Global Competition: Can U.S. Still Play by Its Rules? : Economy: Japan, Germany take different approach to relations between business and the government.

Two years ago, the leaders of two of the world’s largest industrial conglomerates--Shinroku Morohashi of Mitsubishi Corp. and Edzard Reuter of Daimler-Benz AG--gathered their top lieutenants and strategic planners for two days of private talks in Singapore.

The agenda: finding ways to combine Germany’s unsurpassed engineering skills with the production abilities that have made Japan the envy of the West. “Reuter and Morohashi want to rule the world,” The Economist magazine warned in a caption beneath pictures of the two stern-faced men.

Had a group of U.S. executives organized a meeting like that, they might have spent the next few years in prison. American laws and traditions would treat what Reuter and Morohashi tried to do as illegal collusion. Indeed, such many-tentacled business concerns as Mitsubishi and Daimler-Benz are not even allowed to exist in the United States.

While it is yet to be seen whether the talks produced any concrete plans, they provided a telling lesson in how business is now being done in a global economy where the United States is only one of the Big Three.

The collapse of communism has quieted fears of armed clashes between the followers of Karl Marx and those of Adam Smith. But it has exposed new levels of competition and new dangers of conflict among the three leading industrial economies, in no small part because they represent vastly different models of capitalism. And in contrast with the Cold War era, when there was only one Free World military superpower, it is not at all clear who will call the shots in the contest for economic supremacy that lies ahead.

“In today’s world, Americans cannot force the rest of the world to play the economic game as Americans think it should be played. The game will be played under international, not American, rules,” economist Lester Thurow writes in his newly published book, “Head to Head.”

Whatever its objections to the fairness of the international rules, the United States has no choice but to suit up and play. One idea reportedly explored by Mitsubishi and Daimler-Benz was the possibility of joining forces to compete in the civilian aircraft market. Such a venture would be a direct challenge to Seattle-based Boeing Co., the present world champion in an industry that is considered one of the most promising of the coming decade.

Increasingly, global competition is becoming a three-way struggle for dominance in high-wage, high-growth industries.

With Daimler-Benz and BMW considering moving some of their luxury automobile production to the United States, already home to many Japanese-owned auto plants, economic experts say it is inevitable that the battle for the U.S. market will be even more closely fought. Meanwhile, Japan plans to quintuple the output of its automobile plants in Britain, which have tariff-free access to a unified Europe and threaten Germany’s grip on the market.

Japan also has targeted chemicals and machine tools, which have been important sources of jobs and wealth for both Germany and the United States.

So while the Cold War was a triumph of market forces over command economies, the victory party threatens to disintegrate into a family brawl. With no common adversary to unite them, the divergencies in the allies’ three approaches to a system they all call capitalism create tension in areas ranging from narrow trade disputes to broad formulas for global prosperity.

Ideology Differences

The differences often emanate from basic principles of each country’s national ideology--including such fundamental issues as the relationship between government and business, as well as the relative importance of the individual and the community.

“You can argue whether one is better than the other, but the fact that they are different is going to create a potential for conflict,” said former U.S. Trade Representative William E. Brock III. “In the short term, we are doomed to a lot of problems because we just have not advanced politically as fast as we have moved economically. That is going to force us to be much more effective in linking politically and creating international systems that allow us to do business in the world.”

But for now, the systems already in place seem to be breaking down.

Six years of often-bitter negotiations have failed to produce an agreement on changes in the badly frayed General Agreement on Tariffs and Trade, the international set of trading rules established shortly after World War II. As a result, protectionism is growing as individual countries go their own ways and groups of nations move toward forming trading blocs along the lines of the 12-nation European Community.

Instead of coordinating their economic policies, the Big Three are increasingly splintered because they are mired in domestic economic concerns. The United States is hamstrung by its trade and budget deficits; Germany is staggering under the massive job of integrating the former East Germany; Japan is being shaken by simultaneous crashes in its real estate and stock markets.

Even greater challenges lie ahead. Already, the United States is isolated from its chief economic allies over its refusal to subscribe to strict targets for reducing carbon-dioxide emissions. “The environment is the ideological blockbuster to end all ideological blockbusters,” Harvard Business School Prof. George C. Lodge said.

To come up with a solution to global warming and ozone depletion, nations will have to submit to a sort of “trans-national government,” putting aside their ingrained beliefs about such fundamental issues as the sanctity of private property and the workings of a free market, Lodge said.

For decades after World War II, America was remarkably successful in using its economic clout to force other countries to play by its notion of fairness.

But in today’s world, it is becoming increasingly clear that “our system is patently uncompetitive,” Lodge said. “Germany and Japan clearly have the world’s most competitive systems. In a way, they are alternate models. We’re not going to be like any of them, but there is much we can learn from them.”

To many in the Bush Administration, such comments border on heresy.

“There are always some voices of gloom and doom that want to tell us our industrial base is disappearing and we’re terribly uncompetitive,” Commerce Secretary Barbara Hackman Franklin said. “I don’t really think that’s true.”

Those who draw unflattering comparisons with Japan and Germany must recall that “we’re founded on a different basis. We have a different culture,” she said. “I think there’s great strength in ours. . . . We need to build on our strengths and keep going.”

Americans should not forget, she added, that the United States is still the world’s biggest economy, as well as its largest importer and exporter. U.S. workers, she noted, remain the world’s most productive, with each employed person turning out $46,000 worth of goods in 1990.

Yet growth in U.S. productivity, which economists use as an important gauge of a nation’s economic momentum, was virtually stagnant last year after having fallen in 1990, according to Labor Department statistics. “The U.S. level of output per hour of work remains the highest in the world, but Germany and Japan are moving up at a faster rate,” Federal Reserve Chairman Alan Greenspan has said.

Many argue that those two countries are still playing catch-up after the devastation of World War II. To some extent, that is true. But it does not fully explain the changes that have occurred.

In the past, America’s innovative abilities, huge market and abundant natural resources gave it an automatic edge in economic competition. But today’s cutting-edge industries are driven by efficiency. As Congress’ Office of Technology Assessment has pointed out, America invented the videocassette recorder but now sells only 2% of them.

$350-Billion Potential

A 1990 Commerce Department report identified 12 crucial “emerging technologies” that have the potential to add $350 billion to the U.S. economy. Researchers concluded that America had fallen behind Japan in five of the areas, and was even with it in one.

“They’re exploring the frontiers,” said Jeffrey E. Garten, author of “A Cold Peace,” a book on U.S.-German-Japanese relations. “We’re hung up on an ideology that says all the initiative has to come from business and that individual gratification is the objective of everything we do.”

In theory at least, government and business in the United States have traditionally been regarded as adversaries. It is taken as virtual dogma that the less one has to do with the other, the better for both.

Just as ingrained among America’s values is a reverence for the individual and an almost reflexive suspicion of bigness. America’s folk heroes are the penniless entrepreneurs who toiled in their barns and garages to invent the light bulb, the automobile or the smarter computer.

Conversely, big business has long provided Americans with a ready cast of villains. Around the turn of the century, robber-baron cartels were smashed up by antitrust laws. The 1980s saw the rise and fall of Wall Street’s most notorious privateers.

A savings-and-loan bailout that is costing taxpayers a half-trillion dollars--$2,000 for every man, woman and child in the country--has reinforced a view that financial institutions, in particular, should not be left to follow their own inclinations. Last year, Congress killed legislation that would have relaxed the Depression-era laws that prevent banks from branching across state lines or going into other businesses.

Other nations have no such traditions. Japanese and German banks, for instance, own large stakes in other corporations, giving them enormous influence over their operations.

The international stature of Japanese banks, in particular, has soared. Two decades ago, six of the world’s 10 largest banks, ranked by their assets, were American; last year, seven of the top 10 were Japanese, with this country’s largest, Citibank, coming in 26th.

Though their cultures are vastly different, the histories and traditions of both Germany and Japan have fostered a single overriding belief: The welfare and aspirations of the individual come second to those of the community, whether that group is the family, the corporation or the nation.

“One’s Protestant, the other’s not. . . . One’s got Renaissance, European traditions, the other’s not,” said Ronald A. Morse, a scholar of international relations. “And yet, if you look at these two countries since the 1850s, their histories are similar.”

For hundreds of years, geography isolated each, and each developed under a feudal, patriarchal, hierarchical system, Morse said. “Both have respect for technical skills that probably derive from their agricultural traditions. . . . In both Germany and Japan, you can have high levels of consensus with low levels of coercion.”

Different Approaches

These shared values make themselves evident in each country’s approach to competing in the global economy.

“They use different means, but they have a very similar mind-set, which is not to allow the free market to reign. You take deliberate action within your own culture and your own traditions to nurture certain industries,” said Garten, an international banker and former State Department official.

In both Germany and Japan, banks, government and industries pull in the same direction. Tax laws encourage savings and investment--the opposite of the U.S. system, which rewards consumption by taxing interest on savings and allowing deductions for interest on debt.

In both, the government nurtures infant industries that it believes are crucial to its future.

Japan generally protects them by keeping out foreign competition. One of its most formidable barriers is its networks of suppliers and producers, known as keiretsu, which are so tight that American firms complain that they simply cannot penetrate the market. Japan’s largest firms own enormous amounts of each other’s stock and sit on each other’s boards. Collusion is an accepted business practice.

Germany, on the other hand, has incubated its most promising industries with heavy government subsidies.

A case in point is Airbus Industrie, a commercial aircraft consortium backed by the German, British, French and Spanish governments. Favorable government loans account for almost three-quarters of its financing and have made it possible for Airbus to become the world’s second-largest player in a business that only a few years ago was dominated by American firms. Already, it has overtaken McDonnell Douglas, and it now seeks to go head-to-head against Boeing.

To Germans and many other Europeans with strong social welfare systems, the inequities of U.S. society--particularly the growing gap between the richest and poorest Americans--are the strongest argument against allowing a totally free market to work its will.

As one European official in Washington put it: “The United States believes that others should align themselves on its own model, and if they do not do so, they are unfair traders. We believe the trickle-down theory is no good, and we see the proof in the United States.”

Some Americans see more than a trace of smugness in this attitude, and note that Germany and Japan have historically been far more homogeneous than the United States. Already, Germany is being racked by ugly waves of anti-foreign sentiment, and economist Thurow, for one, speculates that Japan’s future economic power may be curbed by sheer unwillingness to accept outsiders.

Yet, as international friction grows, America is being forced to take a new look inward at the strengths and weaknesses of its own economic system.

It is a sensitive issue. Indeed, few phrases touch a rawer nerve at the Bush White House than “industrial policy”--the type of planning that has, in less than half a century, helped rebuild Germany and Japan into industrial titans.

“Industrial policy” means different things, depending on who is using it. But it almost always comes down to a new, stronger role for government, which inevitably conflicts with the free-market philosophy embraced by the administrations of Ronald Reagan and George Bush.

When one high-ranking Administration official was asked in a recent interview whether it is time for the United States to develop an international competitiveness strategy, he snapped: “If you’re trying to get me to say ‘industrial policy,’ I’m not going to say it.”

Even as they have disavowed it, both Reagan and Bush have experimented with tactics that economists associate with industrial policy. But they are not the sort of comprehensive strategies pursued by Germany or Japan, and even these tentative efforts were clearly against the grain.

“They are very, very small measures, always taken reluctantly, always taken with the idea of ‘How little can we get away with,’ ” Garten said.

Nonetheless, political realities are forcing changes everywhere. For the first time in more than a decade, presidential candidates are debating the idea in the open. It presents itself in bits and pieces--under guises that range from Republican Patrick J. Buchanan’s “America First” campaign to Democrat Bill Clinton’s proposal for a new government agency to funnel federal money now being spent on military research into commercial technology.

Perot’s Targets

Independent Ross Perot insists that he is not a believer in industrial policy, but he advocates targeting “industries of the future.” “If you study MITI (the Ministry of International Trade and Industry) in Japan,” he said, “it works.”

Since the 1980s, as the United States has seen its trade deficit balloon almost tenfold, it has become clearer that all the problems cannot be smoothed out in worldwide trade negotiations. The deeper issues involve asking countries to alter their basic values and traditions, not splitting the differences among tariffs and quotas.

“The traditional means of negotiations have proven to be much too slow to deal with the level of potential tension that is arising,” Garten said.

One new approach being tested is the Structural Impediments Initiative that the United States and Japan entered in 1989.

Japan has promised to cut its trade surplus through such measures as enforcing its antitrust laws, increasing spending on public works projects and loosening restrictions on the establishment of large import-oriented department stores. For its part, the United States has agreed to make itself more competitive by cutting its deficit, overhauling state and federal regulations that dampen trade and improving education and worker training.

Most of these goals are vague, their timing uncertain. But the concept is promising enough that the European Community--which is worried that Japanese imports could undercut the competitiveness of the EC--is interested in starting its own set of talks.

“This is the beginning of an agenda that will be the substance of international negotiations in the future,” Garten said, “not just between the United States and Japan, but Japan and Europe, and the United States and Europe.”

Battle for Cutting-Edge Technologies Although the United States is still competitive in developing cutting-edge technologies, the Commerce Department warned in a 1990 report that Japan and Europe were closing the gap in key categories. Here is the agency’s view of what the future might hold if trends continue in the race to develop technologies expected to generate annual sales of $356 billion by the year 2000:

U.S. STATUS VERSUS JAPAN VERSUS EUROPE LOSING BADLY Advanced materials Digital imaging technology Biotechnology Flexible computer- Superconductors integrated manufacturing Digital imaging technology LOSING Advanced semiconductor Medical devices and devices diagnostics High-density data storage High-performance computing Medical devices and diagnostics Opto-electronics* Sensor technology HOLDING Artificial intelligence Advanced materials Flexible computer- Advanced semiconductor devices integrated manufacturing High-density data storage Opto-electronics Sensor technology Superconductors GAINING None Artificial intelligence Biotechnology High-performance computing

* Fiber optics, lasers and other optical technologies. Source: U.S. Department of Commerce Technology Administration