New Trade Pact Has Aided Japan More Than U.S. : Commerce: Tokyo has worked harder to implement the agreement, aimed at leveling the playing field between the countries. The result is that it has become more competitive.

By TERESA WATANABE

May 20, 1991 12 AM PT

TIMES STAFF WRITER

They were billed as the most extraordinary trade negotiations the United States and Japan had ever attempted. For the first time ever, two sovereign countries dared to demand fundamental changes in what had always been considered domestic matters immune from foreign interference.

The two sides billed the “Structural Impediments Initiative” as a way to sandblast the stubborn impediments to trade in both countries. The United States told Japan to spend more on airports and bridges, streamline its distribution system, crack down on business monopolies. Japan told the Americans to cut their federal budget deficit, save more, study harder, think long-term.

But as both sides meet in Tokyo today to prepare a one-year anniversary report, analysts say the results are clear:

So far, Japan is doing more--and benefitting from it.

Most analysts agree that what the Bush Administration had billed as a way to reduce the bilateral trade deficit and markedly improve U.S. competitiveness in Japan may not do either. Rather, they say, the SII agreement will mainly serve to make Japan a more efficient economy and tougher global competitor.

“Ironically, the losing side, Japan, actually comes out ahead,” said Marcus Noland, an economics professor at USC.

Noland and others believe that a more efficient Japan will benefit American consumers with lower prices for better goods. Others argue that SII could backfire on Americans by creating an even more formidable adversary.

“Foreign firms have a difficult time in Japan not because of collusion but because of the high level of cutthroat competition,” said John Haley, a professor of law and East Asian studies at the University of Washington. “If (SII) makes the Japanese economy more competitive, it will just make matters worse.”

But don’t blame Japan for that outcome, analysts say. Under the SII accord, both sides agreed to take action that would strengthen their economies and improve their competitiveness. The widespread view, however, is that the Japanese have done far more.

“You really have to respect the Japanese for taking on some very difficult issues,” said Noland, the so-called intellectual godfather of SII. “The U.S. pledged to do all sorts of things, but they just have not been addressed with any degree of seriousness.”

A U.S. Treasury official, however, defended the government efforts as “substantial progress” and said it was too soon to tell who had done a better job.

As the one-year anniversary approaches next month, a review of the two sides in fact shows more quantifiable progress by the Japanese:

* Japan promised to streamline its distribution system and passed five bills in the last Diet (Japan’s Parliament) session to do just that. One key reform will allow large retail stores such as Toys R Us to open in Japan without what had been a waiting period of as long as 12 years.

* The nation pledged to increase public works spending by about $3 trillion in the next decade. The new budget contains a sufficiently large increase--6.4%--to meet that goal. (U.S. negotiators pushed public investment in Japan as a way to soak up national savings and reduce the Asian nation’s trade surplus.)

* On antitrust enforcement, the government has increased investigators by 20%, from a staff of 129 to 154. New investigations and fines have also increased.

* The Diet recently passed legislation to increase the surcharge on collusive firms from 2% of sales to 6%, although the United States asked for 10%. The maximum criminal penalty was doubled.

Efforts to convert unproductive farm land into housing fell far short of U.S. expectations, however. A larger and less expensive stock of housing would make it easier for the Japanese to buy their own homes and use up their huge savings, which amounted to 14% of gross national product in 1988. That, in turn, would help reduce Japan’s trade surplus.

But a bill to reform the tax system, which lopsidedly favors agricultural land holdings, “got turned to Swiss cheese,” said Noland.

U.S. officials say their next major targets will be two of the most controversial: exclusionary business practices and keiretsu , or interlocking business groups. Negotiators will push for more antitrust enforcement, greater ability for private parties to sue, greater shareholder rights, increased access to company books and requirements for outside corporate directors, among other things.

“They lie at the heart of the closed Japanese system, and that’s what we’re hoping to change,” a Treasury official said.

On the U.S. side, the key pledge was to reduce the federal budget deficit. But the 1991 deficit is expected to balloon to $309 billion--a 50% increase over the 1990 figure of $220 billion, according to the Congressional Budget Office.

To be sure, the massive bailout for the savings and loan industry and other factors, including the recession and Persian Gulf War, have contributed to the bulging deficit. But, to Japanese and some American ears, that sounds more like excuses.

U.S. officials say, however, that the budget act passed last year contained spending reforms that should help reduce the deficit by $500 billion over five years.

To promote savings, the Bush Administration proposed “family savings accounts” and enhanced individual retirement accounts. Both, however, remain on the drawing board.

To improve U.S. competitiveness, the Administration is pushing legislation to allow firms to enter joint production ventures without running afoul of antitrust laws. The bill stalled in committee last year and will be reintroduced in the 102nd Congress.

To encourage long-term corporate thinking, Treasury officials say they have completed a review setting out steps the private sector can take to reduce the cost of capital and improve relations with shareholders. An attempt to cut the tax on capital gains was rejected by Congress.

Officials are still “studying” ways to convert to the metric system, another pledge. As of last June, the biggest accomplishments reported by the U.S. side included comments received, meetings held and the selection of 46 state officials to the National Council on State Metrication.

More concrete gains were made in other areas. Federal spending on research and development increased $800 million for a record level of $67.2 billion in fiscal year 1991. The Administration’s 1992 budget calls for an $8-billion increase.

And the number of sectors with export controls is expected to be reduced in a new list to be published this month.

But if U.S. progress seems meager, it hardly surprises anyone. That’s because SII was conceived more as an alternative way to “do something about Japan” than harsh unilateral action from Congress.

“Most people unofficially will admit that this was more about Japan than the U.S. A lot of people thought the U.S. pledges were just pro-forma balancing,” said Douglas Ostrom, an economist with the Japan Economic Institute of America. The Washington institute is funded by the Japanese Ministry of Foreign Affairs.

But several analysts on both sides of the Pacific say the United States could gain immeasurably if it took its SII commitments more seriously.

“If the U.S. were to enact fully all the Japanese proposals, it would experience a rapid surge in national savings and reduction in the twin deficits, and would set the stage to enter the 21st Century with a healthy and up-to-date stock of fixed and human capital,” said Jeffrey Frankel, an economics professor at UC Berkeley. “The Japanese government is more likely to deliver on its commitments and, therefore, the more substantive gains will accrue to the Japanese people.”

Noland of USC is more plain. “It’s pretty pathetic. There really is a kind of hubris that Americans have to recognize,” he said. While the Japanese see a problem and find solutions, “our system is increasingly getting to a point where it doesn’t work at all.”

There are several reasons why it has been easier for the Japanese to honor their pledges. A key factor is that the Japanese use foreign pressure--called gaiatsu --to overcome entrenched special interests and do what is in the national interest.

For years, Japanese reformers have campaigned against the inefficient distribution system, limited housing and high consumer prices. Using the excuse of foreign pressure, they can achieve what they would otherwise fail to do in the face of opposing farmers, say, or small-shop owners.

But the United States has no history of gaiatsu . As a result, there is no incentive to sacrifice special interests for the national interest--particularly in a Congress where the reelection rate is 98%.

“The Japanese are asking us to do things that are politically impossible, like increase taxes or cut spending,” Haley said. “It’s a lot easier for them to import rice than for us to do either of those things.”

In addition, analysts say, many of the Japanese changes could be made bureaucratically. But most of the Bush Administration pledges require legislation--and therefore support from the Democratic Congress.

In any case, a growing number of Japanese--and Americans--are getting impatient.

“SII, if done correctly, could have been a good way to apply gaiatsu on ourselves,” said one American businessman in Tokyo. “A lot more tension should be placed on what the Japanese side says the U.S. should do. There are so many things we need to do that we’re not doing.”

Many Japanese agree. Last week, Japan’s most influential business group, the Keidanran, issued a position paper on SII that directly took Americans to task for their failure to implement many of its promises. In the current round of meetings, the group wants more emphasis placed on structural problems in the United States rather than Japan.

“The general trend is that Americans quickly denounce others while putting their own problems on the shelf,” said Hiroshi Hirabayashi, economics minister at the Embassy of Japan in Washington.

“If the U.S. side insists on Japanese implementation, forgetting its own commitments, this will be very unfair,” he added. “The Japanese public, as well as the government, are not in the mood to accept that kind of approach.”

Major Elements of the Initiative

Japan agreed to:

* Increase public works spending.

* Streamline its distribution system.

* Convert more farmland to urban use.

* Reduce exclusionary business practices.

* Open keiretsu business relationships to outsiders.

* Reform pricing.

The United States agreed to:

* Increase savings.

* Reduce its federal budget deficit.

* Improve industrial competitiveness and encourage long-term thinking.