s the table below hows, the United States has an enor­ mous bi lateral merchandise Lrade deficit with Japan. Much of the deficit reflect:.. the fac1 that the United State:-. tend:, to cxporl raw materials anJ a few military goud-, 10 Japan. whi le importing large amount:- or· manufactured items. The deficit in automobile vehicle:-. parts. and engines alone i~ equal 10 about 577c uf the total U.S.-Jupan trade deficit. Thar defrcir is in turn equal to PART 1 WITH ELLEN FROST roughly 43 % of the total U.S. trade deficit. P ETER Efforts LO lower the U.S. deficit include Prel-iiclenL Nixon·s threat to Let's take automobiles first. When Japa­ invoke the Trading with the Enemy act Lo gel Prime Minister Tanaka to ~el nese claim that U.S. auto makers can't sell ··voluntary .. textile quotn1- in 1968. the 1971 Smith:-.onian Agreement whid1 cars in Japan because they have not made allowed the value of the yen to floai upwards, a 1981 agreement 10 lim it (until recently) either right-hand drive cars Japane,e automobile import:-. the MOSS (Market Oriented Sector Specific l or cars at the low horsepower level (under 2,000 cc) that constitute 80% of the Japa­ talks begun in 1985 to olvc specilil: trade problem:,. the 1986 Semicon­ hese market, don't they have a point? ductor Trade Agrccmem wherein the Japanese government stateJ privately Eu.EN that it ·'expects'' the U.S. market share to reach 20%. the SIi (Structural The primary issue is not engine size or hnpediment Initiative) of 1988 under which Japan pledged lo deregulate steering wheels. It so happens that Ameri­ and spend more so that customers might benefit while the U.S. pledged to can manufacturers have been making improve its schools and cut deficit spending. and the 1993 U.S.-Japan Frame­ cars with steering wheels on the right side for some time. But that is not the point. work for a new economic partnership under which ·'baskets" or specific The point is that Japanese consumers agreements would help us trade. In June, 1995, after tense and often angry should have the right lo choose which talks, the automobile '·basket" was finally woven. Americans claimed that car suits them best, and to purchase the agreement committed Japan to opening uomestic markets LO U.S. cars; competitively priced parts, just as Ameri­ Japanese claimed that they had defeated an Ametican request for numerical can consumers do. The overarching issue is the control -;aJel, targeb,. exercised by Japanese vehicle manufactur­ To help provide mate1ial:,, f'or clm,sroorn discussion of these issues. ers over both dealer networks and the auto Ed11cutio11 Abour Asia has askeJ two experts to comment. In the first inter­ parts replacement system. Those twin prob­ view. Associate EdiLOr Peter Frost discusse:. the U.S.-Japan trade problem lems are the focus of the June 28 agree­ with his sister. Ellen Frost. former coun~elnr to U.S. Trade Repre~enwtive ment announced by Ambassador Kantor and MITI Minister Hashimoto. In a number Mickey Kantor. [n Lhesecond interview, Ed1tcutim1 About Asia Editor Lucien of concrete, measurable ways, the Japanese Ellington dbcusses the trade problem with Professor Ki yoshi Kawahito. government agreed to open and deregu­ who do1,ely follows U.S.-Japun trade bsues. late the market for both automobiles and auto parts. Building on this agreement, U.S. manu­ U.S. Merchandise Trade with Japan (1994) I I facturers have stated that they plan to I export 300,000 vehicles to Japan by the CATEGORY EXPORTS IMPORTS DI FFERENCE year 2000. By then they anticipate 1,000 new outlets for foreign cars. Food, Feed, Beverages 10,335 385 + 9,950 PETER Industrial Supplies 13,429 10,763 + 2,666 But the Japanese government claims that the dealers are legally free to market Capital Goods 17,379 53,112 -35,733 U.S.-made cars. EuEN Automotive 3,405 40,717 -37,312 The Japanese system doesn't operate the way ours does. Whal the law says is much Consumer Goods 6,888 12,381 - 5,493 less important than what happens behind the scenes. Japanese automobile manufac­ Other 2,052 1,797 + 255 turers maintain control over their dealers I through financial ties as well as certain TOTAL: 53,488 119,155 -65,667 forms of cooperation and technical support. In effect, dealers have been func­ In million~ ol Juliar~. f.a.s. value basi&. Note th:1t ··othd. for the U.S. ,on~ist~ of military tioning as captive distributors, highly equipment. Also, even the JEI source hstcd bl!lnw gives slightly Jifferent fi gures dependent on a single manufacturer. In the ucrnrJing to the st:1mlarJ of measurcml'l11 useJ. rounding off. anJ the like. past, dealers interested in selling foreign Sourco: lapiln Econom,, lmlilllle, St;Hi>t,c.,I Profile· International Tramacllom ol l•p•n and the United Stales in cars have expressed fears of retribution 1994 The total of i1nporh lo U1• US. i, 11,ted 011 page 32 as 119.156. Th e lap,111 l1>slilule rs alllli•ted with lhe from their affiliated manufacturer. tapanese govemtnem. lh dddrus 1s l 000 Connec11cut Avenue, Wi:uh1n9ton. D.C. 20036

26 En11rN10N Aoot-r ASIA Volunw I, Number l Pebruary 'l Q9o TEACHING TuE TRADE WAR

served until P ETER ELLEN FROST important sectors employing skilled and Wel l, how come the E.uropeans seem to June, 1995, as Counselor to disciplined U.S. workers, U.S. companies be do1ng at least marginally better (4.9% the U.S. Trade Representative, have gone through a productivlty revolu­ of Lhe market versus 3.2%) than we are? tion and are highly successful in compet­ Ambassador Mickey Kantor. ELLEN ing with Japanese companies in third The Europeans have targeted the luxury She is now o Senior Fellow at markets. Nevertheless, penetrating the car market. This doesn't threaten the the Institute for International Japanese market is like chipping stone. manufacturers to the sa me degree as PETER Economics in Washington. our vehicles. Even so, many E.uropeans You've talked before about how each privately complain about many of the side is building its case from a totally dif­ same practices that we have criticized. ferent starting point. Can you elaborate? P£TER ELLEN What about auto parts? If, as the United We shouldn't forget that there are many States claims, our auto parts are 1 S-30% competing interests on each side. There is cheaper, why do lapanese buy 80% of no single Japanese or American voice. But their replacement parts (versus only 20% in simple terms, the Japanese case is that in the U.S.) from the original manufac­ a truly competitive product can be sold in turer? Why can't U.S. auto parts manu­ Japan, whereas the American case is that facturers break into this lucrative market? certain key products that are now com­ ELLEN petitive-including autos and auto parts­ The problem here is the strict and fre­ face a wide range of subtle and pervasive quently obscure government regulations barriers in the Japanese market. governing the repair, inspection, and PETER modification of vehicles. The effect of Is this just a game, or are we headed for these regulations has been to channel re­ deep trouble? pairs to automobile dealerships and other ELLEN certified garages which tend to use the I come out somewhere in between those manufacturers' replacement parts almost two poles. I think that this tension is seri­ exclusively. Needless to say, japanese con­ ous. Friction of this kind cannot help but sumers pay through the nose. A shock ab­ erode the kind of trust and good feeling sorber, for instance, might cost $225 in on which an alliance depends. Long-time the United States, but over $600 in japan. friends of Japan who suggest that the trade P ETER problem will simply go away are not What about Japanese government doing the Japanese a favor. At the same claims that it cannot interfere in these time, the two countries have so many privately negotiated areas? interests in common, and so many areas ELLEN where they cooperate closely, that I'm not This is fine, in theory, but the japanese worried about the fundamentals of the government has implicitly encouraged or relationship. What I'm hoping is that tolerated an anticompetitive system fo r the size of the overall U.S. trade deficit and the pro-reform forces in japan will gather decades. The Clinton Administration, like the composition of U.S.-Japan trade. We strength, so that foreign pressure will its predecessors, is trying to introduce have a large global deficit because as a become less and less necessary. genuine competition into the market. In nation we spend more than we save. If the PETER the near term, this requires the coopera­ Japanese are saying that our global trade What do you think of the plausibility of tion of the government, for instance, in deticit is rooted in the United States, they the argument that the Clinton Adminis­ enforcing japan's own antitrust laws. are in large part correct. tration has been particularly bellicose with P ETER The bilateral deficit with japan is quite a Japan on trade because japan-bashing is How aboul the Japanese argument that different issue. In normal circumstances, it popular with certain groups such as orga­ the trade problem is really rooted in does not particularly matter whether we nized labor that are hostile toward Japan? the United States? After all, we have prom­ run a deficit or a surplus with any particu­ ELLEN ised for some years now to cut our lar country, provided that market forces are I challenge the word "bellicose." The deficit, encourage savings, and improve at work. In the case of Japan, however, the Clinton Administration's Japan initiative our work force. bilateral imbalance has ballooned out of arose because of widespread frustration, ELLEN all proportion because of pervasive barri­ but it is not tantamount to war! The ques­ It's important to distinguish between ers in the japanese market. In a number of tion is therefore off the mark. What is plau-

27 PART 2 WITH KtVOSHI KAWAHITO sible is that the Clinton Admrn,stration cific car makers, and they wouldn't easily recognizes that a firm stance toward open­ LUCIEN switch. If, say, a Toyota dealer switches to ing the Japanese market lends credibility Let's take automobiles first. Why don'l be a Nissan or Honda dealer, that would to overall U.S. trade policy. You cannot go more U.S. made cars sell in Japan? be national news. Certainly, it is not easy to the Congress and say that you believe KIYOSHI either to convince any of them to break in open trade and investment and then Essentially for the same reason that they the long-time tie and market a U.S. car. overlook the second biggest national mar­ have not been selling well elsewhere in the It is possible that in some cases Japa­ ket in the world. You cannot say that trade world except in North America; namely, nese car dealers, despite their wish to is good because it shifts the composition they have not been adapted to the condi­ switch lo another car-maker or become a of U.S. jobs toward the high-wage, high­ tions and requirements of the market. dual agent, do not dare to do so in fear of skill end of the spectrum and then Ignore Although more than 50 models of U.S.­ retaliation. The Japanese government a major market for the goods and services made large cars (engine capacity of more seems to be increasingly determined to produced by that labor. You cannot urge than 3,000 cubic centimeters) are intro­ protect such dealers through the applica­ U.S. firms to be globally competitive with­ duced and collectively selling well, that tion of antitrust laws and other measures. out giving them a chance to compete segment in the total Japanese market is Incidentally, I understand that a against Japanese firms in their home very small (3%). In the biggest segment, similar exclusive dealership system exists market. It just doesn't work. For that rea­ which accounts for 80% of lhe total mar­ in Europe and that U.S. automakers son, any U.S. President is going to have to be resolute vis-a-vis Japan. It isn't just ket and entails small cars with the engine have long been doing in Europe as Euro­ labor union members who believe that capacity of 2,000 cc or less, no U.S.-made peans do. Japanese resistance to market-opening cars are Introduced; obviously they can­ LUCIEN measures justifies extra foreign pressure. not compete with Japanese and European Even with the promised changes, cars here because they are not adjusted to PETER won't it take a lot of time for traditional Since the entire issue of Japan-U.S. trade Japanese tastes (e.g., European styling), Japanese business relationships and seems to be both controversial among customs (e.g., left-side drlvinq), and stan­ existing regulations to change? dards (e.g., power control rear mirrors). experts and highly emotional, what is your KIYOSHI opinion on how high school and univer­ I believe that European-made American cars In general, reforms tend to take more sity instructors should approach the issue? should have been introduced in Japan. time in Japan than in the U.S. for various Moreover, American automakers, wlth ELLEN reasons, including the preference to use I favor a multidisciplinary approach to the exception of Ford, have little invested consensus in.stead of majority ruling and the trade problem. Students should ac­ to develop their own distribution, service, the concern to minimize hardships on quire a historical perspective by learning and training systems, as compared with affected parties during the transition. On about the goals of the Meiji Restoration their European counterparts. In this the other hand, when promises for change against the backdrop of what was happen­ connection, note that European cars have are made internationally, the Japanese tend ·ing in Asia at the time. They should reflect captured a larger auto market share in to implement these faster than Americans on the lingering consequences of two and Japan than in the U.S. because they are more sensitive to world a half centuries of isolation during the Very good news is that the Big Three of opinions. Incidentally, such expressions as Tokugawa era, as well as the impact of the U.S, have very recently taken defini­ "plan," "expectation," and "hope" should defeat in World War II. They should have a tive steps to develop their own dealerships not be confused with "promise." grasp of Japanese geography so that they and to market smaller cars. Other positive Over the years, many government regu­ understand Japan's sense of vulnerability news is that the Japanese government and lations in Japan have become obsolete, and somewhat insular mentality. They its affiliates are ready to provide American only protecting the privileged, and some should learn the basics of economics so automakers with some assistance, includ­ business practices have apparently been that they understand the sources of the ing low-interest loans to develop left-side fraudulent or illegal by Japanese and U.S. trade deficit and concepts like com­ drive cars. international standards. In these areas, parative advantage. They should look at LUCIEN reform campaign~ seem to have been how Japanese society is changing and how I What about U.S. claims that Japanese car accelerating; for instance, nowadays a those changes will affect trade. They dealers don't dare market U.S. cars? day hardly passes without some new de­ should be exposed to the Japanese politi­ KtYOSHI regulations and antitrust actions. On the cal system and bureaucratic decision mak­ Such claims are very misleading. In the other hand, it is also realistic to assume ing. All this presumes that students are fully first place, some Japanese car dealers, that some meaningless regulations wlll aware of the peculiarities of our own his­ notably the Yanase network, have been tory, geography, economy, society, and remain for a long time. politics-a sine qua non for understand­ marketing imports, including U.S. cars. It is important, in this connection, for Secondly, domestic car dealers have Americans dealing with Japan or any other ing another culture. ■ long-term business relationships with spe- country to recognize the difference be-

28 Erit t''l'l111,,A1111t I ASIA \/Olun\e I, Number I FelJruo ry I 1>96 TEACHING THE TRADE WAR

PROFESSOR KIYOSHI tween unfair regulations or practices thal national differences in income spending, should be removed and uncomfortable KAWAHITO former Chair of all relevant countries' concerted efforts cultural elements to which they must the Middle Tennessee State are necessary. If the surplus is a natural development caused by international dif­ adapt themselves patiently. University Economics LUCIEN ferences in product innovations, recycling What about auto parts? Is the Clinton Department has published of the surplus to benefit people in the administration correct when it claims that extensively on the Japanese world is in order. Japan's unnecessarily strict auto inspection economy and U.S.- Japan Japan should continue to aggressively regulations shut out U.S.-made replace­ remove those government regulations ment parts? relations. and business practices which unfairly discriminate against newcomers in the KIYOSHI Partly correct, in the past, I believe, market, native or foreign, because that is although the expression "shut out" is the right thing to do. And I want to misleading. emphasize this point. It should be noted, The strict auto inspection system has however, that most economists in the U.S. existed in Japan for a long time for safety, and Japan see this factor as relatively traffic control, environmental protection, insignificant in reducing the trade imbal­ and other purposes not associated with ance. More important are the correction any economic protectionism. However, it of the overspending habit of the U.S. and has had the unintended side effect of dis­ underspending habit of Japan, and the couraging the use of less known brand generation of more product innovations parts. The U.S. proposed changes of regu­ in America. These discussions may be difficult for lation in this area, and Japan not only ac­ cepted most of such proposals but incor­ non-economists to digest. The following list of basic facts may be helpful: porated additional reforms. These deregu­ lations have either been implemented or 1. The average Japanese has been are about to be implemented. buying slightly more American products L UCIEN than the average American has been Breaking up these cozy government and buying Japanese products, but the Ameri­ business relationships will require strong can population is twice as large as the political leadership. Do you think that the Japanese. Japanese government is up to It? 2. The American market is open, but not K ,voSHI as open as uninformed people think; The government and business relation­ Japan fares better than the U.S. in terms ships in Japan have been based on philo­ of the three major " traditional" yardsticks, sophical principles and historical back­ namely the average rate of tariff, number grounds different from those in the U.S. of quantitative import restriction catego­ Moreover, they are similar to practices in effect of mounting pressures from the ries, and the extent of ''buy-national" many Asian and European counlries. They public and efforts of conscientious bureau­ requirements. do not need to be broken up just because crats and politicians. 3. The U.S. developed a national over­ they are different from those in the U.S. LUCIEN spending habit in the early 1980s when or uncomfortable to newcomers in the In your opinion, does Japan have an income taxes were cut as much as 25% system. Only those obsolete practices obligation either to its own consumers or while keeping the level of government which are just protecting the privfleged in other nations to reduce its large current spending high; the more spending, the discrimination against others and causing account trade surplus? Please elaborate. more imports. economic and social inefficiency should K1Y05HI be removed. Japan, the U.S., and any other country 4. While the U.S. still overwhelmingly Given the Japanese polilical system, it is should be concerned with the welfare of leads the world in the number of Nobel­ difficult for a strong political leadership, people at home and in the world. If the Prize-win n in g technological break­ as understood in the U.S., to develop, and large current trade surplus of Japan is throughs, Japan now overwhelmingly as a resu lt substantive reforms may take a caused by unfair trade barriers and impos­ leads the world in the number of patented long time in some areas. On the other ing hardship on people, lapan should by product innovations. hand, many reforms can materialize with­ all means reduce and eliminate the out strong leadership, as a combined surplus. If the surplus is caused by inter-

29 5 . Measured by the ODA (Official Prime Minister in Japan unless he is al least reporter who can read Japanese-language Development Assistance), the average 55 years old. newspapers for checking the other view. japanese today provides twice as much Hashimoto, regarded as a talented and In this circumstance, I suggest that they foreign aid as the average American. promising politician by analysts for call the Japanese consulate or jETRO LUCIEN more than two decades, was expressing, (Japan External Trade Organization) in What future do you se e for the somewhat rhetorically, the Japanese their districl U.S.-Japan trade balance? position on the trade issue that had Finally, tell the students that, like KIYOS HI been a near consensus for some time. His Americans, most people in the world Some but not sizable improvement in popularity did increase recently, not are good natured and conscientious and the bilateral balance in the near fulure. Just because of his outspoken manner, but that lack of informational objectivity as in the past len years, the dollar value because his capabilities happened to be and cultural sensitivity often make good of lapanese imports from the U.S. will recognized more widely through mass people bad. Tell them to maintain confi­ increase significantly, but the increase media exposures. dence but drop arrogance. Encourage will be largely offset by a rise in American As a matter of fact, American and them to learn a foreign language, travel, imports from Japan. Japanese professional trade negotiators and open their hearts. ■ I believe that the 21st century solution are surprisingly courteous and friendly Lo the trade dispute is to liberalize the to each other. High-level politicians' pub­ Editor's Note: movement of people between the two lic remarks give a different impression. Since the time of the interview countries. Today, goods and money move Incidentally, it may be interesting if lhird­ Mr. Hashimoto has become freely internationally, world operations cou n try observers are asked which Japan's Prime Minister. without specific national identification are appeared more bellicose over the trade everywhere, and trade statistics have dispute, the Murayama-Hashimoto team become substantially misleading. Yet or the Clinton-Kantor team. people cannot freely reside, work, or start L UCIEN businesses in each other's country. Since the entire issue of japan-U.S. trade Let American workers obtain jobs in Ja­ seems to be both controversial among pan and let American businessmen freely experts and highly emotional, what is start businesses in Japan, selling American your opinion on how high school and products directly to consumers. Let the university instructors should approach the lapanese, who must pay exorbitant prices issue? for housing and space, freely live 1n the K IYOSHI Ed itor's Note: U.S. and contribute to product innova­ They should remind their students that tions. Let us restore this human right which there are two sides on any controversial we lost to immigration laws and other international issue, just as on domestic 1 regulations about a century ago. issues. They should try to present a Each of tlte i11ten iewees LUCIEN balanced picture of the issue. They should was unaware o(the What do you think of the plausibility of also stress that for mutual understanding the argument that Japanese high-level and cooperation the sensitivity to be idenHt)I of the second bureaucrats such as Minister Hashimoto able to see the issue from the other interviewet' or of the are being particularly bellicose and tough side's pofnt of view is important, just as it with American trade negotiators because is with respect to gender, race, and other interviewee's comments. they will gain domestic political advan­ domestic issues. tage? The difficult part for the instructors is to Ellen Frost and Kiyoshi KIYOSHI find the time and means to develop a Kawahito have been Little credence can be given to such an balanced picture themselves. Obviously, argument, which assumes the American relying on American television news and invited to provide their type political setting. Under the polilical newspaper reports is inadequate, as most system of japan, which is much less demo­ (but not all) American newspapers and reactions to this article cratic than that of the U.S., one's political television stations tend to depend on for publirntion in t!Ie party and faction affiliations, past positions, English-language sources of information and seniority are far more important than and incorporate remarks of only American A ugust 1996 £AA. the image projected to the public. A john politicians. Even the largest newspaper In Kennedy, for instance, would nol become most states does not seem to have a single

30 Volume I, Number l l·dm1ary 1996