World View : DEALING WITH JAPAN : Two Ways to Cut a Trade Deficit

It was almost exactly five years ago that France’s then-minister of European affairs, Edith Cresson, lectured a pair of American reporters about the abysmal U.S. trade deficit with Japan.

“Americans don’t see what’s going on with the Japanese,” she insisted. “They are like ants, eating you up. You just don’t notice it, don’t feel it, don’t see it.”

Pausing, she added, “We plan to be firm with the Japanese.”

And the Europeans did try firmness.

They worked to keep a tight control on Japan’s auto exports, with France and Italy resorting to especially tight quotas to guard their domestic industries. Since 1989, the European Union has launched 26 anti-dumping actions against Tokyo, charging the Japanese with unfair pricing practices. Occasionally, EU member countries even took a page out of the Japanese book of subtle-but-effective non-tariff barriers.

French customs authorities, for example, quietly decreed that all imported Japanese videocassette recorders be cleared at Poitiers, a city nearly 100 miles from the nearest port and staffed by a single customs inspector.

The collective impact of these measures, however, hardly dented the Japanese trade juggernaut.

For Europeans, as for Americans, the imports kept growing, Japan’s home market remained closed and trade deficits soared.

But as a frustrated United States reaches for a hammer to resolve its trade disputes with Tokyo, the Europeans are now trying the kid-gloves approach.

While Washington has opted to revive its feared “Super 301” legislation, giving President Clinton the ability to impose sanctions against Japan, and has forced showdowns with Tokyo in areas such as cellular telephones and semiconductors, the Europeans are engaging the Japanese in a conspicuously quiet dialogue to coax the Asian industrial giant toward greater openness.

“We agree with the Americans’ goal (to reduce Japan’s trade surpluses by opening the Japanese domestic market) but not their means,” said Peter Guilford, the EU’s chief spokesman on trade matters. “The Americans give the impression they can’t venture out the door (on trade matters) without a gun and holster.”

It’s hardly surprising that the Europeans have changed tactics.

In the years since Cresson vowed firmness, the European Union’s cumulative trade deficit with Japan has reached $142 billion--a figure even greater than the American imbalance with Japan when expressed as a percentage of total trade.

(Taken together, Japan’s trade surpluses with the United States and the European Union, the world’s two other great industrial trading powers, total $384.5 billion for the past five years.)

While the EU’s trade imbalance with Japan declined slightly in 1993, few see it as the start of an encouraging trend. And there are other problems. For instance, Japanese direct investment in the 12 EU states was running at about 15 times the rate of European investment in Japan the last time it was measured, two years ago.

At the core of the present European strategy is a so-called trade assessment mechanism (TAM) in which groups of Japanese and Europeans review the flow of trade in about 30 specific product areas, then trouble-shoot if there are problems.

In the 15 months since they were established, the groups have met eight times in either Tokyo or Brussels, with many of the initial sessions devoted to such basics as statisticians from both sides explaining methods and databases.

“This has been an intensive exercise,” noted Tetsuo Yamashita, a senior trade specialist at Japan’s mission to the EU. “People have gotten to know each other well. We’re hoping for a positive outcome.”

In an attempt to keep the TAMs away from the public eye, both sides have agreed to a virtual news blackout on the contents of the talks--refusing, for example, even to name the product areas under discussion.

The first real proof of the TAMs’ effectiveness, however, is expected to come toward the end of next month, when EU Trade Commissioner Leon Brittan travels to Tokyo to discuss with Japanese leaders what action the results of their discussions require.

Some analysts believe the Europeans could benefit from the intensity of Japan’s dispute with the United States.

“The Japanese will be under pressure to do something,” declared an EU trade official. “They’ve got to show that there’s a softer way to resolve these issues, that something less than browbeating works.”

Europeans, it seems, have decided to coax Japanese markets open with praise rather than prod with criticism. As the EU applauded the modest market-opening measures announced by Tokyo last week as a “positive first step,” U.S. Trade Representative Mickey Kantor dismissed the package as “half-finished work” with few specifics.

The package included pledges to further stimulate Japanese domestic demand and reform government purchasing procedures, presently biased toward domestic suppliers.

The fact that the Europeans employ such a low-profile strategy reflects the very different images Japan has in Europe and the United States.

Despite its steady inroads, Japan still accounts for only about 10% of the EU nations’ total foreign trade. Partly because of this, Japan-bashing has yet to become a political sport here. In the United States, the Japanese percentage of total American foreign trade runs around 15%.

Indeed, since the collapse of the Iron Curtain in 1989, West European politicians have been far more preoccupied with the potential trade impact of the new, low-wage democracies on their eastern doorstep than with Japan.

The extent to which the Europeans have tried to distance themselves from the latest U.S. clashes with Japan was underscored in recent comments by Brittan, who described the American approach of setting numerical targets for specific products variously as counterproductive and discriminatory, “incompatible with Europe and America’s mutual commitment to free trade and multilateralism,” he huffed.

Independent European economists tend to support the EU’s tactics, at least for the present.

“Experience has shown that Japan only reacts to pressure, but that pressure can’t just be brutal demands,” said Helmut Laumer, a director of the Munich-based Ifo Institute for Economic Research. “The consciousness in Japan has grown enormously that something has to be done. Now is the time to work carefully.”

Said James Rosenstein, spokesman for the Brussels-based Assn. of European Automobile Producers: “We agree with this general approach. Most Europeans don’t like managed trade.”

Despite the criticism of American tactics, however, Brittan and other EU trade officials have begun to talk about a trilateral approach to the problem, in which they would work with the Clinton Administration and Japan on the trade balance.

But they claim that Washington has so far failed to share information from its contacts with Tokyo that, they say, is necessary for any greater U.S.-EU cooperation. Some question the sincerity of American calls for closer coordination.

“There’s a certain suspicion that the Americans only want some cover and international respectability for Japan-bashing,” commented Guilford, the EU trade spokesman.

The American ambassador to the European Union, Stuart Eizenstat, denies that the United States is withholding information on its talks with Japan. He said in an interview that “a rather intensive exchange” of data has already begun.

“They (the EU) may not be fully satisfied with the detail they’ve gotten, but the process has begun and it’s continuing,” he said.

Eizenstat also cited two key factors that could drive the EU into closer cooperation with Washington on the Japan issue.

* Europe’s deepest recession since the 1930s has generated an urgent need to create more export-led jobs. Opening up the large and rich Japanese domestic market could help do just that.

* Data gathered during the TAMs process could convince Europeans that their products are running into the same trade barriers that American goods have hit in trying to penetrate Japanese markets.

“They haven’t come to any final conclusions yet, (but) they are beginning to recognize--as we have--that many of the problems are not of their own making,” Eizenstat said.

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There are also signs that even supporters of the EU’s less confrontational tactics are growing impatient for results as the deficit with Japan persists.

While negotiators from the EU and Japan last month concluded an agreement that offers Japanese auto makers a slight increase (to about 12%) in their share of the huge EU market in 1994, there has been little progress in Japan’s commitment to open its auto market to European cars.

Automobiles, the biggest single item in the EU’s trade with Japan, also constitute roughly one-third of the EU’s 1993 deficit.

“At present, it’s all for them and nothing for us,” said Rosenstein, the spokesman for the European auto makers. “In a reasonable world, European producers should be able to get about 10% of the Japanese market, when we’re now getting about 2%. We’re entirely dissatisfied with this.”

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Brussels Bureau researcher Isabelle Maelcamp contributed to this story.

Deficits and Diversity Like the United States, the European Union has run a substantial trade deficit with Japan. * U.S. Trade With Japan (billions $) 1990 Imports: 81.4 Exports: 47.3 * 1991 Imports: 84.7 Exports: 49.5 * 1992 Imports: 84.8 Exports: 46.3 * EU Trade With Japan (billions $) 1990 Imports: 47.9 Exports: 31.4 * 1991 Imports: 54.4 Exports: 29.3 * 1992 Imports: 54.9 Exports: 27.5 * SOURCE: Eurostat * Exports to Japan are very diversified, although the European Union relies heavily on auto exports. * Top EU Exports to Japan (% of total) * Automobiles: 13.3 Medical, pharmaceutical products: 7.1 Organic chemicals: 6.3 Clothing, accessories: 5.1 Misc. manufactured goods: 4.6 Office machinery: 4.0 General industrial machinery 3.8% SOURCE: European Union * Top U.S. Exports to Japan (% of total) * Aircraft, associated equipment: 5.9 Wood: 4.0 Automatic data processing machines: 3.9 Thermionic, cold cathode, photocathode valves: 3.8 Maize, unmilled: 3.2 Parts for office machines and ADP machines: 3.0 SOURCE: U.S. Department of Commerce