U.S. and Japan Turn in Opposite Directions on Trade

February 20, 1994|By GEORGE FRIEDMAN and MEREDITH LeBARD

In 1991, we published a book called "The Coming War with Japan." We felt, against the prevailing view, that the United States and Japan were headed for serious trouble -- first a trade war, and then, much later perhaps, a real war.

In the short term, we predicted three major events: the end of Japan's economic boom, the formation of the North American Free Trade Agreement with Mexico and Canada, and the collapse of Japan's Liberal Democrats. Together, these would work to kick off a trade war between the United States and Japan.

A Japanese prime minister and an American president met Feb. 11, and, failed to reach agreement. And neither of them blinked. Through last week, there were threats of a trade war. A new era was born.

We caught a lot of grief for our views, so we must confess to some satisfaction at the turn of events -- we're human. But it is now time to understand why the issues raised at the summit cannot be solved.

In 1993, the United States had a $60 billion trade deficit with Japan -- a new record. The 1993 gross domestic product for the United States will be somewhere around $6 trillion. This means that for every dollar generated domestically, one penny is sent to Japan.

For a single trade relationship to generate a loss equal to 1 percent of GDP is extraordinary. To give you some idea how much money this is, consider that the deficit with Japan equaled nearly a third of all the money Americans saved last year ($200 billion). Or, consider that the trade deficit with Japan was greater than the $46 billion we spent importing oil last year.

Certainly, some have benefited from trade with Japan, but the bottom line has been a dreadful loss. How could this have happened?

The conventional argument has been that the United States simply has not made products that could compete in Japanese markets. The prime example cited was U.S. autos.

Now it is true that U.S. manufacturers sell almost no cars in Japan. The Japanese domestic car market was about 3.5 million cars last year -- of which than 20,000 were American.

The Japanese buy some Mercedes, BMWs, Volvos, Land Rovers, Peugeots, Cherokees and other upscale and novelty vehicles. However, the bulk of the world auto market is the mid-priced family sedan -- and it is virtually impossible for any foreign manufacturer, U.S. or European, to sell this bread-and-butter item in Japan.

It may well be that the United States sells the worst cars in the world, but the fact is that no other country manages to sell cars in Japan, either.

More than 30 percent of the American car market is held by foreign manufacturers, as is 35 percent of the German market. Last year, only 5.2 percent of all cars sold in Japan were of foreign origin, and of these almost 20 percent were Hondas and Toyotas manufactured in the United States.

The argument that the Japanese do not import American cars because of quality is obviously nonsense. The roughly 4 percent market share held by foreign manufacturers is not the result of shoddily built European cars. Foreign cars have a much smaller share of the Japanese market than in any other industrialized country because Japan, systematically but informally, excludes foreigners from their markets.

Why do they do this? The Japanese are a great industrial power, fully capable of competing at home and abroad. Why do the Japanese play the role they do and risk the wrath of the United States and the European Union? Why aren't the Japanese more forthcoming? They are pragmatists. Why not avoid a battle with the United States, accept a numerical target they can live with -- say a $30 billion trade surplus -- and open up their market?

The answer is that the Japanese cannot accept any numerical target because they cannot accept any decline in their trade surplus. In fact, their economic difficulties are so profound that they need to increase their trade surplus to compensate for deep-rooted weaknesses in their financial system. The Japanese are not compromising because they cannot.

Japan is in its worst economic crisis since the end of World War II. Crisis is not hyperbole. The value of Japanese land and stocks declined by $4.04 trillion in 1992. This decline was larger than the total gross domestic product of Japan in 1992, which was $3.66 trillion.

To have an entire year's work wiped out by stock and real estate losses would be unnerving for anyone -- but this has been going on since 1990 and shows no sign of stopping. What makes this doubly painful is that, in the past, land and stock prices have kept the Japanese economy booming, serving as collateral for more and more outrageous borrowing practices. The Japanese economy was driven by speculation in land and stocks, and corporate empires were built on paper profits. When land and stock prices collapsed, so did the "bubble." The banking system almost went, too -- and it is not clear that it won't still collapse.

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