Can Japan Shift Economic Strategy? : More Emphasis on Home Market Would Ease U.S. Trade Gap

For months the United States has been putting pressure on Tokyo to widen American access to the Japanese market, and the government of Prime Minister Yasuhiro Nakasone is responding. But even if the Japanese removed all barriers to manufactured goods and farm products from the United States, the increase in U.S. exports would make only a small dent in the huge and dangerous American trade deficit.

It is hard to see how Japan’s deficit share can ever be reduced to politically and economically acceptable levels unless the expansion of Japanese imports from America is accompanied by a slowing of Japanese exports to this country. Interestingly enough, Japan seems closer to accepting this fact of life than the Reagan Administration and key members of Congress.

The U.S. trade deficit--the difference between what we buy from abroad and what we sell to other countries--will soar past $150 billion this year. The shortfall in U.S. trade with Japan accounts for about a third of the total. As the protectionist drive in Congress makes clear, the situation simply cannot be allowed to continue. Legislation to impose limits on Japanese exports to this country may be passed by the Senate this week.

The Japanese say, with justice, that much of the problem lies in the overvalued dollar, Washington’s failure to control the huge federal budget deficit, and the lack of effort by many U.S. exporters to adapt to the Japanese market.

But there is no question that real barriers do exist to foreign penetration of the Japanese market. The Nakasone government, anxious to head off protectionist moves in the United States and Western Europe, has inaugurated a program of tariff reductions and is encouraging Japanese consumers to buy more foreign goods. The latest “Action Program” is expected to be formally announced in Tokyo on Tuesday.

Past market-opening moves by Japan were seen as insufficient by Congress, Administration trade officials and affected industries, and the new package is expected to meet the same reaction. But Tokyo finds it difficult to go much further because of resistance from important constituencies of the ruling Liberal Democratic Party (the farm lobby and the tobacco and wood-products industries, for example) that do not relish more foreign competition.

As a result, leading members of the LDP have been urging Japanese industrial leaders to come up with a package of voluntary restraints on exports to the United States in order to dampen the protectionist thrust in Washington, and to make it unnecessary to go much further with politically sensitive market-liberalization moves in Japan.

Just what kind of export restraint is likely to emerge isn’t clear, nor is it known how substantial the restraints might be. However, proponents of export restraint are said to be thinking in terms of autos, telecommunications equipment and semiconductors, among other things.

In any event the Reagan Administration hasn’t waited for the details before objecting that what Washington wants is meaningful access for U.S. goods to the Japanese market, not additional restraints on Japanese exports to the American market. This is in keeping with President Reagan’s free-market philosophy, as well as this country’s longstanding dedication to liberal trading principles. But the Administration would be wiser to encourage rather than discourage a trend toward voluntary restraint by Japanese exporters.

Most economists doubt that, with all barriers removed, U.S. exports to Japan would gain by more than $10 billion. And, since the barriers are cultural and psychological as well as economic, the actual potential for U.S. penetration of the market is much less. This means that no attack on the trade deficit with Japan is going to work unless it deals with Japanese exports.

Failure to recognize this fact is a sure way to guarantee the ultimate adoption of anti-import legislation in Washington that would do more harm to liberal trading principles than unilateral restraint by Japan. And, considering the importance of Japan as an ally and the important role of the Liberal Democratic Party in supporting that alliance, it hardly serves U.S. interests to push market-opening measures in Japan to the point of causing serious political problems for the LDP.

If Tokyo finds it more politically palatable to help correct the trade imbalance with America by mixing concessions on the import side with restraint on the export side, the United States should not object. It’s also worth remembering that greater Japanese restraint on exports, if significant and permanent, could help achieve a long-term U.S. policy goal: encouraging the Japanese to put more emphasis on developing their domestic economy and less on ever-increasing exports.

The remarkable success of Japanese exports is a reflection of the high quality of Japanese cars, cameras, video recorders and other products, and the dedication and skill of Japanese managers and workers. But it also reflects an obsessive concentration on exports that is woven into the whole fabric of Japanese economic policy.

There is much support in Japan for spending more on housing, roads and other public works, and for taking steps to increase consumer buying. Pumping up the home market would, in the long run, help deflate the obsession with exports.

However, while the Japanese government pays lip service to the concept, nothing real ever happens. To the degree that a program of export restraint forced Japanese business to depend more on the domestic market, the government would be obliged to help the process along.

A fundamental change in economic strategy almost certainly is not what the Japanese supporters of export restraint have in mind; they probably look on restraints as a temporary tactic. With time and encouragement from the United States, however, that could change. It’s unfortunate that, instead, the Administration is telling the Japanese not to do it.