Your Move, Japan

It was a balmy Sunday afternoon, but the mood inside the Oval Office on May 7 was somber. President Clinton, Treasury Secretary Robert E. Rubin, and other top economic advisers were mulling punitive tariffs against Japan after the collapse of talks aimed at prying open Tokyo's auto market.

The President's chief worry: Would sanctions roil the financial markets? In the past, talk of a U.S.-Japan trade war caused the dollar to tank against the yen, sending jitters through Wall Street and making the White House back away from the brink. This time, Rubin assured Clinton that traders had already discounted the dollar in anticipation of sanctions. "Not acting could be just as pernicious" to the greenback as pressing the fight, warned one senior adviser.

As the 40-minute meeting wrapped up, a resolute Clinton gave unqualified approval to the most serious trade confrontation with Tokyo yet. The strategy now is two-pronged. The Administration will slap up to $5 billion worth of tariffs on Japanese luxury-car and minivan imports. And the Clintonites plan to take their case to the new World Trade Organization, accusing Japan of collusive practices that shut out competition in its car and auto-parts markets. "We're going to resolve this matter and open Japanese [auto] markets one way or the other," vows U.S. Trade Representative Mickey Kantor.

The unprecedented penalties on Japanese imports would take effect by June unless the Japanese offer a deal--and Administration officials calculate they will. Japanese officials, who have threatened a WTO complaint of their own in response, seemed caught off guard by the tough actions. Now, world markets appear to be betting that Japan will blink first. On May 10, announcement of the U.S. actions pushed the dollar up slightly against the yen. Big Three auto stocks also jumped.

JUMPING THE GUN? Tokyo thinks it has good grounds to challenge the U.S. actions. Japanese officials contend that the U.S. needs WTO approval before it can slap sanctions on their products. "Unilateral actions that violate international rules are not acceptable to us," says Kiyohiko Nanao, a top economics official at the Japanese Embassy in Washington. Yet even before the announcement of sanctions, U.S. officials said Japan was hinting at a resumption of talks to resolve the dispute before the first shot in the trade battle is fired.

Whatever the outcome, this is a high- stakes game. Just the prospect of crippling tariffs on Japanese imports is sending shock waves through auto circles from Motown to Toyota City. The sanctions, which would send duties soaring from a current 2.5% to 25% or more, would clobber sales of upscale models such as Toyota's Lexus, Honda's Acura Legend, and Nissan's Infiniti. The Japanese auto makers already have been hurting from the yen's 19% rise against the dollar so far this year, and the tariffs will price them out of the most profitable U.S. niche. "It could be devastating," says Jack H. Thompson, president of Thompson Lexus of Doylestown, Pa. "It could ruin Lexus."

Detroit may suffer damage as well. Many Lexus and Infiniti dealers also own Cadillac or Lincoln shops and are highly leveraged. If their Japanese luxury franchises are wrecked, "you could end up toppling a house of cards and pulling other dealerships down with it," warns Jim Olson, Toyota Motor Corp.'s group vice-president for external affairs.

It's a risk U.S. policymakers are prepared to take. They're frustrated after 20 months of fruitless negotiations over cars and auto parts, which account for nearly 60% of Tokyo's $66 billion trade surplus with the U.S. The problem, Administration officials claim, is that Japan hasn't budged much in talks aimed at providing greater access for Detroit's cars in Japanese showrooms and relaxing regulations that bar the sale of U.S. parts in local repair shops. The biggest sticking point has been Japan's refusal to agree to increase U.S. auto-part purchases by a specific amount, a key Administration demand.

So far, Tokyo has won the public-relations war. Japanese officials scored points by condemning the U.S. proposal as "managed trade." But the Clintonites figure the domestic political payoff and the global economic consequences of a threatened trade war are overwhelmingly in Washington's favor. Hanging tough with Japan will play well with disaffected blue-collar workers, especially members of the United Auto Workers, a potent Democratic force in key electoral states such as Ohio and Michigan. U.S. business has chimed in, too. "The federal government should make it clear to the Japanese that they aren't playing fair and that we won't stand for it," says Roland S. Boreham Jr., chairman of Baldor Electric Co. of Fort Smith, Ark.

SURER TOUCH. The showdown with Tokyo gives Clinton an opportunity to appear strong at a time when he has little chance of moving an agenda through the Republican-controlled Congress. "Standing up for reciprocity in trade is tantamount to standing up for America," says Democratic pollster Geoffrey Garin. An added benefit: The moves will blunt the criticism of neo-isolationists who oppose Clinton's free-trade moves in Latin America and Asia.

Often ham-handed when it comes to confronting Japan on trade issues, the Clintonites seem to be showing a surer touch. The breakdown in trade negotiations with Tokyo in February, 1994, sparked a run on the dollar. This time, "sanctions have been widely advertised by the Administration," so the impact on the markets has been muted, says David Hale, chief economist at Kemper Financial Services Inc. in Chicago.

In fact, financial trends are running in Washington's favor. The strong yen threatens to prolong Japan's recession, but the U.S. stock market is setting records almost daily, and the bond market is rallying.

To minimize harm to U.S. industry and middle-class American consumers, the Administration chose to target Japanese luxury imports. Would-be Lexus buyers have lots of alternatives, from U.S. Cadillacs and Lincoln Continentals to German BMWs and Mercedes. That surgical strike is meant to pressure Japanese carmakers into pledging to buy more U.S.-made parts. And bringing a broad claim against Japan at the WTO could undercut its threats to file unfair-trading charges against the U.S. at the new global court.

But the political rhetoric on both sides has escalated to the point that it will be tough for either to find a face-saving compromise. "Everyone has drawn too many lines in the sand," frets one U.S. official. The worst-case scenario goes like this: The sanctions go into effect, Tokyo retaliates by quietly slowing exports of electronic components essential to the U.S.--forcing American plants to cut production. Financial markets get fidgety. Then, in a year, the WTO decides in Japan's favor.

But even if that happens, Japan could still lose out. Its auto makers would be hemorrhaging red ink--Mazda Motor Corp. and Nissan Motor Co. are already hurting badly. And a WTO decision against the U.S. could prompt Clinton to withdraw from the WTO under pressure from America Firsters. That would undermine a new world trading system it took seven years to negotiate.

With so much at stake, both sides will probably blink--eventually. But right now, with Japan least able to afford a drawn-out confrontation, the U.S. is waiting for Tokyo to make the next move. So long as the stock and bond markets take the showdown in stride, the Clintonites have no intention of backing down anytime soon.


The Clinton Administration's strategy is to hit Japanese products with big punitive tariffs while hurting as few American consumers as possible:

SOAK THE RICH Japanese car lines, such as Toyota's Lexus, Honda's Acura, and Nissan's Infiniti, hold 32% of the U.S. luxury market. Sanctions on them would mainly hit wealthy, not middle-class, buyers. A potential hitch: The main beneficiaries could be Germany's Mercedes and BMW, not Detroit.

PREEMPTIVE STRIKE GM, Ford, and Chrysler control nearly all of the U.S. minivan market. Already, Japan's share of the market has plummeted since a 1991 Big Three complaint that Japanese carmakers were dumping minivans in the U.S. The big losers are Toyota's Previa and Mazda's MPV.

FULL-COURT PRESS The Clintonites will file charges with the new World Trade Organization against Japan, charging the Japanese with a pattern of collusive trade practices that shuts out competition. Japanese officials are threatening to file countercharges that U.S. sanctions violate WTO rules.

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