Rougher Trade

Washington and Tokyo trade warriors, after clicking the abacus of national self-interest, narrowly averted a trade war over Japan's auto and auto-parts markets. But make no mistake: U.S.-Japanese trade relations are on a nasty trajectory. Prodded by Eastman Kodak Co., the Clinton Administration on July 3 launched an investigation of Japan's photographic film market. And Tokyo, once again, has struck a defiant stance.

With feuds looming over aviation rights, semiconductors, government procurement and telecommunications (table), the rivalry between the economic superpowers is heating up. At issue: a clash over the shape of the post-cold-war trading system. Japan's mercantilist-leaning economy--shielded domestic markets, price-gouged consumers, and aggressive exporters--is under attack by free-traders in Washington. Europe is putting the pressure on, too.

Subtle changes under way in Japan suggest plenty of conflict ahead. A new band of economic nationalists now control Tokyo's trade diplomacy. Led by International Trade & Industry Minister Ryutaro Hashimoto, they are becoming less willing to countenance U.S. hectoring about Japan's fortress economy. MITI mandarins feel Japan blundered by bowing to past U.S. demands such as the 20% market-share target in a 1991 semiconductor pact and the $19 billion worth of auto parts outlined in a 1992 deal. "We have had bitter experiences centering around numerical targets," seethes Hisashi Hosokawa, MITI's director-general of international trade policy.

"RIGGED." That's why the just-completed agreement on Japanese autos and parts is viewed as an absolute triumph in Tokyo. True, U.S. companies won better access to Japan's lucrative replacement-parts market and domestic dealerships. Clinton also scored politically at home, especially with the blue-collar crowd in America's industrial heartland.

But the deal lacks strict enforcement mechanisms to ensure that Japan's carmakers stick to their goal of buying an extra $9 billion in parts. More broadly, says Chalmers Johnson, president of the hawkish Japan Research Institute, the accord doesn't tackle the "rigged structure of the Japanese economy."

Take Japan's "shaken" system of government-licensed auto garages, which effectively shut out foreign rivals. Hashimoto has promised to review rigid inspection requirements that steer business to local companies. After U.S. pressure, new rules that took effect on July 1 were billed as halving the number of required inspection rules and giving consumers the option to get their cars tested at national inspection sites. Then, they could arrange for repairs on their own--and go bargain-hunting.

Yet when T.W. Kang, managing director of consulting firm Global Synergy Associates, recently took his 10-year-old Toyota in for inspection, he found few available government sites. And inspections by dealers, he found, are as convoluted as ever. Result: a $1,300 repair bill. "There appears to be change, but the underlying dynamic remains," says Kang.

Far from dismantling most trade barriers, Tokyo's rising trade stars are aggressively peddling their brand of capitalism throughout Asia. Finance Ministry Director-General of International Finance Eisuke Sakakibara--Japan's lead negotiator in stalled global financial trade talks--even authored a book called Beyond Capitalism about the triumph of Japan's interventionist economic style.

The Administration may have miscalculated when it chose to back Detroit carmakers, widely perceived in Japan as corporate slackers. The impression is that "narrow U.S. corporate interests have hijacked a much more globally important relationship," says Toyoo Gyohten, Bank of Tokyo Ltd. chairman and the Finance Ministry's special envoy on international financial matters.

Now, a more assertive Japan may force the Clintonites to rethink the strategy of attacking specific Japanese markets. Washington wants to help Kodak pry open Japan's film market, where Fuji Photo Film Co. sells 70% of all consumer film and controls distribution. "It's going to be very hard for the government to turn around and threaten sanctions against Fuji, having stepped back from" the auto talks, says a Clinton trade hand.

Hawks think the U.S. needs to go after bigger game: the awesome clout of the mandarins, mainly at MITI and the Finance Ministry, who micromanage about 40% of domestic industrial production with a web of 10,000-plus regulations that keep foreigners out.

One place the U.S. may be able to exert leverage is with Japanese companies. On July 5, House Speaker Newt Gingrich (R-Ga.) blasted Clinton's trade policy and said the U.S. should respond to Tokyo's intransigence as the French sometimes do--by making life tough for Japanese companies. Gingrich's advice: Tell Tokyo all Japanese cars exported to the U.S. must pass through a sole inspection station in, say, Seattle manned by a staff of seven, half of whom would be on vacation at any given moment.

CORE MELTDOWN? Already unnerved by four years of economic stagnation, many Japanese multinationals want more freedom to shed capacity and workers. That's anathema to the ministry guardians of Japan's lifetime-security compact. "On much broader issues, the U.S. really has a point," says Yotaro Kobayashi, CEO of Fuji Xerox Co. "Japan really needs this kind of pressure to respond."

A certain amount of pressure is being generated from within, too. Take the current price-fixing row between Japan's Fair Trade Commission and Shiseido Co., a giant in Japan's $16 billion cosmetics market. The once toothless FTC has warned Shiseido to stop strong-arming retailers into not discounting its products--a charge the company denies.

If Washington and Brussels could ever put an end to their sniping and attack Japan's structural impediments before the new World Trade Organization, Japan could really feel the heat. U.S. Trade Representative Mickey Kantor's team is infuriated by European Commission trade chief Sir Leon Brittan's stiff resistance to government-backed targets on trade, which Brittan considers contrary to the principles of free trade. The U.S., which had pressed Europeans for more concessions, stormed out of multilateral finance talks on June 30.

Still, the EU has its own list of 250 trade disputes and has quietly tried to prod for deregulation in Japan. It also has taken its complaint against Japanese liquor taxes, which it claims discriminate against European brands, to the WTO.

Given all the pressures that are building, some analysts predict the core of U.S.-Japanese relations will change. "The relationship has been sold to the American public as providing an unsinkable aircraft carrier for maintaining stability out here and sold to the Japanese as guaranteeing the U.S. export market," says John P. Stern, Tokyo representative of the American Electronics Assn. "None of that is true anymore."

Whatever happens, the architecture of Japan's system will come under ever closer scrutiny. For now, the hard-liners are holding sway. During their recent marathon negotiations in Geneva, Hashimoto and Kantor goofed around at a photo-op with a kendo stick, a Japanese martial arts weapon. Next time around, they may pull out the brass knuckles.

The Heat On Tokyo

World trade complaints against Japan


The U.S. and Japan have exchanged threats to withdraw landing rights from each others' carriers in July if Tokyo doesn't let Federal Express add flights between Japan and other Asian nations.


U.S. trade negotiators announced on July 3 that they will press Eastman Kodak's complaint that Fuji Photo and Tokyo officials have conspired to limit Kodak's access to the Japanese market.


Washington and Tokyo are at odds over extending a 1991 deal that insured U.S. chip companies 20% of Japan's market. The goal has been reached, but the pact expires in July, 1996.


In a World Trade Organization case filed in June, the European Union is challenging Japanese taxes that the EU contends discriminate against the sale of foreign alcoholic beverages.


The U.S. will highlight failure of a 1994 agreement with Japan to spur Japanese purchases of foreign telecom equipment when the accord comes up for review later in July.

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