Pardon us for observing the rich irony of Japan threatening to take Indonesia to the World Trade Organization because of Jakarta's plan to build a "national car." For decades, Japanese auto makers and government officials worked together to protect their domestic market from foreign competition. Now, Tokyo is angry at Indonesia for copying Japan's very own industrial policies.

The U.S. is unhappy, too, with Indonesia, but at least American policy is consistent. Washington and Detroit have protested Japan's auto policy for years. They have also complained about Korea's protected market. Now, Commerce Secretary Mickey Kantor is in Indonesia delivering the same message. We hope he has better luck.

Indonesia isn't helping matters. President Suharto simply issued a decree giving one of his son's companies, a joint venture with Korea's Kia Motors Corp., sole "pioneer status" as national-car maker. He gave Kia-Timor Motors an exclusive three-year exemption from luxury taxes and high import duties on parts. When his son admitted he couldn't even put together an assembly line, the rules were changed, allowing the import of 45,000 Kia sedans for a year. After that, the Kia-Timor cars must be made with a growing percentage of Indonesian parts. Japanese car companies, with 95% of the Indonesian market, have cried foul. The tax and tariff concessions to Kia-Timor Motors will undercut the prices of Japan's autos by 50%. Forced to set up large assembly operations in Indonesia, the Japanese now must go up against Korean imports masquerading as national cars for a year. (In yet another ironic twist, Ford Motor owns 16.9% of Kia and 45% of Mazda Motor, which, in turn, owns 7.5% of Kia.)

The Japanese have a point. But so do the Indonesians. After 30 years in Indonesia, Japanese auto makers still use only 10% to 20% of Indonesian parts in their cars. Despite a huge potential market, they have been loath to part with technology. The Japanese carmakers have also been very reluctant to hire local managers, annoying the Indonesians. These are the same complaints Malaysia recently made to Japan concerning its own national car, the Proton.

When it comes to cars, there are two Asian economic models operating today. Thailand, the region's largest auto market to date, has an open, market-oriented economy. Korea, Malaysia, and, of course, Japan have more protected, state-directed economies. Now there is Indonesia. For years, Japanese bureaucrats from MITI have proselytized Japan's brand of mercantilism throughout the Pacific Rim. They seem to have won the hearts and minds of Indonesians. In return, the mercantilist missionaries have created an economic environment unfriendly to Japan's own companies.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE