Japan's annual motor vehicle production now exceeds the United States' by more than half a million; its stock market capitalization is 60% of the world total and the nominal value of its 146,000 square miles of land is twice America's 3.6 million square miles.
South Korea operates the world's most modern steel mill and exports technology to the United States. The Taiwan central bank reserve of nearly $70 billion is the biggest in the world, a sum of historic precedent.
In the mid-1960s, French author Jean-Jacques Servan-Schreiber warned in "The American Challenge" that U.S. multinational firms were taking control of Europe's economies. Twenty years later, the Asian challenge confronts the United States with a vengeance.
The U.S. assault on Europe proved transitory. The Asian tide rising at American shores almost surely represents the wave of the future. While Reagan Administration policies are cited by a majority of economists as the precipitating factor in unbalancing the U.S. current accounts, those policies merely accelerated and exacerbated an inevitable trend. The unresponsiveness of our trade deficit to dollar depreciation against the currencies of established industrial powers is indicative of the new world patterns. Since the four newly industrialized countries--"nics"--of South Korea, Taiwan, Singapore and Hong Kong tie their currencies to the dollar instead of letting them float against it, depreciation has boosted their competitiveness further.
While these nations' combined exports are only about two-thirds of Japan's, it is tempting to argue, says MIT economics Prof. Rudiger Dornbusch, "that the share of the nics in world trade is small and that even at high growth rates they present no near-term problem. But that would be as much of a mistake as to misunderstand the inevitable rise of Japan over the past 20 years."
Together with Japan, the nics now make Southeast Asia the world's third major industrial region, in competition with North America and Western Europe. They confront all mature industrial economies, but especially the United States and Japan, with a new reality.
We are in a sense victims of our own success. Ever since the Korean and Vietnamese wars, American policy has been to provide a bulwark against communism by strengthening the economies of its Asian allies. As part of this policy, we have provided not only military and economic aid, but facilitated Asian penetration of American markets.
While there are differences in the economic development of each of the nations, the similarities are far more striking. Japan, South Korea and Taiwan have relatively high population densities and few natural resources, so they depend on importing and processing commodities, then exporting the manufactured products. To develop skilled work forces, these Asian nations have given high priority to education. Their societies, homogenous and egalitarian, give them national purpose. Essentially, they are meritocracies based on educational achievement--hence the fierce competition among young people so evident in Japan. They have a work ethic that emulates the Puritan and perhaps puts it to shame. And they have made a success of the kind of central economic planning that causes advocates of pure laissez faire to wince.
Clearly, Japan has provided both the impetus and the model. The nation's role as a staging platform for the U.S. military during the Korean War provided the stimulus for economic reconstruction. A large pool of unemployed and underemployed labor, paid less than a sixth of American workers' wages (and at the time less than a third as productive), provided the foundation. By the late 1950s, U.S. entrepreneurs were discovering the economic advantages of Japanese production in such new fields as electronics.
Beginning with the first macro-economic plan in 1955, the Ministry of International Trade and Industry (MITI) and the Ministry of Finance identified opportunities, delineated goals and outlined the path for industry. These ministries, with major influence on both the political and commercial structures of Japan, have no counterparts in the United States. Culturally, on their crowded islands, Japanese early learn to suppress individualism and find satisfaction as members of a group. Production, consequently, takes on the nature of a patriotic movement with national goals. Unlike the adversarial relationship that frequently exists between business, labor and government in the United States, the various segments of Japanese society have a common aim. Semiannual profit-sharing bonuses for workers reinforce the perception that individual success translates into the success of the enterprise and vice versa.
Much of what is true for individual enterprise is applicable to industry as a whole. While Americans have concentrated on discoveries and scientific breakthroughs, the Japanese have taken American technology and, by diligence to detail, improvements in process, attention to service and consumer trends, they pick the fruits of trees that Americans planted.
Korea is following in Japan's lead. Starting a decade later and having a longer distance to travel, the Koreans are now about where the Japanese were in 1970. Under the aegis of a super-ministry, the Economic Planning Board, which structures the economy much more directly than Japan's MITI, Korea first applied itself to the development of labor-intensive industries: textiles, clothing, footwear and light electronics. Industrial conglomerates known as jaebols were encouraged, and their names--Hyundai, Samsung, Gold Star, Daewoo--have become familiar to Americans.
In the early '70s, U.S. rapprochement with China and America's demand that Korea take primary responsibility for its own defense led the government to shift emphasis to a buildup of heavy industry, as a foundation for one of the world's more powerful armed forces. Although this policy was viewed in the context of the '70s oil shocks--and declining demand for steel-- as an error, it has been vindicated with startling swiftness in the '80s.
In 1983 economists still doubted whether a Korean car could be marketed successfully in the United States; by 1986 Hyundai had refuted that skepticism. Offering serious competition for both the United States and Japan, Korea in 1986 boasted a massive trade surplus of $4.6 billion. Working 54 hours a week for $1.68 an hour, Koreans are spurred by a "beat-the-Japanese" ethic. "The Koreans say the Japanese are lazy," Dornbusch observed.
While Japanese and Korean economies have developed along nationalistic lines, the Taiwanese have become a veritable American economic satellite. Adopting the Japanese export-oriented model in 1961, at about the same time as the Koreans, the Taiwanese were soon discovered by U.S. multinationals worried about Japanese competition. At the same time California's Silicon Valley was becoming famous for electronic innovation and development, Taiwan, its labor priced far below Japan's, quietly became the multinationals' production center for consumer electronics. By the mid-'70s more television sets were being exported to the United States from Taiwan than Japan.
Because the Taiwanese are not permitted to hold foreign currencies and the economy is structured around small, family enterprises, Taiwan's central bank has become a vast depository of foreign exchange for which there is inadequate outlet. Although government has fostered development of considerable heavy industry, private investment in the island has lagged because of the uncertainty of future independence from China.
Japan, where the appreciating yen has brought production costs to U.S. and West German levels, is faced with restructuring its economy. The first response has been to follow the example of American multinationals and move production to the nics--Mitsubishi (25% owned by Chrysler) is now godfather for a Taiwanese car just as it furnishes the engine and technical expertise for Korea's Hyundai.
Because Korea has failed to let the won move up against the U.S. dollar and the Taiwan dollar has appreciated only about 10% (still 30% to 50% overvalued), the United States is caught in what New York financial consultant A. Gary Shilling calls a "vicious equilibrium." The dollar depreciates, but America doesn't benefit since its trade deficit merely moves from Japan to the nics.
The trouble is that economies designed for export are structured to produce more than they consume and most commodity-producing nations lack either the income or the populations to absorb exporters' manufactures. The '70s provided a temporary solution when dollars extracted by oil-producing nations from industrialized nations were then recycled through bank loans to developing nations. But with defaults among the debtors, precipitated by the high-interest policies adopted by West European, Japanese and U.S. central banks in 1979, this multilateral pattern disappeared.
The United States must now look at its former Southeast Asia proteges as nations that have moved up to become full-fledged competitors, more and more producing the same goods they previously imported--and at considerably lower prices. These goods, including automobiles and machinery, compete in the home market, compete in third markets and compete in America. Consequently, the United States has moved in the '80s from a more or less balanced trade position to a roughly 3-1 ratio of imports over exports in relation to Japan, Taiwan and Hong Kong and 2-1 from South Korea.
For the Japanese, who will more and more see themselves underpriced in the same fashion they have been underselling the United States, restructuring the economy from exports to import-consumption may be more wrenching than the readjustments demanded of America. So far the Japanese seem to be adjusting but their inflated land and stock values leave them vulnerable. "Is 1929 around the corner?" asks Dornbusch. "The easiest crash scenario involves Japan."
If Japan's unprecedented economic growth should slow, and the stock market--geared to capital gains, not dividends--should begin to contract, a chain reaction might result as investors shift out of corporate securities. Much has happened since the 1930s to make it "unfashionable to think about financial crashes," said Dornbusch, but we should now "at least ask whether this confidence is still warranted." The truth is that 1929--and before that 1893--marked the end of similar periods of great industrial expansion fueled by a combination of cheap wages and new products, but brought down ultimately by imbalances between the capacity to produce and the wherewithal to consume. Korean and Taiwanese workers, earning less than $2 an hour, are not a market for $10,000 cars. Singapore's prevailing manufacturing wage of $2.44 an hour is incompatible with a $7,420-per-capita gross national product, substantially greater than Spain's or Italy's.
The world can no longer depend on one great consuming nation, the United States, living off credit, to sustain a host of producers, while unprecedented piles of money--unable to find profitable investment--flit electronically around the world in a new kind of Monopoly game.
Events move much faster now than they did 30 years ago when Japan started up the industrial ladder and the United States presented a vast, accommodating market for other countries' economic expansion. The lesson from the stresses of the '80s is that these dangerous imbalances have grown beyond the capacity of one nation to address unilaterally; they require a coordinated multinational effort--preferably before, not after, a collapse.