Facing Reality In Japan Trade

For months, the big question between the U.S. and Japan was whether the two sides could reach agreement in their so-called framework talks by Sept. 30. If not, would Washington invoke a trade-law provision called Super 301 and impose sanctions? How would Japan react? Would currency markets continue to "punish" Japan by pricing the yen even higher, thus making its exports more expensive?

In one version or another, this Kabuki dance has been played out repeatedly for decades. But why does the U.S. trade deficit with Japan continue to grow? This year, it's expected to reach $61 billion, up from $41 billion in 1990 (chart). During the same period, the yen has appreciated 39% against the dollar. A strong yen simply hasn't solved the problem. Nor is it likely to.

Furthermore, despite all the hoopla, even Administration officials admit that success in the sector-by-sector talks won't do much to reduce Japan's trade surplus. "I don't think anyone in the Administration believes these negotiations are going to lead to a substantial reversal of our trade deficit in the short term," says Jeffrey E. Garten, Commerce Under Secretary for international trade. The Japanese concur.

REAL PRESENCE. Everybody also seems to know that sanctions, in the form of punitive tariffs or quotas, would deprive U.S. industry and consumers of vital products. These include liquid-crystal displays, VCRs, and fax machines--not to mention the Lexus. Despite all of Washington's threats, it's not politically rational to shut off the flow of such products. Besides, some goods are assembled at Japan's transplants in the U.S., so the traditional water's-edge trade policy is out of date. That also helps explain why the strong yen doesn't work like the theory says it should.

In short, the failings of the traditional U.S. approach to Japan are all too evident. That suggests the need for a thorough rethinking of U.S. policy vis-a-vis Japan. The goal should be a serious, long-term focus on the economic imbalance, not episodic trade brinksmanship and yen-dollar crises.

First and foremost, the U.S. government and industry should work together to promote more investment into Japan. That means revising tax laws and technology-transfer rules that actually discourage U.S. penetration of technology niches. Trade penetration, particularly in Japan, requires a physical presence, including control of distribution channels.

Yet Japan has the lowest level of per capita foreign direct investment in the industrialized world. For years, Japan discouraged foreign investment to protect its own industries. Now, however, the yen has soared so high that acquiring land and doing business in Japan seems prohibitively expensive to most outsiders.

Japan doesn't deserve all the blame, however. Ever since its bubble burst and other parts of Asia started growing faster, increasing numbers of U.S. companies have decided to bypass it and go where the pickings are easier. Some U.S. executives, enamored of China or India or Mexico, are simply writing off the country, and the Commerce Dept. has been egging them on by promoting big developing markets--but not Japan.

This could prove to be a serious strategic error. Not only is Japan the world's second-largest economy, but it also is home to many globally competitive manufacturers. Not to compete with the Japanese on their turf gives them extra breathing room and deprives Americans of market intelligence. "Our Japanese competitors produce good products, and we can't be successful in Asia unless we're successful in Japan," says Douglas R. Browning, vice-president for finance at Procter & Gamble Far East Inc.

"DOWN THE ROAD." To spur the emergence of more Motorolas and Microsofts, with strong positions in their niches, the U.S. government should insist on working aggressively with Tokyo to encourage inward investment. Japan's Ministry of International Trade & Industry has taken a few modest steps to ease entry by foreigners, such as creating foreign-access zones with limited incentives and services. But much more is needed to attract the investment necessary to really make a dent in the surplus.

Besides incentives, it's time for the U.S. to put more emphasis on Japanese deregulation again. Deregulation has been a buzzword in Japan for more than a year, but U.S. and Japanese negotiators haven't held any serious talks on the subject. Says U.S. Ambassador Walter F. Mondale: "That's still down the road." Why? According to one American official, the U.S. hasn't yet figured out what it wants to ask of Japan, or how.

How should Washington orchestrate a broader-gauged, more potent approach toward Japan? Glen Fukushima, vice-president of the American Chamber of Commerce in Japan and a former U.S. trade negotiator, argues for the creation of a Japan Office within the White House. Earlier this year, Bill Clinton read and circulated among senior Administration officials a paper in which Fukushima made his case. But so far, nothing has happened.

A less ambitious alternative might be to improve the Japan data-collection and monitoring services of the U.S. Trade Representative's Office and the Commerce Dept. This idea is pushed in a new book called Opening Japan from the Economic Strategy Institute think-tank in Washington. The authors also urge creation of a task force consisting of members of Congress, senior trade officials, and American executives to make recommendations each year as to what must be done in policy toward Japan.

Part of this new and more sophisticated approach would be an increased focus on what Japanese companies are doing in the U.S. and how that affects trade. Rather than displacing imports, at least some of Japan's stateside factories encourage them. The Commerce Dept. estimates, for example, that 73% of Japanese imports into the U.S. go through facilities and distribution networks owned by Japanese. That's why seemingly obscure fights over domestic

content and supplier networks are so important.

It's also key to link treatment of those American subsidiaries with trade goals in Japan. It makes little sense, for example, for Japanese construction companies to be winning about $3 billion in contracts from U.S. government agencies, when the U.S. is stonewalled in the construction sector in Japan. The same lesson applies in other industries, such as telecommunications.

Likewise, how closely linked are American trade goals with the Clinton Administration's technology-promotion policies? Washington has made progress on redirecting the federal weapons labs toward commercial purposes and on funding some promising "critical" technologies. But the trade hand of the U.S. government and the technology hand often don't know what each other is doing. There is no mechanism for coordination.

NOT JUST PRESSURE. Not to be forgotten, of course, are the macroeconomic forces at work in sustaining the U.S.-Japan imbalance. The U.S. saves too little and consumes too much. For Japan, it's vice versa. So Americans need to continue to make progress on their budget deficit, and they need to keep pressing Japan to stimulate its economy. Tokyo's recent decision to cut taxes for three years is positive because it should increase consumption. But by itself, that probably won't have a big impact on Japan's import of U.S. goods.

In the end, the U.S. shouldn't forsake pressure tactics of the traditional sort. But it can't rely exclusively on them, or on the hope that such macro-economic factors as a strong yen or slightly improved growth in Japan will narrow the trade gap. A more comprehensive, systematic approach is required. To redress an imbalance that's been building for years, the U.S. will have to attack the very structure of an increasingly complex relationship.


1 Create a powerful Japan Office within White House to carry out a long-term, consistent strategy. Should be staffed by experienced Japanese speakers.

2 Promote U.S. investment in Japan to help crack market. That means easing U.S. tax and technology-transfer rules that discourage such investment.

3 In areas where U.S. manufacturers depend on Japanese suppliers, create more government-industry strategies to spur U.S. competitors. Model: Sematech.

4 Establish more industry association offices in Tokyo to disseminate data about standards and regulatory issues. Model: The American Electronic Assn.'s office.

5 Link treatment of Japanese companies in U.S. with market penetration in Japan. If a Japanese company is blocking access in Japan, it should feel pressure in the U.S.


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