Tackle Trade War’s Neglected Child : Japan: An improved climate in both nations for direct investment would allow more U.S. access to its markets.
Large and persistent U.S.-Japanese trade imbalances have motivated past presidents--Democratic and Republican alike--to emphasize trade policies designed to encourage American exports to Japan and restrain Japanese imports to America. Let’s hope this week’s Asian-Pacific Economic Cooperation summit in Seattle focuses attention on an issue that until now has been largely ignored by past U.S. administrations: impediments to reaching Japanese markets via foreign direct investment (FDI).
Business managers and academic economists, among others, have long recognized numerous benefits of free-flowing direct investment across national boundaries. New research also suggests that in some circumstances FDI may well act as a complement to, rather than a substitute for, a nation’s exports to overseas markets. Increased U.S. direct investment in Japan at times may well boost not only American production in Japan, but also related U.S. exports to that market.
Despite the manifest advantages unregulated FDI can provide, however, levels of American (and other foreign) direct investment in Japan remain pitifully small. As a percentage of gross national product, for example, FDI in Japan ranks far below similar percentages for the United States, Britain, Germany and virtually all other advanced industrialized countries. Recent data suggest that the Japanese ratio of outward versus inward FDI is equally skewed. Whereas foreigners have directly invested roughly as much capital in America as America has invested abroad, for example, Japanese FDI overseas now exceeds FDI in Japan by a factor of more than 20.
Why has so little U.S. direct investment penetrated the Japanese economy? Clearly, America’s own actions are part of the explanation, and include the strategic errors committed by U.S. firms as well as misguided economic policies pursued by past American administrations. However, the fact that relatively more U.S. foreign direct investment has entered most other advanced industrialized countries, together with the fact that other nations have also encountered enormous difficulties investing in Japan, suggests that Japanese impediments to investing are at least as telling. Indeed, even so-called success stories leave the clear impression that major impediments to investing continue to operate. Just ask Toys “R” Us, which had to deal with complex Japanese government regulations and concerted opposition from Japan’s toy industry before gaining access.
What can the Clinton Administration do to improve American access to Japanese markets through FDI? Assigning greater priority to foreign investment issues would be a good start. The United States could demonstrate this new resolve by intensifying efforts to establish an international legal framework for FDI similar to that spelled out for trade in the General Agreement on Tariffs and Trade. The Clinton Administration also should consider converting the Office of the U.S. Trade Representative into the Office of the U.S. Trade and Investment Representative. Such a measure would not only signal America’s newfound determination to confront barriers to U.S. direct investment abroad; it also might enable the Administration to better coordinate policies affecting the increasingly inter-related fields of trade and investment.
Other Administration actions, however, should aim to encourage the Japanese themselves to improve the environment for FDI. American officials could, for example, support the position articulated by Japan’s powerful Federation of Economic Organizations ( Keidanren ), which held that elements of the Japanese business Establishment could make a significant difference by enabling foreign companies to become true insiders in numerous domestic industry associations.
The United States likewise could encourage the Japanese government to play a more significant role. Properly crafted U.S. initiatives could spur the Ministry of Justice to revise applicable laws and regulations to expand the rights of shareholders in Japanese corporations, thereby increasing opportunities for foreign investors to gain a real voice in the governance of Japanese corporations through stock acquisitions. The United States could seek quicker action by the Ministry of Finance to deregulate barriers to foreign firms in the financial services industry.
Indeed, the United States might even suggest that the Ministry of International Trade and Industry inaugurate a campaign of “moral suasion” to demonstrate to Japanese business and the public that FDI from abroad can contribute mightily to the growth of their domestic economy.
President Clinton is right to say that the American people want change. In his dealings with Japan, one of the most constructive changes he could undertake would be to shift America’s traditional policy emphasis on trade toward a more balanced approach that also adequately addresses investment.
