Time Out in the Chip War : Pushing Japan Further Could Turn Into Reciprocal Ugliness
Japan-bashing has now taken on the aura of official U.S. policy. It’s a perilous gambit, an invitation to bitter and mutually harmful conflicts.
Our illusion is that we can somehow compel the Japanese to do what is right for them and for us. We rationalize the stridency of our rhetoric and actions as necessary evils for a greater good. The Japanese, we say, react only to pressure. This is true up to a point. But because they believe--sometimes correctly, sometimes not--that our demands are selfish and unreasonable, they may miss the larger message. Change is mainly necessary for their own good, not ours.
The occasion of this policy change illustrates the dangers. Semiconductor “chips” are the tiny components of computers, communications equipment, television sets and most electronics. In 1986 the United States and Japan agreed that Japan would encourage more imports of U.S. chips while also stopping the “dumping” of Japanese chips at unfair prices around the world. Now the United States says that Japan has not complied with the agreement. Therefore we’re threatening to slap a 100% tariff on $300 million worth of Japanese electronic imports.
In the chip war, almost everything is the opposite of what it seems. We see ourselves as the wronged victim of a broken agreement. In fact, Japan was forced to sign a bad agreement that probably was unenforceable and doomed to fail. We view our chip industry as being strangled by Japan’s. In fact, the American industry is still the world’s largest, and its problems stem mainly from overcapacity. Japan’s high-technology industries, including semiconductors, could be badly hurt by the rising yen.
Nor did Japan alone cause its large trade surplus. Much of the recent increase stemmed from fast U.S. economic growth, which spurred our imports. But none of this exonerates the Japanese. Their illusion is the mirror image of ours: They blame their growing economic problems on a deliberate U.S. policy to raise the value of the yen. It’s up about 40% against the dollar since early 1985, making Japanese exports less competitive and threatening the export-led growth of the Japanese economy. Since early 1986 the physical volume of Japan’s exports has fallen.
The Japanese theory is fantasy. It’s true that on any given day an offhand comment by, say, Treasury Secretary James A. Baker III may drive up the yen. But the basic pressure propelling it upward has been Japan’s huge trade surplus, $83 billion in 1986. Its traders earn so many dollars, which must then be sold for yen, that the dollar is inevitably pushed down and the yen up. Higher Japanese demand for dollars to make overseas investments only partly offsets the upward pressures.
For Japan, the mechanics of exchange rates poses a merciless choice: Either Japan narrows its trade surplus by increasing imports and economic growth (higher growth also would raise imports), or the yen automatically climbs further and cuts the trade surplus through lower exports. Ironically, high-technology exports, led by computers, might suffer the most. In these markets, Japanese companies have little if any advantage over U.S. companies. By contrast, their hold on the car market is stronger. In 1986 nearly 40% of Japan’s $59-billion trade surplus with the United States stemmed from automobiles, trucks and parts.
The best policy for both countries is faster economic growth and more openness to imports. But we cannot dictate to Japan how to change its economy and society. Our exports to Japan (and those of other countries, too) are held down by trade barriers that often involve custom as much as official policy. The amount of our export loss is unclear: Estimates range from a few billion dollars to nearly $20 billion. But these restrictions cannot be ended by negotiation. They are too numerous and complicated; any agreements easily could be frustrated by the Japanese.
The barriers will fall only when the Japanese decide that it’s in their interests to make them fall. Many changes would be wrenching. For example, ending the huge protection afforded to Japan’s farmers would expand food imports. Similarly, the Japanese will spur greater economic growth only when they decide that their interests require it. They resent foreign suggestions about how to alter their tax and spending policies. So do we. These matters engage national sovereignty, and can’t be settled diplomatically.
It is said that we can force Japan to change by being tough on vital trade matters, such as chips. Well, maybe. The danger, though, is that these individual conflicts will obscure the larger issues. The talks develop their own momentum and emotions. In chips, for example, U.S. companies had legitimate complaints about fair access to Japan’s market. But they used this problem to coerce Japan into a global price-fixing agreement, which is described deceptively as a remedy to “dumping.”
Low chip prices mainly reflect vast global excess production capacity. Chip demand (mostly for computers) fell far short of forecasts. In 1986 the U.S. industry utilized only 57% of its capacity. When supply exceeds demand, prices fall. In Japan, chip prices are lower than in the United States. But we insist on higher Japanese export prices--to all countries, not just to us. We say that prices should equal full production costs. True, that’s one definition of dumping. But the artificial gap between Japan’s low domestic prices and higher export prices inspires cheating that the government says can’t easily be policed.
The complaint rings true. Price controls rarely work. So both countries feel that they have been had, and in a sense they have. Our best policy is to be patient while the rising yen elucidates Japan’s predicament to the Japanese. Instead, the chip dispute may become a prototype. It vents our nationalistic frustrations and makes it appear that politicians are “doing something.” It implies a series of narrow disagreements, with both sides believing that the other is making unreasonable demands and acting in bad faith. Japan offers grudging concessions, but there are few basic changes and much ill will.
Our Japan-bashing may become their America-bashing.
