U.S. Trade Deficit Eases but Friction With Japan Goes On

Signs of a reversal in America’s trade imbalance with Japan are finally emerging, but no one is yet predicting an easing of the friction in trade relations between the two countries.

Last year, for the eighth year in a row, the U.S. deficit, which already had been described by U.S. officials as “unsustainable,” rose to a record $59.8 billion, according to the U.S. Commerce Department. But the year’s increase in the deficit, $1.2 billion, paled in comparison with increases of $15 billion, $12.9 billion and $8.9 billion for the previous three years.

“The good news,” said a U.S. official here who asked that he not be identified, “is that it was not terrible. It’s leveled off. . . . Just leveling off is a major first step . . . and maybe we’ve started the march downward.” Hiroki Sakamoto, director of the Americas division in the Japan External Trade Organization (JETRO), said, “The growth of red ink has stopped.”

Now, for the first time in years, the U.S. official said, “nobody expects it to get significantly worse.” Yet he said he foresees no significant improvement in 1988.

Nor do most Japanese economists. They question whether American manufacturers are capable of taking advantage of the export advantages that a weaker dollar gives them. Trade figures show Asian and European exporters outselling the Americans in Japan.

The Nomura Research Institute predicts that Japan’s surplus with the United States will fall by $6 billion this year, because of a decline in auto exports brought on by sluggish American demand.

The U.S. official said the institute’s forecast is “a realistic possibility” but added that such a decline would “not be significant.”

Sakamoto said he thinks Nomura’s prediction is “a bit too sugary” and also said that “Six billion dollars wouldn’t be enough to alleviate protectionism in Congress. We’d need cuts in $10-billion chunks to do that.”

The decline in the U.S. deficit is not expected to divert American complaints away from Japan. Nor is the new attention that U.S. officials are focusing on the still-spiraling deficits with newly industrializing Asian countries.

For the most part, the relatively minor 5.2% gain that the United States recorded in exports to Japan last year was not brought about by market forces. The increase occurred, the U.S. official said, mainly in product categories under Japanese government control, such as foodstuffs and tobacco, and in industries where Japanese production capacity was strained, such as lumber products.

“We’re a marginal supplier for a lot of things here (that) they import once they reach their capacity,” he said. American exports increase, he said, only where the Japanese government allows them to increase.

The growth in the yen’s value relative to the dollar, which should have made American imports less costly here, did contribute to increased U.S. sales of such products as chemicals, aluminum, office equipment and telecommunications machinery.

But these increases, the U.S. official said, were “not the kinds of increases you would see in the United States” if the dollar had risen in value by 86%, as the yen has done since Sept. 22, 1985. In 1987 alone, the yen appreciated by 25%.

Unlike America’s global trade for 1987, the official said, hardly any improvement in U.S. trade with Japan can be traced to the change in exchange rates. Japanese manufacturers, he complained, have cut profit margins to the bone in an effort to hold their shares of the U.S. market--and by doing so have helped to further drive up the value of the yen.

The Japan Assn. of Corporate Executives, the Keizai Doyukai, agreed. In a January report, the association said: “Desperate efforts by many businesses to absorb the costs of the mighty yen are pushing its value even higher. It is not acceptable for Japanese companies to engage in cutthroat competition simply to grab a larger market share, nor should they employ pricing policies that create the impression that export prices are lower than domestic prices.”

New Ball Game in ’88

The association urged business firms to end their “traditional pursuit of growth through quantitative expansion, emphasis on exports and competition for market share” and to switch to higher value-added products aimed at the domestic market, with an emphasis on profits.

Although the volume of Japanese exports to the United States decreased last year, their dollar value increased by 3.9%. Moreover, monthly surpluses, which remained close to $5 billion throughout the year, failed to show any sign of decline.

One major reason for the halt in the U.S. deficit’s rise was an unprecedented falloff in exports of passengers cars to the United States. Passenger cars account for half of the deficit. Shipments through November, including models not counted under Japanese-government imposed export quotas, fell by 313,700 cars, or 12.7%, compared to the same period in 1986.

It will be a new ball game this year, though.

Japanese factories in the United States and Canada capable of producing an additional 885,000 cars will begin operating in 1988. Although actual production is expected to fall far short of that capacity, significant expansion of U.S. production could seriously worsen the overall U.S.-Japan trade balance if exports from Japan do not fall below the 1987 level.

With Japanese-made components accounting for about 50% of the value of Japanese-brand cars produced in the United States, one such car of every two assembled in the United States is the equivalent of a car exported from Japan. So far, none of the nine Japanese auto-exporting firms has announced any plan to replace exports with cars produced in the United States.

Hondas Hot in U.S.

“I don’t think the auto makers are thinking of substitute production,” JETRO’s Sakamoto said. Unlike the Nomura Research Institute, he predicted that car exports will remain virtually unchanged this year, while parts and component exports increase.

Last year, unit sales of Japanese cars declined by 7.6%, although the value of sales, thanks to higher retail prices, declined by only 2.4%.

Takashi Ishihara, chairman of the Japan Assn. of Corporate Executives and chairman of Nissan, predicted Feb. 9 that sales of Japanese cars in the United States will decline by 10% this year. Yet Ishihara’s own company predicts that its exports to all markets will decline by only 1%.

Honda, one of the firms that will be expanding its North American production facilities this year, said it expects its global exports to decline by only 0.1%.

About half of all Japanese auto exports go to the United States.

Sakamoto said he doubts the ability of U.S. manufacturers to seize a “golden opportunity” arising from the devalued dollar to expand exports in 1988. Pointing to a decline in U.S. investment for factory equipment in 1986 and a tiny increase in 1987, he asked rhetorically, “Do they have the capacity to supply goods for exports?”

“If Japanese manufacturers were in such a situation,” he said, “they would invest in new production facilities to boost exports. But I can’t see this happening in the United States.”

Although major U.S. multinational firms are active in Asia, “they amount to only 1% of the total companies in the United States,” Sakamoto said. “The eyes of the rest aren’t open to this golden opportunity. They just don’t have an ‘export mind.’ ”

Most American manufacturers, he said, either do not attempt to export to Japan, or “quit trying before results can be achieved.”

Last year’s results provide mixed evidence to support his charges. Not only did the United States make a poorer showing in exports to Japan than to the rest of the world--an increase of 5.2% in sales here, compared to an overall gain of 11.5%--but U.S. shipments to Japan also fell below the overall 18.2% increase in Japan’s total imports.

U.S. performance in this respect was worse than that of countries in Europe and Asia. Shipments from the European Community rose by 42.3%, while Asian countries increased their exports to Japan by 57.2%.

The U.S. official said most of the European gain came from the accounting effect of calculating in dollars the value of European currencies that appreciated during the year. In fact, he said, Europe’s trade deficit with Japan expanded by a bigger margin last year, $3.4 billion, than did the United States’.

He acknowledged that the Europeans, West Germany in particular, “are doing a little bit better than we are, but not a great deal better.”

“There is no question about Asian export growth,” he said, “but it’s all at the lower end” of product lines.

James C. Abegglen, a professor at Tokyo’s Sophia University, writing in the magazine Tokyo Business Today, put the blame squarely on American firms.

“Quite simply,” he said, “U.S. companies are rapidly losing market share in Japan’s imports. This is despite the advantage conferred by the shrinking dollar, an advantage not available to the Germans, whose currency has moved with the yen. . . . It is more and more clear that the larger part of the cause of U.S. trade problems lies not with Japan but with the United States.”

Although they are hedging their bets on trade with the United States, economists and government officials unanimously expect Japan’s global trade surplus to decline this year.

The government expects real growth to rise to 3.8% in fiscal 1988, despite a 1% drag on the gross national product caused by a decline in net exports. In the fiscal year ending this March 31, net exports are expected to decline 1.3%, pulling growth of 5% down to an overall increase of 3.7% in the GNP.

But all the major Japanese banks and research institutes that foresee a leveling off or a slight decrease in Japan’s surplus with the United States base their forecasts not on the prospect of more American goods coming into Japan but on an outlook for fewer Japanese sales to a sluggish American market. Without sluggishness in the United States, a new and widely perceived ability to export profitably at exchange rates of 120 and 130 yen to the dollar could change the outlook dramatically.

Moreover, economists here are unanimous in predicting a further appreciation of the yen’s value. This would spark another rise in the value of Japan’s exports and wipe out the prospects for a reduction in the bilateral trade deficit.

BOOSTING CAPACITY Japanese firms that are opening new factories or expanding existing ones in the United States and Canada in 1988. Figures show auto/truck production capacity. Above, welder at Honda’s plant in Ohio.

COMPANY CAPACITY Honda U.S. 40,000 Honda Canada 63,000 Suzuki-GM Canada 32,000 Mazda 240,000 Mitsubishi-Chrysler 200,000 Fuji-Isuzu 60,000 Toyota Tennessee 200,000 Toyota Canada 50,000 TOTAL 885,000