Tackling Japanese Trade Barriers

It is generally acknowledged that something is seriously out of kilter in our trade with Japan. In such a situation, the natural tendency is to blame one party or the other.

American companies have consistently complained about barriers to the Japanese market. Until recently, such complaints were routinely dismissed by most academics and many policy-makers. Since formal Japanese barriers to foreign sales had been eliminated by the end of the 1970s, it was assumed that the difficulties encountered by American companies trying to sell in Japan resulted solely from their own failings.

During the past several years, however, this conventional wisdom has been questioned. Although the weight of opinion within the Bush Administration seems to rest with those who adhere to the traditional view--such as Michael Boskin of the Council of Economic Advisers and Richard G. Darman of the Office of Management and Budget--others within the Administration and Congress, as well as a growing number of academics, believe that market barriers in Japan are a real problem, requiring new policy solutions.

What explains this change in thinking?

First, there is the persistent trade imbalance between the United States and Japan. Despite a dramatic drop in the dollar’s value--from 250 yen in 1985 to as little as 125 yen in 1989--America’s trade deficit with Japan has been largely unaffected.

Second, the ratio of manufactured imports to gross national product has remained fixed at about 2% a year in Japan for the past 20 years. In contrast, the other major industrialized economies have witnessed major increases in import penetration of manufactured goods during the same period.

Third, unlike the other industrialized economies, Japan resists importing products from industries in which its companies are major exporters. Intra-industry or two-way trade, in which different countries’ versions of the same product are traded, is under-represented in Japan’s trade. The relative absence of intra-industry trade indicates that when foreign goods are directly competitive with Japanese products, they have trouble entering the Japanese market. Because foreign sales in Japan are disproportionately handled by the foreign affiliates of Japanese firms, especially Japanese trading companies, this pattern of trade is not surprising.

Finally, the relative closure of the Japanese market is reflected in prices. If Japanese companies were forced to compete with foreign suppliers, prices in Japan would stay in line with prices in other world markets. Several recent studies confirm what Japanese consumers know well: The prices of goods and services in Japan are significantly higher--by as much as 60% on average--than the prices of similar products in world markets.

On balance, the evidence suggesting persistent barriers to market access in Japan is compelling. What are the policy implications?

Some argue that there are none. Japanese behavior does not appear to violate formal rules of the General Agreement on Tariffs and Trade. High Japanese prices at home hurt Japanese consumers, not us. Indeed, if Japanese companies dump their products on world markets at lower prices, we actually benefit.

There are two problems with this response. First, Japan’s behavior threatens the world trading system. The United States and Europe have already retaliated against what they perceive to be unfair Japanese trading practices by restricting Japanese access to their markets in several industries. A growing fraction of world trade now violates GATT rules, and without a major expansion of Japanese imports, this trend will worsen.

Second, a do-nothing strategy threatens the survival of some strategic U.S. industries, such as the semiconductor industry. At stake are profits, employment and production in a range of high-technology industries and the concomitant pool of scientific and technological know-how that they create.

Over the loud objections of free traders, the United States has gradually adopted a tougher bilateral negotiating strategy with Japan. The goal of negotiation is the identification and elimination of Japan’s import barriers, including barriers resulting from Japan’s regulatory policies and barriers resulting from the tight relationships among Japanese companies. Such barriers have traditionally not been part of trade policy negotiations, but they must be addressed in negotiations with Japan because of the unique role that they play in insulating the Japanese market.

The negotiating strategy has had some payoff and should be continued. In several industries that have been the subject of the most intensive negotiations, export sales to Japan have grown rapidly, although they remain small in absolute terms. In other important products, such as semiconductors and supercomputers, however, sales to Japan remain disappointing, despite years of negotiation.

Frustration over the mixed results of lengthy negotiations has strengthened support for a third strategy--the unilateral imposition of quantitative targets on Japan’s imports. In industries such as semiconductors, in which negotiations fail to produce timely results and continued exclusion from the Japanese market seriously damages American producers, quantitative targets are a necessary fallback position.

Such targets should be used only as a last resort and should be limited to particular industries. Where necessary, such targets should be backed up by complementary domestic policies to support U.S. producers. Again, the semiconductor industry is a case in point.

Targets for aggregate trade flows, such as the target for the growth of U.S.-manufactured exports to Japan recently suggested by Prof. Rudiger Dornbusch of the Massachusetts Institute of Technology, should be avoided. We must be explicit about the industries in which we want a bigger share of the Japanese market--if we impose an aggregate target, the Japanese will make the choices for us.

Finally, because Japan’s trading patterns harm not just U.S. interests but also the broader interests of the international trading system, the United States should use multilateral negotiations and multilateral targets for improved access to the Japanese market when possible. A unilateral approach, such as the one mandated in the Super 301 provision of the 1988 Trade Bill, will further poison U.S.-Japan relations, will raise the ire of our other trading partners and will strengthen our image as Japan bashers.

In fact, the United States is in a weak position to launch a credible trade policy initiative against Japan. Although there is compelling evidence that Japan’s markets are closed to import competition, there is equally compelling evidence that our national savings deficit, not Japan’s market barriers, is the major factor behind our trade imbalance. If Japan can be bashed for a system that discriminates against foreign producers, America can be bashed for its budgetary incompetence, which is every bit as threatening to the world economy. Perhaps that is why Boskin and Darman prefer not to recognize the Japan problem; to do so requires acknowledging the U.S. problem as well, a problem that they seem reluctant to address.