U.S. Must Avoid Trade Errors of 1980s

“Japan bashing” has become shorthand for American criticism of Japanese trading practices. Implicit in this phrase is the assumption that such criticism is a demagogic, unjustified assault on the blameless victor in a trade rivalry. On the other side, commonly voiced complaints about “Japan Inc.” imply that current trade discrepancies result solely from the unfair trading practices of a mercantile monolith.

A dispassionate interpretation of the facts indicates that neither of these views is wholly accurate.

Between 1987 and 1990, America’s trade deficit with Japan declined by more than $15 billion. Assertions that Japan was an unfair trading partner began to sound like special pleading, as Japan’s imports of American products jumped by 72%. Now, however, as a result of a higher dollar, slower growth in Japan and apparent economic recovery at home, the trade imbalance between the United States and Japan is poised to increase.

If trade relations were strained when the U.S. trade imbalance with Japan was improving, imagine what they will be like when the imbalance gets worse. As we enter a period of heightened trade conflict, we should take stock of the lessons of the 1980s so we don’t make the same mistakes in the 1990s.

The first lesson is that there is some truth to the Japan Inc. characterization. A decade of research has established that the Japanese market is significantly more closed than the markets of the other advanced industrial nations.

The major impediments to Japanese market accessibility are rooted in the unique character of Japanese business organizations and their distinctive relationships with one another and with the Japanese government. The recent scandal in the Japanese financial market is only the latest evidence of the blatant cronyism and favoritism that has shut out foreign producers.

Overt trade barriers are easy to identify and can be challenged under rules of the General Agreement on Tariffs and Trade. The structural impediments to Japan’s market, in contrast, are less visible and fall outside of GATT’s purview. Such impediments would be best remedied by new international regulations on the restrictive business practices characteristic of Japanese companies and the promotional policies that give them a preferential advantage in the Japanese market. Even an optimist would have to admit, however, that the short-term prospects for a GATT-like agreement on such regulations are virtually nil. GATT members can’t even agree on the more straightforward issue of agricultural subsidies.

For policy-makers interested in a meaningful time horizon--one measured in months or years, not decades--the question is what to do in the meantime. This question is of greatest importance to the United States, which remains Japan’s largest trading partner and which accounts for 50% of its trade surplus. (Seventy percent if the flow of Japanese goods through East Asian countries to U.S. destinations is included).

Again the experience of the 1980s provides some answers:

* U.S. trade negotiators should concentrate their efforts on improving market access in Japan in specific industries. Requests U.S. negotiators made in the 1980s to eliminate impediments to sales of specific American products were very effective.

* It may sometimes be necessary for the United States to negotiate a minimum share of the Japanese market for foreign suppliers. Given the strength of Japan’s agricultural and construction lobbies, minimum foreign shares of Japan’s rice and building markets are the most American negotiators may hope to win. They are better than nothing at all.

* The United States should actively promote exports to Japan. A pro-export program might include tax credits and expanded lending programs for exports as well as the provision of expert advice and information about Japanese market opportunities to small and medium companies.

* The United States must avoid trade measures that increase the prices and profits of Japanese companies. Because they have deep pockets and long time horizons, Japanese companies often compete aggressively on price, even when it involves selling products below cost. The traditional U.S. response to such competition is an anti-dumping suit, and the traditional Japanese response is to end dumping through price hikes. A better policy would be to directly subsidize U.S. companies rather than one that would raise the revenue earned by their Japanese competitors and the prices paid by U.S. consumers.

* While struggling to open Japan’s markets, the United States must avoid closing its own. Limiting imports or foreign investment from Japan is a sure-fire way to reduce living standards without making our companies more competitive.

* No trade policy, taken by itself, can eradicate real differences in quality. Japan’s trade surplus with the United States continued to grow in the last four years, particularly in industries in which Japanese producers have made real competitive gains, such as electrical machinery and computers.

We should not be shocked to find that while the United States now manages to run a trade surplus in Europe, where the competition is comparatively weaker, it continues to run a trade deficit in Japan. Nor should we be shocked to find that America’s comparative advantage in trade with Japan lies increasingly in such low-tech products as metals, wood, grain, meat and fish, all of which enjoyed growing trade surpluses over the last few years.

Unfortunately, even the best trade policy with Japan is not a substitute for a change in our domestic priorities. How can a nation with minimally educated high-school graduates, crumbling infrastructure and inadequate investment compete with one whose high-school graduates test at college levels and whose investment rate is among the highest in the world?

Unless we can “bash” the Japanese into behaving as irresponsibly as we do, we are destined to fall further behind.