JAPAN OPENS THE EXPORT SPIGOT
Its surplus is widening--and so far, the U.S. isn't complaining
Life has been grim of late for Fuji Machine Manufacturing Co., a maker of machine tools and automatic assemblers for circuit boards near Nagoya. During this year's first quarter, Japan's sputtering economy dragged down Fuji's sales. But suddenly, there's good news. Fuji's first-half sales to overseas customers, including such U.S. companies as IBM and American Telephone & Telegraph Co., now seem likely to jump 32%.
Fuji Machine's performance is one sign that Japan, once again, may export its way out of recession. Mounting surpluses with the U.S. could further strain U.S.-Japanese economic relations and risk a new political backlash in this election year. What makes this so sensitive is evidence that the chronic Japanese trade surplus with the U.S., rather than shrinking, could widen as the U.S. economy recovers. Besides consumers snapping up Japanese products, American companies are turning to Japan for the capital goods and components they need to compete. And, contrary to American expectations, Japan's "transplant" factories in the U.S. are adding to the widening gap.
Look at the numbers. During the first quarter, Japanese exports--led by autos, semiconductors, and office equipment--rose by 8.1% from the same period last year. And as the domestic market cools, imports are bound to sink. As a result, after three years of decline, Japan's trade surplus with the U.S. is headed up again, to around $51 billion this year from $47 billion in 1991 (chart). "Japan today is running monthly surpluses as large as the annual surpluses of the 1970s," says Senior Economist Kenneth S. Courtis of Deutsche Bank Capital Markets (Asia) Ltd. in Tokyo. He sees the overall trade surplus rising to a record $135 billion this year.
So far, the new runup has generated hardly a whimper from George Bush. Ever since his market-opening trip to Japan ended in disaster last January, he has been running for cover on trade--leaving the tough talk to rival Ross Perot. "Japan is just too important to be hostile to," says a senior U.S. official. And if the Japanese are worried, they're not showing it. In fact, the Ministry of International Trade & Industry in early June released a seven-year study calling the U.S. an "unfair" trader.
NEW MARKETS. But Tokyo's surpluses may have become more deeply embedded than ever in the structure of its trade. In the past five years, Japanese companies have spent $3 trillion on new plants and equipment. The result, in some industries, is excess production capacity--and a powerful incentive to export.
For example, sluggish demand will force Mitsubishi Petrochemical Co. to export ethylene from a new plant that will come on-line this year. And the precision-machine industry, which includes cameras and watches, is staggering under huge inventories. One result: Fuji Photo Film Co. plans to start exporting 10,000 camcorders a month to the U.S. and Southeast Asia. And it intends to boost those exports to 50,000 a month within a few years.
The Japanese want to slow the growth of surpluses with major trading partners, however. Japan is shifting some exports toward the Middle East and China, where it has trade deficits. Mitsubishi Motors Corp., for example, plans to boost exports to Australia this year by 23%, to 69,000 vehicles, even as exports to other markets slip a bit.
Even so, a key Japanese export target is the U.S. capital-goods market, as economic recovery triggers renewed U.S. investment in plants and equipment. In machine tools, well-heeled Japanese companies are stocking U.S. warehouses with inventories of standard equipment, says Dennis T. Casey, president of Van Dorn Plastic Machinery Co., a Strongsville (Ohio) maker of injection-molding machinery. While it takes Van Dorn four to six weeks to fill an order, the Japanese can deliver from inventory in two to five days--and even let customers take the machinery on a six-month trial. "The Japanese can drive you out if they want to," says Casey.
IMBALANCE. Large amounts of Japanese machinery are also being pulled into the U.S. by the auto transplants and by Detroit's Big Three. General Motors Corp.'s Saturn plant, for example, uses Japanese injection-molding equipment. And the transplants create a growing appetite for Japanese auto parts. So, the U.S. deficit in auto-parts trade with Japan is likely to balloon, offsetting the expected drop in finished auto imports.
In fact, the only solution to the chronic trade imbalance may be massive U.S. direct investment in Japan, according to Dennis J. Encarnation, a professor at Harvard Business School. That's because two-thirds to three-quarters of U.S.-Japan trade is intracompany, he argues in a new book. And Japanese companies have many more U.S. operations pulling in capital goods and parts than Americans have in Japan. "The deficit could worsen if U.S. companies don't establish a stronger presence in the Japanese market," Encarnation says.
That's a long-term process, of course. For now, Japan's best hope of ducking new U.S. trade recriminations is that the Perot campaign fizzles--and Bush and Clinton keep looking the other way.Robert Neff in Tokyo, with Paul Magnusson in Washington and Bureau Reports