U.S.-JAPAN TRADE ACCORD : And Now to the Hard Work Ahead

The trade agreement between Japan and the United States makes a start on dealing with profound problems in the world’s two largest economies, but how much will really change depends on hard work ahead.

U.S. unemployment and declining standards of living among U.S. workers can be traced partly to its long-running trade deficit with Japan and to the composition of that trade.

The cars and car parts agreement can begin to correct such difficulties, but the United States and U.S. business will have to do more to make sure they are not restricted in the future in the world’s second-largest economy and elsewhere in East Asia, the world’s fastest-growing economic area.

Wednesday’s agreement, for all President Clinton’s crowing about “achieving goals,” is a compromise that stops short of seeking a verdict on Japan’s trading system, under which it runs a surplus with every major country on Earth.

Still, Japan has its own troubles. The Japanese economy is widely reported to be sliding into recession, even depression, because its stock market is down more than 60% and its banks are carrying more than $500 billion in bad loans--that’s a far greater debacle than the U.S. savings and loan crisis. Losses on that scale have stalled growth in the Japanese economy for five years.

Yet there are no bread lines in Japan, no forlorn men selling apples on Tokyo street corners. On the contrary, construction cranes dot Tokyo’s skyline. Japan’s unemployment stands at 2% to 3% of the work force.

The reason has a lot to do with Japan’s social contract, of which its trade protectionism is only one part. Job losses as the economy stagnated have been handled through early retirements and the shifting of labor from large, high-paying companies--the Toyotas and Toshibas--to smaller supplier firms that pay lower wages and benefits.

It’s a controlled system that pumps goods out to other countries but buys goods from them only as it suits policies designed to provide full employment--or even lifetime employment at some big companies.

“To some extent, Japan has been exporting the social costs of its own economic adjustment to the rest of the world,” says Mike M. Mochizuki, a senior analyst of Japan at Washington’s Brookings Institution.

*

To be sure, Japan’s consumers don’t get many bargains, often paying 40% above average world prices for simple household items such as tables and chairs--although discount stores have opened in the long recessionary period.

For a long time, the United States didn’t mind buying more from Japan than it sold there; experts argued that U.S. consumers got the bargains denied Japan’s own people.

But then the trade deficit grew enormous--it was $66 billion last year--and U.S. administrations responded with policies that lowered the dollar and raised the yen, aiming to make Japanese goods more expensive and “uncompetitive.”

It didn’t work out that way. The trade deficit didn’t shrink even though Japan’s companies started producing more goods in U.S. factories. The weak dollar added to U.S. companies’ disadvantages in trying to invest in Japan.

*

Meanwhile, the high yen pushed Japan’s companies to invest in South Korea, Thailand, Malaysia, Indonesia and Singapore, from which they gained lower-cost parts and a mounting presence in the economies of East Asia.

By contrast, U.S. industry looked like a fading presence in Asia. And slowly it dawned on the White House and Congress that the United States was paying a price for having only restricted access to Japan’s $4-trillion economy--that’s roughly two-thirds the size of the U.S. economy--and for not being aggressive in Asia’s new markets.

Evidence was everywhere. Three years into the economic recovery, unemployment is still 5.7% of the work force--roughly 6.7 million people. Moreover, wages have been falling even as output per worker has been rising.

*

The trade deficit is partly to blame--if a country imports far more than it exports, to some extent it displaces its own labor. And the trade deficit with Japan is especially insidious. Japan sends $40 billion in high-value autos and auto parts--made by well-paid workers--to the United States, yet takes less than $4 billion in auto-related goods in return.

By a rule of thumb that each $1 billion in exports accounts for 20,000 jobs, the U.S. deficit with Japan may account for more than 1 million of the unemployed.

So the Clinton Administration set out to open up Japan’s trading system. And Wednesday it got an agreement on dealerships and parts purchases by Japanese auto makers.

Markets were less than impressed. “It’s something the Japanese companies were going to do anyway--U.S. parts are good quality and lower-priced,” says Anne Zachara, an equities trader at Nomura Securities.

*

Still, changes are coming to Japan. Other countries will look at their one-sided trade relationships and object. Increased Asian imports will displace workers in Japan, forcing political and economic changes. Even now, “there are a lot of people in Japanese companies who have nothing to do but look at their thumbs,” says economist Sung Won Sohn of Norwest Corp. in Minneapolis.

“Yes, there will be change, but Japan won’t change the integrity of its brand of capitalism,” says Mochizuki.

America therefore will be challenged to demonstrate the merits of its freer market capitalism, which, let us not forget, leads in technological development and in bringing more choices to workers and consumers.

*

But nobody hands out favors in this world. U.S. companies will have to work hard to broaden their presence in Japan and in the rest of Asia. That’s where opportunity lies for the next two or three decades at least.

Wednesday’s trade agreement could be a good first step, but in international business as in sports, follow-through is all-important.