But Economies Are More and More Melded : Clamor Increasing in U.S. for Trade War With Japan

Is the United States finally about to “get tough” with Japan on trade?

If America’s business elite is an accurate barometer, get ready for a trade war. Business leaders and Wall Street financiers, who traditionally have shunned aggressive trade policies in any form, are clamoring in significant numbers for action against Japan.

“What sparked the shift in the position of the American business community? In a word, frustration,” says Sen. Max Baucus (D-Mont.), chairman of the international trade subcommittee of the Senate Finance Committee. “With Japan, free trade simply has not worked.”

But powerful forces are pushing in the opposite direction as well. For all the differences between the United States and Japan, financial and technological changes are forcing the world’s two biggest economic powers to cooperate with each other more closely than ever.

“The Japanese and U.S. economies have become deeply intertwined over the past decade,” said Raymond Vernon, a Harvard University international economist. “With hundreds of billions of dollars of Japan’s assets in the United States, each country has a hand on the other’s throat. Threatening Japan makes no more sense than threatening a first strike in nuclear politics.”

What is at stake is nothing less than the strength and stability of the non-communist world heading into the 21st Century. The economic competition between the United States and Japan is fast catching up with the military contest between the United States and the Soviet Union as the central focus of U.S. foreign policy.

Warning by Bush

It is the Bush Administration’s instinct to draw closer to Japan. President Bush, alarmed by growing sentiment against Japanese investment in the United States, warned Americans earlier this year that, if Japan stopped buying U.S. securities, that would only make the federal budget deficit more difficult to finance.

A recent Administration policy paper named Japan as America’s most important ally in the Pacific. Secretary of State James A. Baker III proposed that the United States and Japan work closely together to establish a new international body to encourage economic and political cooperation in the Pacific Basin.

“Japan has become a world power,” the secretary said in a speech to the Asia Society in New York late last month. “We applaud this achievement, which holds so much promise for the future. But, to make the most of that promise, the United States and Japan must build a new and truly global partnership.”

Punishment for Surpluses

However, Administration officials recognize that economic nationalism--pressure to make America first again--limits how close it can draw to Japan. Voters are demanding that Japan be punished for its huge trade surpluses with the United States. And members of Congress are listening.

“There is a xenophobia developing on both sides of the U.S.-Japan relationship,” said a senior Administration official who asked not to be identified. Unless the Administration acknowledges that and takes at least moderate actions against Japan, he said, Congress will force its hand.

“But Congress also has to realize that Japan is not a nation we can kick around with impunity . . . “ this official added. “We don’t live in a unilateral world any more.”

Like their American counterparts, many Japanese leaders see the necessity of developing a new partnership with the United States.

“We had 100 years of Pax Britannica and 50 years of Pax Americana,” Tomomitsu Oba, a senior official at the Ministry of Finance, told a Pacific Rim conference in Nagoya last year. “What comes next? Pax Consortia!”

Shift in Economic Power

It may be an uneasy peace, if history is any guide. David Hale, chief economist at Kemper Financial Services in Chicago and a specialist in economic history, argues in the spring issue of Foreign Policy magazine that today’s shift of global economic power is unprecedented since the years between the world wars.

“In that period,” Hale said, “British financial power was on the decline and American economic power was on the rise. This contributed to global instability because the United States was an immature creditor power reluctant to abandon its tradition of protectionism . . . .

“Today, America’s financial power is on the wane, while Japan is emerging as a major creditor power. As with their American counterparts during the late 1920s, Japanese policy-makers traditionally have been inward looking and reluctant to assume a larger global leadership role, creating a potential vacuum in the world economic adjustment process.”

Such analysts as Nathaniel Thayer of Johns Hopkins University’s School of Advanced International Studies and longtime Tokyo consultant James Abegglen warn that the new economic interdependence between Japan and the United States will breed knotty disputes.

“The underlying question in all this is whether Japan can tolerate dependence on America for a market, for investment and the like, and can the United States tolerate its dependence on Japan for capital and for key products,” Abegglen said. “The fact is, we’re not so good at handling this degree of intimacy.”

Past trade disputes were limited to such relatively narrow areas as textiles and steel. But, in recent years, as the two economies have become more entangled, conflicts have developed for more fundamental reasons: Japan’s archaic product-distribution system, which critics argue discriminates against foreign goods; government-sponsored research projects in both Japan and the United States, and Japan’s cut-rate sales of computer memory chips to other countries.

As a result, the rhetoric of warfare is in the air on both sides of the Pacific. Karel van Wolferen, a Dutch journalist who has lived for 25 years in Tokyo and has written a new book about the entrenched Japanese political system, paints a picture of a wayward, almost fascist Japanese economy that is a danger to the rest of the world.

Writer James Fallows, in a widely discussed Atlantic magazine article entitled “Containing Japan,” applies the same term to America’s chief Asian ally that Sovietologist George F. Kennan coined in the late 1940s to describe the U.S. policy of holding Soviet expansionism in check.

Containing Japan was what was on the minds of two key committees representing American business when they recommended earlier this year that the United States abandon its traditional free-trade approach to dealing with Japan. They urged that the United States switch to “managed trade” and negotiate specific goals for Japanese purchases of American goods.

One of the committees was a Bush Administration advisory council, headed by American Express Co. chief executive James D. Robinson III and salted with such pillars of the industrial establishment as John Akers, chairman of IBM, Allen E. Murray, president of Mobil Corp., and Edward Pratt, chairman of Pfizer Corp. The other panel, known as the Emergency Committee for American Trade, represents 67 major U.S. corporations that historically had advocated free trade.

Both groups insisted that the Japanese trade surplus with the United States should be slashed by whatever means necessary. They condemned Japan’s entire economic structure, not just its tendency to close its markets to foreign goods.

“Given the different structures of the two economies, trade policy solutions lie somewhere between free trade” and “managed trade,” the Administration advisory council concluded. Trade policy, it said, must become “results-oriented.” The United States would set the goals--the Japanese might agree to buy a certain number of U.S. supercomputers, for example--and the Japanese would be expected to achieve them or else face possible retaliation.

The proposal sparked a heated debate. Clyde V. Prestowitz, a former Commerce Department official, contends that the United States and Japan already have adopted a system of managed trade, although they have yet to acknowledge it. “We know that we are not going to have open markets, so let’s establish some criteria,” Prestowitz said.

Robert Z. Lawrence, a Brookings Institution economist, disagrees. “The United States is likely to be far worse off under a system of managed trade than we were before,” Lawrence said. “What we need most is a system that is open to American exports. Our interest in an open trading system has never been greater.”

Managed trade received a tryout in May when the Bush Administration, invoking Section 301 of the 1988 trade law, accused Japan of unfair trade in satellites, supercomputers and lumber. If the Administration cannot negotiate reductions in the alleged trade barriers, Bush may order sanctions against Japan.

The reviews in Japan were decidedly not favorable. “We will not accept any negotiations proposed in the framework of Section 301, with its threat of unilateral measures,” Japan’s then-chief cabinet secretary, Keizo Obuchi, asserted within hours after the Administration’s move.

On the other hand, Japan expressed a willingness to accept a separate U.S. proposal to establish a joint high-level committee to examine structural impediments to trade. The Japanese were more receptive because the United States promised that the talks would be two-way, focusing on the outsized U.S. budget deficit as well as trade barriers in Japan.

Japan’s double-edged response points up the danger of the more confrontational approach. If the United States merely provokes retaliation every time it acts against perceived unfair trade practices by Japan, it may lose more than it gains.

One reason is that worldwide production of goods has left many American companies dependent on Japanese firms for crucial components of their products.

Consider what happened when the Bush Administration was debating which Japanese products it might retaliate against in response to Japan’s failure to open its market in cellular telephone services to Motorola, which makes high-quality cellular telephones and other mobile radio equipment. Dozens of American enterprises--from Sematech, the consortium of semiconductor makers, to Estee Lauder, the cosmetics company--lined up to argue that the fallout would damage their own ability to compete in international markets.

“What always happens in these cases is that the same companies that are lobbying the U.S. government to be tough are also trying to make sure the retaliation doesn’t jeopardize any of their suppliers or business interests,” Lionel Olmer, a former Commerce Department trade official, explained. “But it’s impossible not to jeopardize somebody’s interest.”

Whatever the risks, it is clear that the United States and Japan are moving into unmapped territory with unknown consequences for the future.

“It’s the end of an era,” Abegglen said. “The United States suddenly is aware that there is a limit to what you can demand of Japan. So maybe we do better if we’re not quite so close. Maybe it’s time for Japan to tell us to go pound sand when our demands are unreasonable.”

And, in Japan, the recent defection of millions of voters from the ruling Liberal Democratic Party creates a shaky political climate that makes Tokyo less likely to want to forge closer ties with the United States.

Some analysts hope that a more mature relationship between the United States and Japan will emerge in place of the outdated postwar alliance, in which the United States played the confident teacher while Japan assumed the rule of dutiful student. Japanese officials served notice during a visit last February that Japan wants a wider say on a broad array of economic and foreign policy issues, ranging from international debt to relations with the Soviet Union. Baker says that the United States will encourage such a shift.

“Ironically, the worsening of U.S.-Japanese relations over the next five to 10 years will also prove beneficial to the long-term relationship between the two nations . . . “ Alan Webber, managing editor of the Harvard Business Review, said. “The benefit will be for each side to correct its false impression of the other and emerge from a period of greater hostility with a relationship based on greater understanding.”

But the adjustment will not be painless.

For now, Americans are deeply confused by a world in which economic rivalries between political allies are assuming greater importance than the simpler Cold War struggle between communism and the free world.

In the emerging new world, it is no longer so easy to distinguish the good guys from the bad guys. From now on, in fact, they may well be one and the same.