Victory For Free Markets Everywhere

The auto agreement signed between the U.S. and Japan is a clear victory for those who argue that from now on, access to open American markets must carry a price: reciprocity. It sends a strong signal to the entire international trading community that mercantilism--protecting domestic markets and industries while exporting aggressively into other nations' markets--is no longer acceptable. It proclaims an end to America's cold war global economic strategy of bolstering Japan, South Korea, and Europe against communism by allowing them to protect their local industries. This should have happened years ago.

President Clinton deserves full credit for taking the risks in going to the brink in order to save free trade. There was no waffling this time. Firm leadership helped generate the broadest domestic support ever for a tough U.S. stand to pry open Japanese markets. The Republican leadership, industrial leaders, labor, most of Congress, and nearly all of the nation's governors backed the President. Never before has this kind of equanimity of political support on the American side been presented to Japanese negotiators. Before, Japan had been able to fragment U.S. policy by appealing to legislators and governors in whose districts they had factories. This time around, except for the Europeans who confused tactics with strategy, it didn't work.

A polite fiction broke the impasse in negotiations. Japan agreed to measurable targets for increasing sales of U.S. autos and auto parts, but they will be strictly voluntary, coming from side agreements by the private sector. This model has already proved successful in opening up Japan's semiconductor market and with proper vigilance could work in autos. The fact is that, with the yen so strong, it is in the economic interest of Japanese car companies to buy cheaper U.S. parts.

The deal calls for Japan to open 1,000 more of its car dealerships to American and other foreign auto sales in five years and to begin to deregulate the safety-inspections system, which would open the auto parts aftermarket to U.S. products. At the same time, the top five Japanese auto makers agree voluntarily to boost their purchases of U.S. parts by $9 billion, a 50% increase. This is significant. Some 58% of the U.S. trade deficit with Japan (26% of its entire trade deficit) is in autos and auto parts. Reducing that figure in a big way will boost growth and jobs in the U.S.

Bureaucrats from Japan's trade and finance ministries are currently fanning out throughout China and Southeast Asia, spreading the gospel of the "Japanese Way" of economic development. This is a song of mercantilism by bureaucrats who live off it. What Asians are not being told is that the closed Japanese model has always been dependent on exporting to an open American market. The Administration's successful effort in opening up Japan's market to foreign goods will not only help Americans, it will also inform Vietnamese, Thais, Indonesians, South Koreans, Chinese, and even some Europeans that free trade with the U.S. is now a two-way street.

Before it's here, it's on the Bloomberg Terminal.