovers: How Environmental Policies Propagate Through Product Attributes (NBER Working Paper 35197), Koichiro Ito, James M. Sallee, and Jonathan (Andrew) Smith study “attribute propagation”—the mechanism by which a domestic policy induces broader changes in product attributes through multinational firms’ product design decisions. The researchers focus on a Japanese fuel-economy subsidy introduced in 2009, which provided consumers purchasing vehicles above a weight-based fuel economy target with subsidies ranging from approximately $700 to $1,500—roughly 5 to 10 percent of the average price of a new car. Because Japanese automakers sold many of the same car models in both Japan and the US, some US-market vehicles were potentially exposed to the subsidy’s influence while others—Japanese-brand models sold exclusively in the American market—were not.

Japan’s 2009 fuel-economy subsidy improved the fuel efficiency of Japanese-brand vehicles sold in both Japan and the United States.

The researchers compare fuel economy trends between these two groups of vehicles over the 2003–2019 period, drawing on vehicle specification records from Car Sensor (Japan) and WardsAuto (US) as well as monthly model-level sales figures and production data from MarkLines. They find that for vehicles sold in both Japan and the US, the subsidy generated an 8.7 percent improvement in US fuel economy relative to vehicles sold by Japanese automakers exclusively in the US. They estimate that the direct effect in Japan was larger: a 25.2 percent improvement. They also find that US automakers, whose sales volumes in Japan were too small to make compliance with the subsidy worthwhile, showed no statistically significant change in the fuel economy of their US vehicles.

The researchers find a greater degree of attribute propagation when a given vehicle is produced in a single facility and shipped to multiple markets, and on models with smaller preexisting fuel economy differences between the Japanese and US markets. The latter finding suggests that less-differentiated products are more likely to be jointly designed for multiple markets.

The researchers estimate that global CO₂ reductions as a result of the Japanese policy were 5.4 times the reductions associated with vehicles sold in the Japanese market. This is because the US vehicle market is substantially larger than the Japanese market, and because American drivers travel approximately 11,218 miles per vehicle annually compared to 3,206 in Japan.