Japan-U.S. trade war?

Shank, Gregory

Introduction

There will be no trade war. For over a decade, Japan has been the No. 1 overseas market for the United States. The U.S. is Japan's largest wading partner. Japanese suppliers provide many of the most important components for Cray computers, and to firms such as Apple, DEC, IBM, Hewlett-Packard, and the Big 3 auto makers (Berger, 1994). A trade war would mean increased duties on Japanese products, and that would raise the manufacturing costs of these finns (Siegmann and Evenson, 1994). In any event, trade sanctions and industry-specific trade measures would only have a minor direct effect on the overall trade deficit. To complicate matters, according to the Institute of International Economics, U.S. export controls, licensing procedures, embargoes, and regulations cost the United States anywhere from $25 billion to $40 billion a year in overseas sales - self-inflicted wounds that may amount to twice the loss from Japanese trade barriers (Marshall, 1994). Few economists believe that the chronic trade deficit with Japan is a problem in itself worth much fuss - or, for that matter, an economic problem at all (Passell, 1994). The U.S. trade deficit with the world (or Japan's surplus) is not linked to the trade policy of specific nations. Americans spend more than they produce at home, and the difference is made up in imports. The U.S. runs a chronic trade deficit with Saudi Arabia, because of the thirst for low-cost oil in this country. We could stop buying oil from them and buy higher-cost oil elsewhere, but that would wreak havoc on the U.S. economy.

Current tension in U.S.-Japanese trade relations is mostly smoke and mirrors. The weak coalition governments in Japan cannot afford to have it appear that they are capitulating to U.S. demands during talks with President Clinton over the "framework" agreement on U.S.-Japanese trade. Their stance against numerical quotas resonates well with ordinary Japanese citizens (Magee, 1994a). At the same time, Clinton was applauded by Republican congressmen and executives from Silicon Valley and other high-tech firms for taking on the Japanese. The Japanese market is one of the few in the world that can absorb large volumes of high value-added goods, and the U.S.-Japan Semiconductor Trade Agreement of 1986, if carried out, would assure non-Japanese chip makers 20% of the $23.8 billion Japanese chip market (Siegmann and Evenson, 1994). A recent dispute centered on Motorola's attempt to expand its share of the Japanese cellular phone market to include the Tokyo-Nagoya region of 60 million inhabitants (close to half the Japanese population). In the rest of Japan, Motorola already claims a 50% share of the market (Magee, 1994b).

Postwar trade friction with Japan has had three peaks. The first was a dispute over textiles between 1968 to 1972. The second, in the late 1970s, centered on iron, steel, and color televisions. The third, from 1980 to the present, focuses on automobiles, semiconductors, and communications equipment. In the first two, Japan relied on cheap labor, accelerated exports, and productivity improvements to increase market share. They were compelled to adopt "voluntary restraints." In the third case, the main factors of friction are technical, and because these fields are closely related to national security, the U.S. responses have become more acute (Ishinomori, 1988).

Structure of Trade

The main driving force behind Japan's impressive economic growth has been an expansion of exports. Critics argue that Japan's industrial policy, together with interlocking company groups, long-term business relationships with mutual obligations, and labyrinthine distribution arrangements permit Japanese industry to aggressively export from the world's second largest, but only near-enclave economy - and to have very low tariff barriers, but still control the composition and value of what comes into Japan from abroad. The U.S. requirement has been for Japan to base its economy on domestic demand, with increased purchases of U.S. goods.

Half of all U.S. exports to Japan are foodstuffs and raw materials; the U.S. imports mainly machinery and vehicle parts from Japan. This pattern is typical of trade between developing and core economies, with the U.S. playing the role of the periphery. Given this relationship, increased U.S. exports to Japan would simply strip U.S. forest lands at a faster rate and increase water demands by agribusiness. The U.S. trade balance took a turn for the worse beginning in the late 1960s, and became a permanent feature in the 1970s as the world economy entered a long-term contraction. The U.S. trade deficit with Japan was less than $2 billion in the early 1970s. In the late 1970s, it increased to nearly $10 billion; and in 1985, to nearly $50 billion. By 1993, the trade deficit with Japan had jumped nearly 24% over the previous year, to a record $59.3 billion.

For the last 15 years, Japan's economic system has run enormous trade surpluses with practically every nation on earth. Japan imports only sparingly in sectors in which it exports, and its overall import level of manufactured goods - cars, electronics, chemicals - is very low, one-third lower as a percentage of GNP than U.S. and European levels. This has a disruptive effect on industrialized countries accustomed to exchanging like goods, and in some instances promotes the elimination of entire industrial sectors (Borrus, 1994). This has led to fears that Japanese firms are seeking to dominate the automobile and semiconductor industries. Japan does restrict many products: foreign companies have a 3% share of the Japanese market, while foreign companies have a 20% share of the U.S. market; for plate glass products, the corresponding figures are 1-2% versus 10.8%; for paper products, 3.7% versus 15%; and for insurance, 2% versus 10% (San Francisco Chronicle, 1994). Another factor is that foreign firms own less than one percent of Japanese domestic manufacturing activity and assets, and are routinely prevented from purchasing a foothold in Japan - a precondition for increasing exports. On the other hand, Europeans exported and sold more than 1.1 million autos to Japanese customers over the last 10 years, and Intel controls over 65% of the market share in Japan for its profitable 32-bit microprocessor (Berger, 1994). Furthermore, aside from regaining dominance of the worldwide semiconductor market from Japan, previously uninterested Japanese companies such as Sony and Panasonic have begun purchasing chips from U.S. semiconductor makers. This year, U.S. car manufacturers are expected to top the output of Japanese auto factories for the first time since 1980. Above all, U.S.manufactured exports to Japan doubled between 1986 and 1992 from $16.8 billion to $30.2 billion (Bloomberg Business News, 1994).

The Japanese Response

Under Cold War conditions and clear U.S. economic hegemony, trade friction and vastly different national economic systems were tolerated within a framework of relatively open trade. The collapse of real socialism changed that, but the ascent of China (and perhaps Russia) will present similar problems to that of Japan. Japan is currently in its worst economic downturn since 1945 - a triple-dip recession following the bursting of its speculative bubble. Land values, against which stock portfolio purchases were secured, have fallen 60% from their highest peaks. This is a situation comparable to the Great Depression of the 1930s, when stock prices fell 73% in the U.S. and 88% in Japan (Aznarez, 1994). Major corporations are restructuring, with the inevitable job losses, and this is threatening the safety net of permanent employment for the male work force. This, in turn, has soured consumer confidence, undermining motion in the direction of buying foreign discretionary goods. At the same time, the mild recovery in the U.S. has led to increased purchases of consumer goods from abroad. The U.S. demanded - and got- the Japanese to pass an economic stimulus package, an outlay of $410 billion for an economy half the size of that of the U.S. The idea was that such stimulation would help pull Japan out of its recession and thereby increase domestic demand. The result of the recent trade friction, however, was to increase the value of the yen by 6% against the dollar. This has the same effect as a 6% tariff on Japanese goods sold in the U.S. (Kataoka, 1994). At the same time, the U.S. demand for numerical benchmarks and specific goals is construed as interference in Japan's business decisions. Such goals are tantamount to demanding that U.S. consumers buy a fixed number of NEC or Fujitsu computers, whether they want them or not.

Seeking to reduce frictions, the Japanese offered an action plan that would change the "style and structure of the entire Japanese economy" and address four key U.S. complaints: imports and foreign investment, deregulation, anti-monopoly enforcement, and fairer government purchasing (Associated Press, 1994).

REFERENCES

Aznarez, Juan Jesus 1994 "The Boom Goes Bust in Japan." El Pais of Madrid, in World Press Review (March): 38-39.

Associated Press 1994 "Hosokawa Is Feeling Heat in Parliament." San Francisco Chronicle (February 19).

Berger, Michael 1994 "U.S.-Japan Conflict Is a Big Misunderstanding." San Francisco Chronicle (February 17).

Bloomberg Business News 1994 "U.S. Companies Resurge Despite Trade Worries." San Francisco Chronicle (February 17): D2.

Borrus, Michael 1994 "U.S.-Japan Trade: Sanctions Necessary?" San Francisco Examiner Business Section (February 20): C1.

Ishinomori, Shotaro 1988 Japan, Inc. Berkeley: University of California Press: 19.

Kataoka, Tetsuya 1994 "U.S.-Japan Trade: Sanctions Necessary?" San Francisco Examiner Business Section (February 20): C1.

Magee, Michelle 1994a "Japanese Applaud Their Leaders Stand Against U.S. on Trade." San Francisco Chronicle (February 17): A11.

1994b "Motorola Disliked in Japan." San Francisco Chronicle (February 21): D1.

Marshall, Jonathan 1994 "Trade Barriers Blamed on U.S." San Francisco Chronicle (February 16): E1.

Passell, Peter 1994 "Economists Say Trade Deficit Is No Big Problem." New York Times, reprinted in San Francisco Chronicle (February 15): D1,4.

San Francisco Chronicle 1994 U.S.-Japan Trade Talks (February 15).

Siegmann, Ken and Laura Evenson 1994 "Silicon Valley Hopes Trade Friction Will Improve Japan Chip Trade." San Francisco Chronicle (February 16).

GREGORY SHANK is a member of the Editorial Board of Social Justice (P.O. Box 40601, San Francisco, CA 94140).