The Secret Weapon That Won't Start A Trade War

The numbers were numbing. Despite the Clinton Administration's hardball tactics with Tokyo, the trade deficit with Japan soared to a record $59.3 billion last year. The figures came out at a touchy time for Administration trade warriors, too--just as they were threatening retaliation if Tokyo doesn't agree to measurable indicators showing its markets are becoming more open to American goods.

But a closer look at the trade numbers released by the Commerce Dept. on Feb. 17 suggests that the Administration might produce better results with a different strategy, one that focuses on the dynamic effects of distribution networks here and in Japan. What the numbers show is this: Build a distribution network, and products will come. "Trade follows investment in the '90s," says Erin Endean, a consultant with Hills & Co. "If you can't invest, you can't trade."

The Commerce data support that argument. More than 80% of all Japanese imports are bought by U.S. affiliates of Japanese multinationals. That's almost double the norm for other foreign multinationals. Meanwhile, parts now account for almost half the value of all Japanese imports, up from 10% in the mid-1980s.

Current policy actually encourages Japan's penchant for importing from home. Foreign trade zones in the U.S. allow foreign companies to import parts from home duty-free if the companies create jobs here. The trade-zone policy, which is under review by Commerce officials, helps explain why autos, parts, and accessories now account for almost two-thirds of the trade deficit. Japanese companies, citing quality concerns, resist buying American components. But some trade experts argue that if Washington threatened to reduce the benefits of trade zones, Japanese companies would change their tune and Buy American--shrinking the trade deficit considerably.

Japanese manufacturers, of course, could always pull up stakes and produce elsewhere. But U.S. trade officials doubt they would do that because the U.S. is such a low-cost assembler by Japanese standards. In fact, a small but increasing share of what Japan exports to the U.S. is re-exported to other countries. For instance, the largest U.S. car exporter to Japan in 1993 was American Honda Motor Co.: It shipped 23,426 vehicles there last year, more than the Big Three combined. "The Japanese are warehousing their products here, assembling them, and then selling them not only in the U.S. but in Europe, Latin America, and Japan," says a government trade analyst.

As the Administration focuses on U.S. trade zones, some trade experts say, it also should bargain with Tokyo to break down barriers to U.S. investment in Japan. That would help companies such as Motorola Inc. that want to expand distribution networks in Japan. Those companies in turn would likely bring in more U.S.-made components. "If there are no American companies over there, there's nothing to pull other U.S. goods in," notes David Meth s, a technology strategist at University of Michigan School of Business Administration. A U.S. policy to strengthen the yen, he adds, would only make it more expensive for U.S. companies to expand there.

HOWLS OF PROTEST. A focus on distribution networks, trade experts note, could also avoid a major pitfall: The growing dependence of American companies on Japanese components and knowhow means trade retaliation could backfire on key segments of U.S. industry. Japanese high-tech firms shipped $20 billion worth of integrated circuits and other electronic components into the U.S. in 1993. Shipments from Japan-based purchasing offices of U.S. companies made up a hefty chunk of that. Companies such as Texas Instruments, Apple Computer, and Digital Equipment now have big purchasing operations in Japan.

Any effort to impose sanctions on Japan is sure to provoke howls of protest from American companies that have established alliances to increase their investment there. AT&T Microelectronics has strengthened its ties to NEC, the world's second-largest chipmaker after Intel. Toshiba has separate partnerships with IBM, Motorola, and National Semiconductor on a range of chip products. Mitsubishi Electric Corp. is a key DEC partner in chips.

All this hasn't stopped U.S. Trade Representative Mickey Kantor from ordering up a list of Japanese electronic products that could be hit with sanctions if Tokyo doesn't budge on opening its markets. Among the likely targets: tape recorders, television receivers, and cordless phones. But there may be a better approach. And the U.S. should consider it before waving a big stick at Tokyo.

      Total 1993 U.S. imports from Japan:
       $107.3 billion
      Top ten imports         Billions of dollars
      CARS, TRUCKS                $21.95
      COMPUTERS                      9.7
      CIRCUITS                       6.5
      AUTO PARTS                     6.1
      TELECOM EQUIPMENT              5.5
      COMPUTER COMPONENTS            4.5
      GASOLINE ENGINES               3.9
      APPLIANCES                     2.8
       TOYS, SPORTING GOODS          2.7
      VCRS, TAPE RECORDERS           2.5
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