Good Deal? Yes. Great Deal? NoAmy Borrus
The phone rang in the Oval Office at 8 a.m. on June 28. A weary Mickey Kantor was calling with good news: At the last moment, marathon talks with Japanese negotiators in Geneva had produced the outlines of a deal to resolve a bitter trade dispute. "We're just dotting the i's," the U.S. Trade Representative told Clinton. After his advisers endorsed the pact, Clinton phoned back: "Hey, Mick. Congratulations! It sounds like you did great."
Clinton had good reason to cheer. His gamble of threatening sanctions against Japan had paid off: He won concessions from Tokyo that could result in significant increases in sales of U.S. autos and auto parts to Japan (table). "This breakthrough is a major step for free trade throughout the world," Clinton said in announcing the pact. Moreover, the President's high-stakes brinkmanship averted a bruising trade war, a legal showdown that could have shaken the new World Trade Organization, and a string of bankruptcies among U.S. dealerships that sell Japanese luxury vehicles.
INSTANT RESULTS. The deal immediately buoyed the sagging dollar against the yen and inspired a modest rally on Wall Street. It also won plaudits from just about everyone affected. Employees at Warnock Lexus in Livingston, N.J., huddled around a television to hear Clinton announce the deal--and let out a collective sigh of relief at word that the President's threat to slap 100% punitive tariffs on their autos would be dropped. "I'm elated," says Warnock CEO Peter G. Jarvis. "Now we don't have to face an economic crisis." Detroit's Big Three were equally euphoric. "We've never, ever gotten anything like this before," says Robert J. Eaton, chairman of Chrysler Corp. "This represents a sea change. The Japanese see they must open their markets."
Perhaps. But there's also a touch of the champagne talking. While the deal marks a big political victory for a President known more for flip-flops than resolve, the substance of the accord is less grandiose. True, it will increase sales of U.S. parts and vehicles. But much of the parts-purchase concessions by the Japanese had been in the works for months. And the soaring yen already has been driving the car companies to move more production and purchasing offshore to U.S. and Asia. "This agreement is like pushing on an open door," says Michael Aho, senior economist with Prudential Securities Inc. Significantly, back in Tokyo, Japanese companies were crowing, too. "We preserved the rules of global free trade," says Toyota Motor Corp. Chairman Shoichiro Toyoda.
For one thing, of the $9 billion in U.S. components that Japanese auto makers have pledged to buy, the lion's share will be purchased by transplants in the U.S., not in Japan. And there's one giant omission: The Japanese government managed to keep any strict enforcement mechanisms out of the deal. That means that while Japan's auto makers agreed to meet significant numerical targets, Tokyo bureaucrats did not--and can walk away from the deal. "With regard to numerical targets, the Japanese stance that this is outside the scope of the government is maintained," says Minister of International Trade & Industry Ryutaro Hashimoto.
International Union of Electrical Workers President William H. Bywater figures he knows what that means: "It sounds like one of those agreements where we pledge, they pledge, and there are no teeth to it." Even a top Clinton adviser concedes: "We shot a big cannon and came back with a modest result."
The deal, nonetheless, is a victory in many respects. It could give Clinton a badly needed boost politically, for one thing. Polls show 70% of Americans backed his tough stance. The auto accord is a hit with blue-collar voters in the industrial heartland who are critical to Clinton's reelection hopes. It also may mollify economic nationalists who opposed Clinton's free-trade moves in Latin America and Asia.
Hammering out an accord hours before the U.S. was to slap $5.9 billion worth of sanctions on Japanese luxury- car imports also carries an implicit warning to Asia's emerging-market nations. Many have sought to mimic the Japanese model of export-oriented industrial policy buttressed by sanctuary markets at home. "This certainly will strengthen our hand in other trade negotiations in Asia," says Robert D. Hormats, vice-chairman of Goldman Sachs International Corp.
And increased sales for U.S. auto parts makers will be far from negligible. Tokyo agreed to review rigid inspection rules, which have effectively blocked U.S. producers of replacement parts, such as shocks and struts, from the Japanese market. And Japanese auto makers' plans to purchase $9 billion more in foreign parts will mean bigger sales both in Japan and at U.S. transplants. "This opens up a whole other realm of possibilities with the Japanese car manufacturers," says Dana G. Mead, chairman and CEO of Tenneco Inc. Adds John F. Fiedler, CEO of Borg Warner Automotive Inc.: "There will be an opening to sell more auto parts in Japan. Now, we have to do it."
The weak enforcement provisions in the deal may not be much of an obstacle in the end. Chrysler and the other U.S. auto makers say the deal's monitoring provisions will be enough to make sure Japan delivers. "Progress, or lack of it, will be very easy to see," says Alex Trotman, Ford Motor Co.'s chairman. "And if we aren't making progress, we'll be back to the bargaining table." Japan's auto makers have a good track record in keeping such deals, too. In 1992, they promised President George Bush they would double purchases of U.S.-made auto parts. And they have, to $19 billion in the latest fiscal year.
AIR WAR. But for the new agreement to really succeed, the Big Three will have to put some muscle into its marketing efforts in Japan. Japanese officials like to note that German carmakers have half as many outlets for their cars in Japan, and sell five times as many vehicles. There are encouraging signs that Detroit will follow through this time. On June 27, Chrysler announced it was investing $100 million to acquire a majority stake in its main Japanese auto distributor. And Ford said it is cutting retail prices in Japan of American-made replacement parts for its vehicles.
This is surely not the last U.S.-Japan fracas over auto trade. There will no doubt be confrontations as Kantor & Co. try to enforce compliance with a new batch of numerical targets. And even as this crisis ebbs, new trade showdowns loom over U.S. landing rights for passenger and cargo air carriers. Then there's Kodak's massive trade complaint that Tokyo officials have collaborated with Fuji Film to limit access to Japan.
For American trade warriors, prying open Japanese markets may have moments of euphoria--but it's still a job that has no ending.
BACK FROM THE BANK
U.S. trade negotiators wrested numerical targets out of Japan on two of three major issues--a significant victory
AUTO PARTS By 1998, Japanese carmakers will expand their production of made-in-America cars by 500,000. That also will help them meet a pledge to increase their purchase of parts from American suppliers by $9 billion, or nearly 50%, by 1998. The additional parts will be for cars sold both in the U.S. and in Japan.
AFTERMARKET PARTS Regulations that have blocked the sale of U.S. replacement parts in Japan will be eased. That could create opportunities for such products as Tenneco's Monroe shock absorbers.
JAPANESE DEALERSHIPS Over the next five years, Japan will increase the number of auto dealers stocking U.S. cars by 1,000, to about 3,000. The Japanese also will review the possibility of more dealerships for European auto companies.