NEWS ANALYSIS : Trade Fight Gets Riskier as Both Sides Dig In

The confrontation between the United States and Japan over access to Japan’s auto markets is potentially more significant and dangerous than any of the long litany of often-tiresome trade disputes that have preceded it.

With the stakes higher now and both sides poised to raise the ante, the latest standoff could be the opening round in an intensifying struggle for economic power that will bring the world’s two largest economies into collision with increasing frequency and intensity.

The suggestion Saturday that the United States might impose sanctions on auto imports, including the possibility of steep tariffs on Japan’s prized luxury models, suggests a willingness by the Clinton Administration to push the boundaries of acceptable international practice and risk heavy damage to a relationship once considered the United States’ most critical, economists and other experts say.

At the same time, Japan’s threat to take the dispute to the World Trade Organization if the United States imposes sanctions shows an emboldened regional power trying to stand up to its largest trading partner. Such a move could be embarrassing to the Administration, a key supporter of the WTO, the newly created referee of world commerce.

The trade battle comes against the backdrop of another contentious economic issue--the fate of the U.S. dollar as it falls precipitously against the yen. The U.S. trade deficit with Japan was $65.7 billion last year, largely because of autos and auto parts, and the imbalance is a major reason for the dollar’s continued weakness in world markets. A strong yen hurts Japanese exports, but it also weakens the United States’ power and influence in Asia, the world’s fastest-growing market.

With the auto sector so critical, neither side can afford to back down, many economists say.

“When it comes to trade, all other issues are peripheral,” said political scientist Chalmers Johnson, the president of the Japan Policy Research Institute. “Automobiles are at the center of things. It’s the last important manufacturing industry left in America.”

Former President George Bush recognized that when he visited Tokyo in January, 1992, accompanied by the chief executives of the Big Three auto companies. But the show of force fizzled under attacks on American product quality and competitiveness. Such attacks are far less valid today.

President Clinton began his term with a vow to seek rapid progress in opening Japanese markets, including a halving of the trade deficit with Japan by the end of his term. When efforts to browbeat Japan into opening its markets failed, White House officials suggested a change in tactics. Japanese observers saw that as a retreat from high-pressure tactics. Instead, the Administration now appears to be raising the pressure.

It is still unclear how the current dispute will play out. Sanctions, even if they are announced soon, would not take effect immediately. That leaves the opportunity for last-minute compromise. And some members of the Administration would prefer to see trade issues continue to take a back seat to security concerns.

But, unlike past conflicts, this appears to be no Kabuki drama. Granted, both sides are playing to their respective political constituencies. Clinton needs to show that he is tough, and so do Japan’s political leaders and bureaucrats. But, unlike in the past, there are no signs of secret talks and there is little undercurrent of goodwill to assure a peaceful solution.

This conflict can’t be compared to the recent negotiations with China over intellectual property rights. Sanctions then were largely symbolic, applied as they were to a wide range of unimportant products. Both sides assumed a quick deal would be made.

But after two decades of trade talks with Tokyo, U.S. negotiators have grown cynical of Japan’s laundry lists of deregulation proposals and appear prepared to risk a weaker dollar and a potential trade conflagration to force open Japanese markets.

The current conflicts are not easily resolved because they go to the core of Japan’s industrial system. Japanese auto makers can’t drastically expand their purchases of U.S. parts and still uphold their traditional supplier network. Acquiescence to U.S. demands would come at the cost of a system that has worked well for companies such as Toyota and Nissan.

Reports in Japanese newspapers, however, that Japan’s auto makers could sharply increase purchases of U.S. parts by their plants in the United States provide one potential way out of the standoff. Those plants could expand purchases without hurting traditional suppliers in Japan.

After talks broke off here Friday, International Trade and Industry Minister Ryutaro Hashimoto, in an unusual tone of finality that gave little room for compromise, insisted that Japan had gone as far as it could to make things work.

“We have put all our cards on the table,” he said. “This is regrettable.”

U.S. Trade Representative Mickey Kantor, who moved up the deadline for resolution of the auto dispute, may be counting on a strong yen--which already is eating into Japanese car sales in the United States--and a weak Japanese economy to help break Japan’s will.

Japan, meanwhile, may have believed that it was calling Kantor’s bluff. Before talks broke down, Japanese officials downplayed the notion that the United States could impose sanctions that would hurt Japan. While Japan was angry and embarrassed in the 1980s when the United States imposed sanctions on Japanese electronics parts in a bid to open that country’s chip market, today trade officials do not seem bothered by the idea of sanctions.

“America is publishing sanctions against countries all the time,” one Japanese official said recently.

Japan views the United States, with its shrinking dollar, as a critical market but one with declining importance. Japan provides parts and machinery that it believes the United States cannot do without. And Japan believes that the United States will compromise--if not now, then in negotiations before the WTO.

A Japanese decision to go to the WTO, however, would carry risks for both sides. Failure to reach a resolution could undermine the organization.

The U.S. side, for its part, may be underestimating the pressure required to overcome vested interests in Japan, Johnson said.

The high yen may be hurting Japanese exporters, for example, but experts point out that it increases Japanese power and influence over the United States in critical markets such as Asia.

One Japanese official said of the impact of currency, “In yen terms, the U.S. is a shrinking market.”

The tension between the two countries was visible as Kantor and Hashimoto talked to reporters in this quiet resort town during a break from talks.

At one point Hashimoto chided Kantor for being overly aggressive, “like my wife when I get home drunk.” Another time, as he moved to shake hands with Kantor, he half-jokingly said that “he’s the kind of person I don’t shake hands with.”

For his part, Kantor ended the talks with a major broadside against Japan that suggested he is acutely aware of the potential significance of the harsh steps the United States may be about to take.

“Historians will have to decide what our leaders were thinking when they ignored the competitive challenge of Japan for more than 40 years and accepted an unbalanced trading relationship,” Kantor said before flying to Washington. “This Administration, from the President down, believes that closed markets--sanctuary markets--have no place in an international trading system.”

Those are fighting words.

Times staff writer James Flanigan contributed to this report.