Hosokawa, Clinton Fail to Reach Pact : Trade: The two leaders are unable to resolve differences in Washington talks. U.S. officials consider retaliatory measures to open Japanese markets.

President Clinton and Japanese Prime Minister Morihiro Hosokawa failed Friday to resolve their deep differences on key trade issues, and U.S. officials began considering specific retaliatory and punitive measures intended to force Japan to open its markets to American products.

“The reality is, we’ll take some action,” a senior Administration official said, holding out little hope that--barring a Japanese concession--a trade clash could be avoided.

After three hours of what were described as “direct, intense” meetings with Hosokawa, Clinton said that, while the overall U.S.-Japanese relationship remains solid, six months of negotiations have failed to reconcile widely differing views on the crucial issue of opening Japanese markets to U.S. goods.

With the failure to reach an agreement by a deadline set last July in Tokyo, the President rejected Hosokawa’s call for more talks.

“There is a need for a little bit of cooling off,” Hosokawa acknowledged, with Clinton at his side in the White House East Room, at a news conference. “We’ll just cool our heads for a while.”

“The President feels it would be pointless” to continue the negotiations “until there is a change in attitude” by the Japanese, a senior Administration official said.

The current dispute between the two major trading partners is over how to reduce Japan’s towering trade surplus in four economic sectors--autos and auto parts, medical equipment, telecommunications equipment and insurance.

Clinton and Hosokawa’s predecessor, Kiichi Miyazawa, agreed in Tokyo last July that they would establish a framework for setting “objective criteria” by which progress in reducing the trade surplus could be measured.

But Japan has insisted since shortly after that agreement was reached that, however such criteria are set, it will not agree to numerical targets--for example, specific sales goals of U.S. automobiles in Japan. It was the hurdle of numerical targets in the four economic sectors that the two leaders could not clear on Friday.

“Unfortunately, we have not been able to reach agreement in any of the four areas we identified last July,” Clinton said. “Japan’s offers made in these negotiations simply did not meet the standards agreed to in Tokyo.

“Today we could have disguised our differences with cosmetic agreements, but the issues between us are so important for our own nations and for the rest of the world that it is better to have reached no agreement than to have reached an empty agreement.

“If Japan has further proposals, our door remains open. But ultimately, Japan’s market must be open,” Clinton said.

Overall, the July agreement is intended to bring down Japan’s global trade surplus, which in 1993 was about $132 billion, nearly half of which was with the United States.

Citing the closed nature of the Japanese market, Clinton said that U.S. medical technology firms have 40% of the European market but only 15% of the Japanese market. Foreign telecommunications companies’ sales amount to 5% of the Japanese market but a 25% share of the market in other major industrial nations, an Administration official said.

Hosokawa, who took office in August, said his administration has been trying to remove regulations from the Japanese economy, mired in a rare recession, and that numerical targets would run counter to such a course.

“That’s not what we’re asking for,” Clinton said, insisting on “a way of measuring by objective standards whether progress is being made in opening markets.”

Senior Administration officials said the White House would focus during the next two weeks on measures that would pressure Japan to take the steps it has resisted, not just during the last six months, but over more than a decade in multiple negotiations.

“We will be reviewing all of our available options to open the markets, and there need be no delay in the review,” a senior official said.

Asked why the Administration was unprepared to take action immediately, the senior aide said: “The Japanese over the last several days have been giving us reasons to think that they might be, at the last minute, meeting our criteria.”

Another official, speaking, as did the others, on the condition of anonymity, said that the following measures were being considered:

* Beginning a number of high-priority, high-profile trade actions against Japan that could result in retaliation against specific industries if violations of existing trade agreements are discovered. This could lead to the exclusion of certain Japanese products from the United States.

* Using the “harassment tools” used by Japan, in which individual imported automobiles are inspected at dockside, a process that can delay their distribution by as much as six months. The United States inspects imported vehicles by class, not individually, to make sure they meet U.S. standards.

* Cracking down on Japanese cellular telephone sales in the United States.

* Scaling back the tax benefits given to Japanese auto makers in the United States.

* Stepping up the use of U.S. laws that prohibit “dumping” on U.S. markets of products sold at prices below their production costs to undercut U.S. manufacturers. Japanese tape recorders and other electronic gadgets routinely cost more in Tokyo than they do in the United States, and the difference is not entirely attributed to fluctuations in the exchange rates of the dollar and yen.

Senior officials met until 4 a.m. Friday in an attempt to find enough common ground to call the meeting a success.

But the U.S. team called the talks off at that point, having perceived no sign of movement on the part of the Japanese.

“I saw panic on the faces of the Japanese negotiators. They did not believe this would happen,” one participant said.

By the end of the formal White House talks nearly 11 hours later, Clinton and Hosokawa demonstrated disappointment, but not anger.

Republicans and Democrats in Congress applauded Clinton’s course.

Senate Minority Leader Bob Dole (R-Kan.) said he was “disappointed” that the talks failed. But he added: “The last thing we need is an ineffective trade agreement that fails to address the real problems foreign firms have in penetrating the Japanese market.”

House Majority Leader Richard A. Gephardt (D-Mo.) accused the Japanese of failing to negotiate in good faith. He said they demonstrated that they thought they could walk away from the agreement reached last July, “just as they have walked away from virtually every other trade agreement they’ve signed in the past.”

Calling for retaliatory measures, Sen. Carl Levin (D-Mich.) said: “The only way to pry open Japan’s markets after decades of jawboning is to place equivalent restrictions on their goods.”

The trade discussions took up a majority of the Clinton-Hosokawa meeting, but the two sides announced afterward Japan’s decision to contribute $3 billion over seven years to international population control programs and efforts to fight AIDS. The Japanese will also join a U.S. program on cleaning up environmental pollution in central and eastern Europe, contributing more than $1 billion in loans and credits.

Times staff writer William J. Eaton contributed to this story.