Standing Small in the Superpower Money Race : TRADING PLACES : How We Allowed Japan to Take the Lead <i> by Clyde V. Prestowitz Jr. (Basic Books: $19.95; 340 pp.) </i>

“Trading Places” joins a growing collection of books viewing Japan’s economy and its society in terms that can only be alarming to the American people and their government in Washington.

But unlike its most prominent predecessors, Harvard professor, Ezra Vogel’s, “Japan as No. 1” and UC Berkeley professor, Chalmers Johnson’s, “MITI and the Japanese Miracle,” Clyde V. Prestowitz’s is the first to offer as its foundation a background in government dealing with the Japanese.

Prestowitz, who served in three key positions involved with Japan in the Commerce Department from 1981 to mid-1986, rejects the view of President Reagan that America is still “standing tall.”

To him, Black Monday on Wall Street last Oct. 19 was “the end of the American Century”--the symbolic climax to Reagan presiding over the loss of “positions of leadership of industrial and financial strength nurtured over the previous century.”

Increasingly, America also is losing its technological edge and must import many products “it can no longer produce,” Prestowitz writes. He even goes so far as to say that “the United States is rapidly succumbing to Japanese economic hegemony.”

Prestowitz’s service in the Department of Commerce guarantees that such comments cannot be ignored. Indeed, his criticism of officials still in office on both sides of the Pacific, his argument for active Washington intervention on behalf of American industry, and his advocacy of retaliation against Japan appear to guarantee that the book will be soundly criticized.

Its likely detractors notwithstanding, “Trading Places” is one of the best and most important books on Japan’s challenge to the United States. Clearly written in simple language, it offers a thought-provoking analysis of Japan’s social customs as well as business and government structure and practices.

No other U.S. government official, in or out of office, has made the point that Prestowitz drives home with the greatest force: “Japanese society, market, government, and companies do not operate according to the rules and assumptions of Western logic” or of Western economic theory.

U.S. policies based on a view of Japan as an American-like economy, he warns, are doomed.

Prestowitz, whose experience with Japan dates back to study at Keio University in Tokyo in 1965, resuscitates with convincing vigor the widely discredited theory of “Japan, Inc.,” a monolith of government, business, labor and the mass media carrying out a national industrial policy.

Americans who overlook the “subtle, nonlegalistic nature of Japanese society,” he complains, miss the point: that to Japanese, openness means a government bureaucracy giving permission to do something. To Americans, he says, it means a government bureaucracy not having the power to permit or forbid action in the first place.

Throughout, he has high praise for his Japanese bureaucratic adversaries--”an elite corps of professionals”--as skillful negotiators.

Politically appointed American officials whose short tenure keeps them “always in training,” by contrast, know little or nothing about Japan and lack “institutional memory,” enabling Japanese “to sell . . . the same horse many times over,” he notes.

Worst of all in the Reagan Administration, he says, is a consistent refusal, because of a doctrinaire commitment to free trade, to take punitive action when attempts to obtain free trade failed. Unwilling to act on its own, the Reagan Administration is reduced to holding up the specter of Congress going protectionist. Ultimately, it has painted itself into a corner of acting not as a negotiator but as “an adviser to the government of Japan on how to handle the U.S. Congress,” he writes.

In one of his most crucial points, Prestowitz argues that Americans, unlike Japanese, fail to see economic strength as strategic power.

“Whereas we treat trade as secondary to national security, for (Japan) trade is national security,” he declares.

U.S. officials, backed up by the American mass media, emphasize the consumer, while Japan emphasizes industry and its contribution to national strength, Prestowitz correctly argues. It is not poor management, he insists, that has caused American troubles but rather an unfavorable “environment” (relative to Japan) in which American business must operate, he writes.

The major weak point in his presentation arises from the impression that he gives--without overtly making the charge--that the overriding consideration behind Japanese behavior is some kind of coordinated conspiracy aimed at domination.

At one point, Prestowitz offers two-thirds of a page of narration on what he says “might have been” the thinking of Matsushita, a major electronics firm, in dumping products in the U.S. market. The bottom line--that Japanese firms have little to fear from U.S. dumping countermeasures--holds up. But the undocumented mind-reading does not. Nowhere in many recitations of Japanese dumping does Prestowitz cite actual manufacturing costs versus U.S. retail prices of goods allegedly dumped.

The book gives unduly sympathetic treatment to American management and only perfunctory acknowledgement of Japanese managerial achievements. At one point, for example, he writes off the recovery of Mazda Corp. to “group support” from the Sumitomo conglomerate and fails to mention innovations in the company’s rotary engine that were the key to its survival from a brush with bankruptcy in the mid-1970s.

While accurately citing the higher cost of capital as a major impediment to American management, he fails to note that, until the late 1960s, Americans enjoyed lower capital costs than the Japanese and threw away the advantage.

Demonstrable inaccuracies are limited to an incorrect date, one mistake in mileage, one incorrect name and a mistake in an executive’s title.

The shortcomings and errors, however, do not detract from Prestowitz’s convincing case for America to “wake up.”

His summation of the American reforms needed to 1) retain industrial, financial and overall economic strength and 2) to compete with Japan (the two are one and the same) is impressive.

Yet, he indirectly acknowledges the near hopelessness of the task he proposes by noting in his conclusion that “a country in which the government and the consumers perceive no stake in the success or failure of producers, in which producers and workers perceive few common interests and few mutual obligations, which pays young corporate takeover artists 20 to 30 times what it pays veteran teachers and which most often settles disputes in a court of law is a country in trouble. No amount of policy tinkering will help if the fundamental values are absent.”