Showdown Time For U.S. Japan Trade?

They talked tough and rattled sabers. But every time officials in the Clinton Administration pushed Japan to open its markets to U.S. products, their hard-nosed strategy backfired. Mere hints of a trade war sent the dollar tumbling overseas and stocks into a tailspin on Wall Street. The result: Washington's record with Tokyo is replete with face-saving compromises and few results.

But now, President Clinton's trade negotiators are headed back for more. They are convinced the yen's rise against the dollar is being driven primarily by Japan's refusal to cut its $132 billion global accounts surplus. They're determined to exploit the strong yen by provoking an all-out confrontation. This time, U.S. Trade Representative Mickey Kantor swears his team is ready to risk adverse market reaction and "jump over the precipice."

HOT SELLERS. The current U.S. target: Japan's $37 billion surplus in autos and auto parts--which amounts to two-thirds of the U.S. trade deficit with Tokyo. With deadlocked talks set to resume on Apr. 17, Kantor is preparing an extensive list of options for retaliation if Japan's carmakers don't boost their purchases of U.S. parts. This time, the U.S. is weighing a reprisal once considered unthinkable: curtailing the special "foreign trade zones" created at Japanese car plants in Ohio, Kentucky, Tennessee, Indiana, and Illinois. The zones allow the Japanese plants to import components at half the usual duty from Asia for final assembly in the U.S. Such hot-selling vehicles as Nissan Motor Co.'s compact pickup truck and the sporty Mitsubishi Eclipse are produced there.

Any Administration move to crack down on the zones is sure to provoke a firestorm--not just with Japanese carmakers but with state governors and U.S. workers at the affected plants who fear their jobs would be jeopardized in a trade war. But one senior U.S. trade official says: "We have lots of different options. The point we're making is, we'll have no constraints upon us if this issue doesn't work itself out."

Angry Tokyo officials declare that if the U.S. plays hardball, they will go to the new World Trade Organization with charges that the Administration is unfairly trying to manage trade in autos and auto parts. "We are at a crossroads, and both sides are looking at each other without any illusions," warns a Tokyo negotiator. Yet the Clintonites are mounting a coordinated effort: The Business Roundtable will soon announce it supports the Administration's tactics. And Detroit's Big Three have lined up the support of Senate Majority Leader Bob Dole (R-Kan.), the GOP Presidential front-runner.

A trade showdown is always dangerous. But the Clintonites figure they have little to lose. The dollar already has plummeted 16% against the yen this year--to 83 yen on Apr. 12--so the Administration trade negotiators figure they can't be blamed for triggering the tailspin. Moreover, with growing signs that the yen is appreciating against other currencies--including the German mark--the pressure is on Japan to stimulate its economy or make the trade concessions that Washington has long sought.

Japanese officials are outraged by what they see as Washington's ploy to let the dollar fall to reduce the $150 billion U.S. merchandise trade deficit. "I want the United States to feel responsible and make a clear stance to defend the dollar," says Japanese Finance Minister Masayoshi Takemura.

OFF THE GROUND. The Clintonites deny that they're clever enough to mastermind the dollar's descent. But they like the lever that the greenback's fall has put in their hands. "The world's second-largest economy has an obligation to open its markets," says Treasury Secretary Robert E. Rubin. He will convey that message to Takemura on Apr. 15, the eve of an Asian-Pacific Economic Cooperation meeting in Bali.

The way senior Administration officials see it, the crisis involves not a dwindling dollar but a super yen. By Apr. 12, the greenback had stabilized against other major currencies, even rising against the mark. U.S. stock and bond markets are thriving, as investors conclude that the American economy is heading for steady growth and low inflation. And Japan's economy, with its financial system floundering, can't get off the ground.

The turbocharged yen is starting to panic Japan's exporters and trade officials, who've watched prices on their products soar. Japan's monetary officials have little leverage to change course. With short-term interest rates already as low as 1.75%, the Bank of Japan has little room to stimulate the economy or bail out troubled banks with more rate cutting.

U.S. officials are preparing to tell Tokyo that if it can't spur the economy with rate cuts or tax relief, it'll have to start accepting more imports. "At some point, Japan will come to recognize the only way they can stem the yen's rise is to open their market," argues Robert Hormats, vice-chairman of Goldman Sachs International Ltd.

Enter the carmakers. The Big Three are mobilizing for a sales push. Ford Motor Co. has taken control of the Autorama distributorship in Japan and has targeted a 5% share of the Japanese market, bolstered by sales of vehicles made by Mazda Motor Corp., its 25%-owned affiliate.

Chrysler Corp. will soon start making right-hand-drive versions of its Jeep Grand Cherokee for sales in Japan. General Motors Corp. plans to ship 20,000 Chevy Cavaliers into Japan next year to be sold as Toyotas. And U.S. auto makers are cutting prices of cars exported to Japan, a move designed to undercut Japanese rivals hamstrung by the rising yen.

BREAK THE BAN. Still, U.S. auto makers gripe that they can't squeeze through the bottlenecks imposed by Japan's distribution system. Most dealers are owned outright by Japan's car manufacturers, who forbid their outlets from selling imports. Detroit's Big Three--holding just 1% of Japan's $118 billion auto market--want Tokyo to exert pressure on its carmakers to break the ban. "Japan is a strong, stable economy looking to compete in every other market in the world," says Andrew Card, president of the American Automobile Manufacturers Assn. "Why won't they let others compete in their markets?"

That's what American companies have been wondering for years. Now the Clintonites figure it's time to stop asking nicely. Although they're risking an all-out trade war and an outburst from some states, U.S. officials think an overvalued yen has given them their chance to take Tokyo to the mat--at last.

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