Bush Should Steer Clear of an Auto Pact with Japan

The rancorous 1995 deal has just expired -- and good riddance, because the car industry has changed dramatically in six years

By Brian Bremner

There's an old adage among Tokyo's diplomats: When times are good in the U.S., Washington trade warriors generally lose interest in hectoring Japan. But when times are bad, watch out. Ronald Morse, a professor at Reitaku University and former State Dept. Japan hand, has even developed something called the Morse Code, which correlates periods of low U.S. growth or recessions with bouts of trade friction. It turns out to be pretty spot on most of the time.

So when I paid a visit to Japan's Foreign Ministry recently, I put the question to one of the top U.S. watchers in their North American Bureau: Are the two countries heading to back into a period of head banging over trade? He hopes not but thinks that we will get a pretty good idea in the coming months. One of the last trade gambits by the outgoing Clinton team has been to bring the fabled 1995 U.S.-Japan auto pact, which expired on Dec. 31, back from the dead. For incoming President George W. Bush and his newly nominated choice for U.S. Trade Representative, Robert Zoellick, this issue will likely be their first brush with official Japan.

Let me mince no words: I hope they let the auto pact rot in its grave. It was a flawed deal from the beginning. And besides, it's completely obsolete in an industry where ownership and national allegiance are being blurred by cross-border mergers and off-shore manufacturing networks. The world in 2001 is a world away from what it was in 1995.


  Back then, of course, the Clinton Administration was trying to exorcise the ghost of past U.S. failures in the Japanese trade arena and advocated a very tough approach. "Results-oriented trade deals" were all the rage. And then Trade Representative Mickey Kantor came on six-guns blazing to make sure the Japanese made big concession in auto parts and made it easier for Big Three auto makers to set up dealerships, among other issues.

When it looked like the U.S. wasn't going to get its way, the Clinton Administration threatened to slap punitive tariffs on Japanese luxury models -- this would have amounted to the opening salvo of a trade war. And leading the charge was Andrew Card, then head of the American Automobile Manufacturers Assn. in Washington and now Bush's choice as White House Chief of Staff.

Luckily, cooler heads prevailed. The U.S. got vague pledges that Japanese auto makers would buy more U.S. parts and help put more U.S. cars in Japanese showrooms. Industry & International Trade Minister Ryutaru Hashimoto, who became popular as a guy willing to stand up to Washington, also claimed victory. By saying Japan would help but refusing to sign onto numerical targets, as the U.S. demanded, Hashimoto looked tough. He was rewarded for that by the Liberal Democratic Party, which elevated him to Prime Minister not long afterward.


  But it was a rather pointless exercise. In the following years, the industry's economic activity went far beyond the import-export sales captured in the trade statistics. Japanese auto makers increased plant capacity in the U.S. and naturally bought parts from local players that delivered the best quality and cost.

Meanwhile, Japan's economic woes opened the door to acquisitions of companies and technologies in the country. Seven out of 11 Japanese auto makers are now affiliated with foreign companies, says my Foreign Ministry friend, who prefers not to be quoted directly. Plus, "with the information technology revolution and e-commerce, there are plenty of opportunities in Japan."

If you don't believe him, listen to the auto execs. In the past, Japan has routinely talked down the yen when it needed more export growth for the economy. During the 1970s and 1980s, when its carmakers built cars in Japan and exported them to North America, that caused clear problems. Now, the yen has weakened in dramatic fashion to about 117 to the dollar.

But who cares, with auto manufacturers' global dealmaking? "Don't expect DaimlerChrysler to be all that upset by a condition that helps Mitsubishi make more money," says W. Van Bussmann, a chief economist with the German auto maker. The reason: DaimlerChrysler now owns a big piece of Mitsubishi. "And remember, Ford is thinking about Mazda, and GM has Suzuki, Isuzu, and Subaru," he adds, referring to the ownership stakes of his rivals.


  Besides, if any economy is going to lose politically sensitive auto jobs in the coming years, it's going to be Japan more than the U.S. Japanese auto makers are more interested in setting up foreign production bases than building new sites in its high-cost economy. Says Toyota President Fujio Cho: "A dip in the yen won't spark immediate trade friction." He adds that Toyota has plans to up its North American production to 1.45 million vehicles a year from its current level of 1.25 million by 2003 or so. That would mean more jobs (and pretty-good-paying ones) for the U.S.

The Clinton trade hawks of 1995 vintage were trying to assuage a narrow constituency of U.S. parts makers that haven't gone global or don't have the quality to compete head on with the Japanese. Ford and General Motors are another matter. They are globally expanding parts makers like Delphi and Johnson. So the best thing that Bush's trade team can do is to walk away from the idea of making the Japanese buy U.S. parts. Better to encourage the Japanese to allow cross-border mergers and alliances to continue to flourish. U.S. carmakers are opening the Japanese economy on a scale that decades of screaming at Tokyo bureaucrats never did.

Of course, the temptation to get tough on Japan will be fierce if the U.S. falls into a recession. And, yes, some areas, like telecommunications, still need plenty of work. But it would be nice if the Morse Code of trade diplomacy went unspoken and unheeded this time. Chasing another auto deal would be a fool's game for the Bushies.

Bremner, Tokyo bureau chief for Business Week, offers his views every week in Eye on Japan, only for BW Online

Edited by Douglas Harbrecht

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