The Japan That's Saying No

It's a heavy burden that the new generation of leaders in the U.S. and Japan is shouldering: high expectations that they can ease the trade frictions which have plagued relations between their countries for years. Jap-

anese Prime Minister Morihiro Hosokawa was elected to clean up the cozy business-government relationship that produced both widespread corruption and closed markets. President Bill Clinton has been insisting since his election that Tokyo must soon make measurable progress in reducing its $50 billion trade surplus with the U.S. So when the two leaders met for the first time in New York on Sept. 27, there was none of the tense sparring that marked Clinton's encounter with then Prime Minister Kiichi Miyazawa in April. Both new leaders, it seemed, were committed to change.

But as negotiators gear up for a new round of trade talks, it's becoming clear that "change" doesn't mean the same thing on both sides of the Pacific. In Japan, the new government will focus first and foremost on political reform. Until that's accomplished, Hosokawa will resist making the kind of trade concessions Washington is demanding. Just as he has adopted a more forceful and energetic style for the television generation, so too is he determined to end the era in which Japanese Prime Ministers offer political gifts to U.S. Presidents. All of which will vastly complicate the negotiations to draft new trade agreements that got under way in Hawaii on Sept. 19.

BIG PLANS. That means Clinton, fresh from victories on the home front and in the Mideast, is running into earlier and tougher-than-expected problems in coming to grips with Japan. Hopes among the Clintonites for significant trade progress by January have faded. Privately, White House officials worry that a serious impasse could unleash protectionist pressures in Congress. "I'm afraid we might have set the bar too high," frets one senior Clinton trade adviser. Frustration on trade also will focus new energy on Clinton's industrial policy and trade-promotion efforts.

Washington's trade plans certainly were ambitious. Administration officials believed they could force Japan to agree to trim its global current-account surplus from 4% of gross domestic product to about 2%. In the framework for talks hammered out in Tokyo in July, the Japanese wouldn't accept specific numbers but agreed to make a "highly significant" reduction in the surplus, which this year is set to top 1992's record $117.5 billion. The Clintonites also believed they could arm-twist the Japanese into accepting numerical targets for measuring progress in such specific areas as autos, auto parts, and supercomputers.

But Japan's economy remains mired in a persistent slump, and corporate profits are getting hammered by the strong yen. Tokyo is in no mood to expose its manufacturers to a wave of imports. Suddenly, the goal the U.S. had in mind looks impossible. Indeed, the U.S.-Japan trade imbalance, spurred by the yen's high value, could reach $52 billion. And it may continue to rise in 1994. That comes at a time when U.S. export growth seems to be running out of gas, and imports are emerging as a drag on U.S. economic growth.

Tokyo doesn't seem inclined to help, despite the dramatic political change that culminated in the ouster of the Liberal Democratic Party and the victory of Hosokawa's seven-party coalition. The Japanese have cut interest rates and introduced a mild new stimulus package, both sought by the U.S. to spur growth and pump up imports. But the government doesn't seem willing to take any bigger steps, such as cutting taxes. Career bureaucrats in the tightfisted Finance Ministry will agree only to an income-tax reduction that can be recouped later with a higher sales tax. "Things have changed radically, but not when it comes to macroeconomic policy," says Masaru Yoshitomi, chair of the Wharton School's U.S.-Japan Management Studies Center.

Similarly, on trade, Tokyo may meet some narrower U.S. demands, but Japanese negotiators in Hawaii bluntly warned their U.S. counterparts to tone down expectations of major moves. The point was driven home in a Washington visit in late September by a trio of high-ranking members of the Japan Renewal Party, a key coalition powerbroker. Their message to U.S. and congressional officials: Domestic political reform is now Japan's top priority.

UNNERVING. To American companies, that sounds suspiciously like a variation on the excuses the Japanese always come up with to keep their markets closed. "It's amazing," fumes Michael C. Maibach, director of government affairs for Intel Corp. "We get a change in parties, and what we hear is the U.S. must wait a little longer. We just can't afford this anymore."

Even more unnerving to U.S. officials is Japan's assertive new tone. Kazuo Aichi, chair of the JRP's policy affairs committee, warned that Japan is no longer America's "little brother." The U.S. must "cooperate" with Japan if it hopes to make significant inroads in the booming Asian market, he said in a Washington speech. If not, he declared, it risks being frozen out of Asia and pushed into a "secondary and shrinking position in world affairs."

If Japan proves unyielding and the Clintonites can't produce what they've promised, Congress may put additional pressure on the Administration. Indeed, Deputy U.S. Trade Representative Charlene Barshefsky has already put the Japanese on notice that such steps may be inevitable. One senior U.S. official warns that Clinton is sure to revive the so-called Super 301 law if no significant progress is made. The statute mandates retaliation against countries that the U.S. deems to be unfair trading partners.

To avert such drastic measures, trade negotiators are refocusing their strategy--and they may be backing off in key areas. Rather than demanding measurable results, U.S. officials are now leaning more heavily toward seeking reforms in Japanese decision-making procedures.

That simply may not prove effective. Take the highly rigged Japanese construction industry. The Japanese have signaled a willingness to alter the bidding process so that the U.S. track records of American construction companies can be considered in awarding big projects in Japan. But they won't agree to specific numerical targets for how many contracts the Americans will get or what value they will have. So an agreement on reforming the bidding process could prove hollow.

"SMELL OF DEATH." Trade experts, such as former Reagan Administration negotiator Clyde V. Prestowitz, believe that efforts to tinker with Japanese regulations will bear little fruit. He is pressing Clinton to bypass the bureaucrats and ask large Japanese companies that have major U.S. operations to buy more American goods. He argues that would be much more effective than the government-to-government talks, which some skeptics already are writing off. "These talks have the smell of death," moans one business lobbyist. To these U.S.-Japan mavens, the Clintonites are just beginning to learn the lessons that the Reagan and Bush Administrations learned in a wide array of talks with acronyms like MOSS and SII. None produced major breakthroughs.

So, despite the smiling faces at the Clinton meeting with Hosokawa, the expectation is growing that the latest round of U.S.-Japanese negotiations may produce at best only marginal gains from the American standpoint. That could prompt a deepening sense of confrontation between Washington and Tokyo. Which is the kind of change neither country had in mind.

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