Don't Let US-Japan Relations Deteriorate

AMERICAN policy toward Japan has long endorsed the assumption that common fear of the Soviet threat could overcome any differences over foreign or trade policies. The apparently reduced Soviet menace and the growing importance of economic issues, however, have spawned in some circles the view that Japan itself represents a potential threat to US security. The proponents of this view contend that Japan does not play by the standard rules of the free market. The US's annual trade deficit with Japan still runs about $52 billion, despite years of negotiations. Moreover, the argument goes, Japan's leaders are uninterested in making Japan a consumption-led society like the US; Japan's goal is economic dominance in the world, and it will open up to trading partners only when forced to.

These critics seek to guarantee market shares or other measurable results in Japan for US goods such as forest products, supercomputers, and semiconductors, which are competitive globally but aren't making inroads into the Japanese market. The highly protected banking, construction, and insurance sectors also are targeted as priority areas. The ``voluntary'' export restrictions on Japanese cars and steel would be retained. Failure to comply would be met by retaliatory slashing of Japanese imports.

It's difficult for Americans to argue with these propositions when they see the Sony Corporation, in the largest-ever Japanese takeover of an American company, buying up Columbia Pictures. Meanwhile, T.Boone Pickens can't even get his representatives elected to the Koito Manufacturing Company's board, despite being the largest shareholder. In Japan it can take years for a foreign investment to receive approval, while companies like Sony can invest in the US at will.

THE Japanese have been crying ``foul'' ever since the US cited Japan for possible retaliation under the so-called Super 301 provision of the 1988 trade act. Super 301 is certainly a contentious way to go about solving trade disputes. But as Carla Hills, the US trade representative, stressed recently in Tokyo, the areas cited under 301 were in strict accordance with trouble spots identified in the Uruguay round of the General Agreement on Tariffs and Trade.

Moreover, we have to seriously wonder what alternatives to the retaliatory approach there are when, for example, Japan's public-broadcasting firm, NHK, declares that it cannot buy US-made satellites in the future because of pressure to support domestic suppliers. Although Japan has largely dispensed with tariffs and quotas, nontariff barriers remain to block out foreign goods and investment. The most notorious obstacles are import and investment regulations; the personal relationships that keep outsiders at bay; and the infamous distribution system.

In Western economies, less importance is placed on nurturing long-term relationships than on price, quality, and supply. In Japan, American companies find that their low bids for contracts are rejected so that existing relationships between supplier and customer will not be jeopardized.

Japan's investments in the US have grown more than any other country's in the last few years. This year, Japan surpassed the Netherlands as the second largest foreign investor in the US and may pass Britain as No. 1 in the next decade. In 1988 alone, 203 company names were added to the list of US manufacturers owned wholly or in part by Japanese investors, bringing to 890 the number of Japanese-affiliated US manufacturing companies.

Japanese investment clearly is beneficial to the US economy, as it provides jobs and capital. But Japan must be made to realize that it's in their interest to make their market as accessible to foreigners as ours is to them. The Japanese can bring about change with impressive speed when they believe that it's in their best interest. This will require patience and persistence on America's part.

Japan has, in fact, been importing more products over the last few years than ever before. This is due largely to Japan's agreement to expand domestic demand in accordance with the Plaza accord of 1985 and last year's market-liberalizing agreements with the US. Still, given that Japan is the world's second largest economy, the amount of goods imported is relatively small.

Americans should realize that opening the Japanese market will not by itself eliminate the US trade deficit. The US-Japan trade imbalance is due largely to macroeconomic policies. In 1985, international consensus was reached to use three policy instruments to correct international imbalances: first, reduce the value of the dollar vis-`a-vis the yen and deutsche mark; second, increase domestic demand, especially in Japan; and finally, reduce the US budget deficit while improving the savings rate.

Since then, the value of the dollar has been reduced in relation to the yen by approximately 50 percent, supposedly restoring US price competitiveness. It must be acknowledged that during the same period, Japan's domestic demand expanded significantly, although from a disproportionately small base. Yet the US budget deficit has not been reduced at all.

Why? In dollar terms, Japan's trade surplus with the US has remained largely unchanged because, after the yen appreciated, higher Japanese export prices offset the greater volume of Japanese imports. The volume of Japanese exports remained basically unchanged while imports increased by about 40 percent.

US policy must reflect these realities. While working to remove investment and import barriers in Japan, the US must also strive to get its own house in order. We must adopt a more long-term outlook and improve competitiveness through technological R&D, improvements in education, and development of a more unified industrial policy. We must also attend to our fiscal problems with greater urgency.

Furthermore, the two countries should strengthen bilateral political consultation such as the Structural Impediments Initiative negotiations, and develop some form of semi-official body of experts from both countries that could address potential conflicts before serious problems arise. Such a group would have little or no usefulness, though, unless it had the clout to see recommendations carried through. In addition, bilateral agreements such as those to transfer military technology are meaningless without some type of follow-through.

While Japan must be made to realize that there are elements of American society moving to promote dangerously protectionist policies if Japan is not seen to be playing by the same rules as we are, the positive areas of the relationship must be exploited. Neither country can maintain its current standards of living without the other.

America depends on Japan for semiconductors, machine tools, consumer products, and financing of its debt. Japan is dependent on the US as its largest market and strategic defender. Still, more areas of cooperation must be found, such as aid coordination. US-Japanese partnership is the best hope there is for resolving third-world debt. It is also much too soon to discount the military threat of the Soviet Union.

IT will be dangerous for both countries if the US-Japan relationship becomes defined by confrontation and not cooperation. Given Japan's financial competence, its growing strength in multilateral organizations such as the International Monetary Fund and the World Bank is a natural and inevitable development. The US should continue to support a growing Japanese role in international affairs, strengthening areas of mutual cooperation and interdependence.

At the same time, pressure should continue to be placed on Japan to open its markets and to share technology. The former adversaries' relationship has matured to a point that it should be able to handle these seemingly inconsistent approaches.

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