The major reason is Americans do not want to BUY small and midget cars. Even those that can make small and midget cars off shore, for far less, do not sell many of them in the US. The best selling cars are mid-size cars including the number one selling car the Camry and the best selling vehicles are TRUCKS not cars.
The imports did exactly the same thing domestics were doing. They were offering ever larger and more powerful cars and trucks during the same time period. Their small cars today are bigger and more powerful than the 'big' cars just ten years ago. If one doubts that, compare a sixties Toyota or Honda to what the sell today.
The only time Americans bought small cars was when the were forced to by them by the government when Carter cause the gas supply problems. Once Reagan did the right thing and let the market decide, they return to buying the larger saver cars they want to buy.
Where the hell does the government, in a free society, get the right to tell manufactures what they must produce and to tell the buyer what they must buy, in any event?
There is far more than GM should have done besides trying to make electric cars practical. They should have figured out cost-efficient ways to make small cars (instead of importing them from Korea), implemented ways to make cars more efficient, make entry level cars that consumers would want and that would last, and improved its manufacturing capability to be more flexible.
Jeff