Clinton Vindicated on Trade Stance, but the Results Don’t Spell Victory

Last June, at the 11th hour and after much rhetorical brinkmanship, U.S. and Japanese trade negotiators made a deal that avoided a trans-Pacific trade war over autos and auto parts. The Clinton administration trumpeted victory, its pride reinforced by public-opinion data showing its get-tough stance had played well with such key Democratic constituencies as unions and blacks. But American critics of Japan lambasted the deal as a sham because it lacked hard commitments from Tokyo to increase its imports of U.S. products.

Sales and export data for the last half of 1995 suggest, however, that the administration was right and its critics were wrong. In the wake of the trade deal, sales of U.S.-made autos and auto parts are up in Japan; Chrysler, Ford and General Motors have begun to create dealership networks, and Japanese auto makers are expanding their U.S.-based production. True, economists say that most, possibly all, of these gains would have been achieved even without the agreement. But Washington took its lumps for forcing a confrontation with Tokyo and now it has earned some plaudits.

Still, a better measure of the agreement’s success turns on how U.S. auto makers will fare as the dollar rises in value against the yen, eroding their cost advantage. In the tooth-and-nail competition for Japanese market share, will sales by U.S. auto makers continue to trail those of their European counterparts and U.S.-based Japanese auto makers shipping product home?

The mettle of the administration’s resolve toward Japan will be further tested when the semiconductor agreement, which led to a dramatic increase in U.S. market share in Japan’s previously closed chip market, expires in July. Japanese officials vow they will not renew it, despite the administration’s willingness to drop numerical targets. Meantime, a suit by Kodak against Fuji threatens to force a confrontation with Tokyo over enforcement of Japan’s own antitrust laws. And the impending breakup of NTT, Japan’s telephone monopoly, could spark new trans-Pacific trade friction, because Japanese officials claim past trade agreements ensuring U.S. access to their telecommunications market do not apply to the newly privatized entities.

The administration’s stance on Japan’s auto market has borne fruit. U.S. auto exports to Japan climbed nearly 30% in 1995. From August to December, the U.S. Big Three signed up 19 dealer outlets. And in January, Chrysler signed up four more to sell Jeep Cherokees. Thanks to the pact’s partial deregulation of the Japanese auto-parts market, Tenneco recently cut deals to get its shock absorbers into Toyota’s nationwide dealer network and into the 6,200 outlets of the JOMO service-station chain.

The “voluntary plans” Japanese auto companies issued at the time of the auto agreement mask more complex and tenuous market conditions, suggesting the jury is still out on the deal.

Other nations’ car makers have benefited even more than the Big Three from the opening of Japan’s auto market. Last year, Japanese car makers increased their sales in Japan of autos manufactured at their overseas plants by 28%, more than quadrupling the sales increases experienced in Japan by either Chrysler or GM. BMW, Mercedes and other German manufacturers have boosted sales even more rapidly than the Big Three and still hold a larger share of Japan’s import market. And most of GM’s increased sales were by Opel, its German subsidiary, a boon for GM stockholders but not necessarily a benefit to GM workers here.

Moreover, the favorable economic conditions that strengthened the U.S. hand in the auto negotiations have already begun to erode. Profits are up among Japanese auto makers and they are using them to replenish their trade-war chests for a counterattack against the “invaders.” With the yen at about 106 to the dollar, U.S. cars and auto parts are already 26% more expensive than they were seven months ago. And the cyclical slowdown in the U.S. auto market will soon have Wall Street asking questions about when Detroit expects to see a return on its “long-term” investments in new Japanese distribution networks and right-hand drive vehicles for its market.

So, while the early results of the U.S.-Japan auto agreement signify success, the real test will come this year. Japanese auto makers recently issued their 1996 forecasts. On average, they project a 7.5% increase in domestic sales. If this year’s Big Three exports to Japan do not increase substantially faster than that, U.S. market share will remain insignificant. Similarly, the accord set a goal of 200 new U.S. dealerships by 1997. That’s a long way from the 39 to date.

Finally, the semiconductor, Kodak and NTT issues will test whether the Clinton administration will be willing to go to the mat with Japan over substantive trade policy in an election year. The White House may be content to score points with voters by simply pounding the table and shy away from pushing Tokyo to the brink. If the administration’s newly appointed trade-pact enforcement panel launches a highly public investigation that somehow never concludes before the election, then it will be safe to say that politics, not opening the Japanese market, is the motivation.

But the Clinton administration should have the courage of its convictions. Early returns from the ’95 auto deal suggest that, in dealing with Japan, the White House can have it all ways: good policy, good economics and good politics. But it must be willing to go to the brink in the pursuit of trade agreements.