CHAPTER EIGHT

U.S.–Japan Trade Needs a Reality Check

TRADE NEGOTIATIONS WITH JAPAN are high on the agenda of the incoming administration. But they will produce only frustration unless the U.S. faces up to some unpopular realities.

(1) The trade concessions the U.S. needs from Japan are not where most people seek them, including a good many people in the administration and Congress. They are not in manufactured and agricultural products. Dismantling barriers to the entry of manufactured goods is unlikely to produce substantial sales. And if it did, the impact on U.S. employment and the balance of trade might even be negative, because Japan is by far the largest foreign buyer of American-brand products.

American goods have a share of the Japanese market that is about twice as much per capita than goods made by Japanese companies have of the American market. Japanese brands have leadership in the U.S. market in cars, consumer electronics, and cameras; U.S.-brand goods have leadership in Japan in computers and software, soft drinks, candy, analytical and clinical instruments, and pharmaceuticals.

However, most U.S.-brand goods sold in Japan are manufactured there rather than imported. They are made by subsidiaries of U.S. companies—increasingly wholly owned rather than joint venture—that tend to buy their machinery and tools from the U.S., thus creating high-value exports and well-paying American jobs. Displacing these Japanese-made U.S. brands—IBM computers, for instance, or Mars bars or Merck antibiotics—with exports from the U.S. is about the most that could be accomplished by the dismantling of barriers to entry of American products. It would mean neither more American jobs nor a lower trade deficit.

(2) The major concern of American trade policy vis-à-vis Japan must be the preservation of our farm exports. Japan is by far the largest buyer of U.S. farm products and the only large buyer that pays full price and in cash. Yet there is not one American-grown product that Japan could not get elsewhere at the same, or lower, price. So far, it has been buying from the U.S. in order to protect its exports to America. But in the next few years Japan will be sorely tempted to use the bait of farm purchases in bargaining with the European Community—and the EC is desperate to find markets for its growing farm surpluses and more than willing to subsidize farm exports.

It makes sense for the U.S. to try to beat down Japanese barriers against American beef and feed—commodities in which the U.S. leads and for which there is substantial Japanese demand. But it is counterproductive to waste bargaining power on minor products, pineapples, for instance, or citrus fruit, and downright asinine to press for the entry of American rice. In fact, maintenance of Japan’s ban on foreign rice and high domestic rice price is very much in America’s interest. Japanese tastebuds much prefer rice to any other cereal. It is only the high rice price that induces the housewives in Tokyo to buy American wheat instead. Also, there is a surplus of domestic rice in Japan—the high price is the result of government monopoly.

(3) But it does make sense to press Japan for concessions in services. Japanese barriers to foreign entry are extremely high, whereas there are few barriers in the U.S. to Japanese entry into services (e.g., banking). Wherever Americans have been permitted to operate services in Japan, in foreign-exchange trading, fast food, bond underwriting, insurance, large-scale building-maintenance, or supplying temporary help—they have done well while substantially improving standards and quality. And there are large—but largely closed—opportunities in information, construction and transportation. However, services are rarely given much attention in public opinion or in the press, and as a result are not given high priority by the government.

(4) The method as well as the content of our trade policy vis-à-vis Japan needs refocusing. The Japanese do not lead from strength, but from political weakness. The most highly protected areas of Japan’s economy—retail distribution, farms, financial services—are antiquated, high-cost, and splintered, as protected industries always are. However, these sectors have even more political clout than their American counterparts—e.g., tobacco farmers and the handful of beet-sugar growers in Colorado. They supply the money for the increasingly greedy political parties—outsiders are getting a glimpse of this in the current Japanese stock scandal. Japanese civil servants have no love for foreigners—if only because they cannot easily control them.

However, they need outside pressure to force change on their own politically powerful interest groups. But they cannot “negotiate,” they must be “coerced”; they must be able to plead “We were raped.” And they cannot give in often—once, at most twice, a year.

The U.S. must think through its strategy rather than react to every complaint by an American industry. What is the one major economic concession we really want to attain from Japan this year? And what demands are we going to make for the sole purpose of abandoning them gracefully? How do we say “no” to domestic American claimants whose demands can only weaken the U.S. bargaining position? And how do we prevent being used by the Japanese for their own purposes as they are now using the demand for access to the rice market both to whip up support for more government control and politically to justify cuts in their exorbitant rice subsidies (without the slightest intention, of course, of letting in American rice)?

(5) Finally, the central problem for American trade policy the next few years is not going to be Japan; it will be the European Community. We must prevent it from becoming a “Fortress Europe.” Yet that is precisely what many European politicians and businessmen have in mind. They see in European economic unification the road to General de Gaulle’s old objective of a Europe without the Americans.

There is pervasive fear of the Japanese in Europe; if allowed free entry, Japanese cars and Japanese consumer electronics would indeed have a larger share of the European market than they have of the American. But there is a danger that this fear will be manipulated to keep out American goods, services and investments. In fact, the way our trade relations with the European Economic Committee are settled in these next several years is bound to determine what our economic relations with Japan will be; for the new principles for international economic relations will evolve out of negotiations between the U.S. and Europe rather than out of negotiations between the U.S. and Japan.

Under “reciprocity”—the current buzz-word in Europe—the U.S. would be in a strong position; our markets—for goods, services, investment—are on the whole quite a bit more open than those of many European countries. And if “reciprocity” were established as the principle we also would have the strongest possible position for our relationship with Japan and the one most favorable to American economic interests and American economic beliefs.

[1989]