VIEWPOINTS : U.S. Industry’s Ills Are Domestic, Not Imports
The storm of protest from Washington about Japan’s allegedly unfair trade practices has quieted again, but the prospects for significantly more-balanced trade appear to be little brighter than before.
Thanks to an appreciation in the value of the yen in the past two months, hopes that the cost of Japanese products sold in the United States will rise while the cost of American products sold in Japan go down, appear to be the main reason for what probably will be no more than a pause in the storm of protest.
The challenge of Japan has in no way lessened.
If the yen continues to strengthen, chances are good that eventually there will be some improvement in the U.S. trade imbalance with Japan.
But the history of 21 consecutive years of U.S. trade deficits with Japan shows that neither yen appreciation nor a further opening of the Japanese market is likely to make a significant impact on the deficit.
In August, 1971, two weeks after then-President Richard M. Nixon suspended the convertibility of the dollar for gold, Japan abandoned a costly attempt to hold the yen’s value at the fixed rate of 360 yen to the dollar that had prevailed for 22 years. The move was hailed as a victory for the United States.
That was a year in which the United States recorded a $4.1-billion trade deficit with Japan.
When the oil crisis struck in 1973 and 1974, years in which the U.S. deficit with Japan had fallen to only $1.7 billion, American leaders--among them Secretary of State Henry A. Kissinger--wrote off Japan in the belief that its heavy dependency on imported oil would impair Japanese competitiveness.
But by 1976, the bilateral deficit with Japan had risen to a record $5.37 billion. Every year since, with the single exception of 1979, it has risen to another record level. It has snowballed even as Japan’s market has become far more open, and is heading toward $50 billion for this year.
The big change was that Japanese manufacturers adjusted to the new exchange rates and made their operations more efficient. There was a shift away from energy-consuming industries and, at the same time, massive investment for the purpose of conserving energy.
Resource-saving investments reduced the need for imported raw materials, and a stronger yen also cut the bill for imported raw materials. Tariffs and other obstacles to imports were lowered, and imports, including manufactured products, increased. Exports, however, increased more rapidly.
The perception of Japan as a closed market stems mainly from the fact that most Japanese businessmen are inclined to be sellers, not buyers. And too few U.S. businessmen have come to Japan to try to sell, though the few who have come tend to report profits that exceed those in other foreign countries.
The most tightly closed doors in Japan today--or doors that are just beginning to open--are in the field of services, not products.
Foreigners are still banned from practicing law here, and even foreign newsmen are prohibited from attending most of the press conferences given by government officials and private businessmen.
Still Bank Restrictions
The first foreign trust banks opened here just last month. There are still restrictions on the activities of foreign banks and insurance companies. And foreign data communications and other “information industry” firms are just setting up shop in the wake of last April’s deregulation of the telecommunications industry.
More freedom to operate in Japan’s services area would most likely give the United States a better balance in its bilateral current accounts, which include non-trade transactions. (In the United States, services now account for the greater part of the gross national product.) But in manufacturing, which produces the goods that go into the trade statistics, the United States continues to be on the outside.
The doors that Japan still keeps closed on manufactured or agricultural products account for such a small proportion of the U.S. trade deficit with Japan that they are statistically insignificant in relation to the size of the deficit. By the wildest estimate, they account for no more than a fourth of this year’s expected bilateral deficit of $50 billion.
Most of Japan’s surplus with the United States is accounted for in two broad areas: The automotive industry and electronics. In both, U.S. manufacturers have yet to show that they can compete against Japanese products being sold in the United States, much less in Japan.
In some major product lines, there is no competition at all. The United States, where the idea for the video cassette recorder originated, does not produce VCRs. Japan supplies 99% of the VCRs sold in America.
Manufacture at Home
U.S. manufacturers, complaining about the strength of the dollar, have increasingly closed factories in the United States and turned to foreign sources. Japanese firms, however, continue to depend on manufacturing at home for the great part of their production, although they too suffered from a strengthening of their currency’s value.
Compared with the 1971 rate of 360-to-1, the yen has gained 43% in value--a gap that should have, but has not, made American products that much more competitive against Japanese goods.
Japanese manufacturing investments in the United States have been carried out largely in reaction to U.S. protectionism, such as government-imposed quotas, and usually have not replaced production in Japan.
Widespread Japanese investment in U.S. color TV factories and Nissan’s truck production in Tennessee did replace exports from Japan. But every one of the six Japanese investments in passenger car manufacturing in the United States, planned or already carried out, represents an addition to, not a substitute for, existing exports.
The money-game approach to management, which has become a way of life in the United States but not in Japan, has taken a noticeable toll, too.
On Oct. 18, for example, Sony of America bought out its 50-50 partner, CBS, and took over 100% ownership of the only factory in the United States producing compact audio discs, widely regarded as the records of the future. In announcing the move, Sony said it plans to increase production from 12 million to 25 million discs annually within a year.
Why did CBS sell out? The announcement did not say, but it was reported that CBS was short of capital and was trying to reduce the debt it incurred in fighting off last summer’s hostile takeover bid by Ted Turner, owner of Cable News Network.
Sold Share of Venture
Similarly, Dow Chemical, after years of a highly successful joint venture here, sold out its 50% equity to bolster its capital position.
Such examples of major U.S. corporate decisions based on considerations stretching no further into the future than next quarter’s earnings report have become commonplace.
Without an overtly political limit being imposed on the trade imbalance, prospects for a major reduction of the red ink appear very dim. And a political limit will not solve the troubles in the United States that allow Japan to continue becoming ever more competitive.
In addition to management problems, those causes run deep. Fundamentally, the United States is falling behind Japan in education. More than 90% of Japanese youths earn a high school diploma, compared with fewer than 75% in the United States.
Since 1980, Japan has graduated at least the same percentage (24%) of its youths from four-year colleges as the United States, and it has already exceeded the United States in the number of students obtaining engineering degrees.
The sluggishness in U.S. productivity gains, America’s inability to save, a decline in the quality of American education through high school, a slackening in commitment to product quality, a lack of teamwork between labor and management and such socially destabilizing factors as a high crime rate all contribute to making the United States more vulnerable to Japanese competition.
None of these problems was imported from Japan, and none of them will go away by weakening the dollar, blocking imports from Japan--or opening up Japan’s remaining closed doors.
