Japan keeping U.S. products out of Asia Intricate network known as 'keiretsu' excludes 'outsiders'

November 09, 1997|By KOZO YAMAMURA

Quietly and without fanfare, Asian markets are slowly being closed to U.S. products. This is no accident. Working closely with their government, Japanese multinational firms are being cloned in other Asian countries. This has resulted in the intricate web of governmental, industrial and distribution ties called "keiretsu,", which has made Japan so difficult to penetrate, being mirrored along the Pacific Rim.

Unless this trend is recognized and countered, foreign firms including U.S. companies will be at a serious competitive disadvantage with Japanese "insiders" in Asia, a region that will continue to grow steadily despite recent setbacks.

Not only does the Japanese government guide Japanese firms operating in Asia, it also tries to lead host governments in the region, especially in Southeast Asia. To increase its economic presence in as many Asian economies as possible, Japan is exercising what has been called a quieter and softer "leadership from behind." Japan is building keiretsu-like production networks that it dominates both across the region and within each host economy.

Besides offering recommendations on everything from industrial to macro-economic policy, the Japanese government uses more direct means - such as a very large amount of cash in the form of foreign direct investment and overseas development assistance - to exercise leverage in the region.

These keiretsu relationships, which benefit "insiders" and exclude all "outsiders," are the central issue in the present U.S. trade case before the World Trade Organization concerning nontariff entry barriers in Japan's consumer photographic film market. In one of the best documented cases in memory, no objective observer can fail to see that Fuji Film, Japan's largest domestic film producer, has maintained for many years close exclusionary relationships with "insiders" that include Fuji's wholesalers and retail outlets.

This has systematically prevented foreign newcomers, such as Eastman Kodak Co. and Agfa, from entering the Japanese film market. The wall protecting the "insiders" has long been too formidable to scale, based on the strengths of better prices and quality. Such activities have put Japanese consumers at a disadvantage for decades.

These practices are often informal rather than explicit and change over time, making it difficult to reduce their lasting influence. It is, therefore, imperative that the U.S. government realizes the crucial importance of the WTO case and advances it strongly. It is not an overstatement to say the eventual outcome of this case will establish an invaluable precedent for finally dealing with the exclusionary tactics of Japanese keiretsu expansion practices.

Research has shown that the influence of the Japanese model on Asian economies is significant. Japanese multinational enterprises maintain exceptionally tight control over their network members - both formally affiliated manufacturers and more informally related suppliers - throughout the Pacific. In a 1995 survey in Taiwan, half of the Japanese subsidiaries indicated they had to "strictly" follow Japan's lead on marketing matters, while American subsidiaries enjoyed far more latitude to make sales decisions.

Len Brownfield, the former head of General Motors' operation in Indonesia, had not expected his entrenched Japanese rivals to play such hardball to protect their market share.

"I had seven well-established guys lined up to be new Chevy-Opel dealers," he said. "But, one by one, they mysteriously fell out. They told me privately that a Japanese manufacturer with whom they also did business had threatened to cut off their supply if they did."

General Motors is not alone. Other U.S. manufacturers of goods such as consumer electronics, machine tools and flat glass also have become victims of this economic coercion.

Any U.S. effort to form a long-term policy must address these exclusionary practices and work vigorously to punish noncompliance by initiating a process of dispute resolution through the WTO.

For its own part, the WTO should also pay close attention to bellwether cases such as photographic film and paper. Through a just ruling, the WTO can reinforce its own merit as an objective arbiter of future trade disputes that are certain to arise as keiretsu-like production networks become increasingly prevalent in other East Asian economies.

Finally, it is of utmost importance that we realize there is little time to implement these recommendations. If we fail to seize this opportunity, we will again encounter in other Asian markets, as we did in Japan for years, trade barriers that are difficult, as well as often politically and economically costly, to overcome.

To ignore this situation is to risk losing access to the world's fastest-growing market.

Such a risk would be unacceptable to the United States, to Asian economies and to Japanese consumers.

Kozo Yamamura is Job and Gertrud Tamaki professor of East Asian studies at the Henry M. Jackson School of International Studies at the University of Washington. He is the author of "Asia Japan's Embrace: Building a Regional Production Network" (Cambridge University Press, 1996) and numerous other books and articles on Japanese economic history and postwar industrial, antitrust, and trade policies.

Pub Date: 11/09/97

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