Japan Works to Avert Trade Clash With the US

Increased imports seen as way to mitigate Tokyo's surplus

THE Japanese government is quietly forging a new trade-policy package that it hopes will head off a major clash with the United States. Japanese officials are facing several deadlines in trade talks with the US next spring. Failure to make visible progress by that time, officials say, will lead to protectionist measures against Japan.

A fierce debate is currently taking place within the Japanese government bureaucracy and the ruling conservative Liberal Democratic Party (LDP) over what specific actions to take. The policy clash is mostly being carried out behind closed doors, with occasional leaks in the Japanese press.

A variety of measures are being proposed to bring down Japan's $80 billion-plus trade surplus, almost $50 billion of which is with the US. According to a senior government policymaker, the toughest battle is being fought between advocates of a policy to encourage imports and those who favor restraining Japanese exports.

The dispute combines typical elements of decisionmaking in Japan - struggles for power between rival ministries, competing interest-group lobbies, and divided politicians. This is complicated by a coming election for the lower house of Japan's parliament, likely in mid-February, in which the LDP faces a serious challenge to its majority rule.

``The most important thing at this point is to import more,'' the senior government policymaker says. A move to improve the trade balance by simply exporting less would curb economic growth in the world economy. It is better to provide larger markets for US and other goods, the official says.

The main advocate of this view is the Ministry of International Trade and Industry (MITI), which is pushing for a variety of policies to encourage imports. Most directly, MITI favors tax incentives for importers, a reverse of its successful policies of the 1950s and '60s to encourage exports from Japan. Given the difficulties and higher costs that newcomers face in penetrating the well-developed Japanese market, MITI officials explain, importers should get some help.

Indirectly, MITI is actively pressuring Japanese exporters to increase their imports on a company-by-company basis. According to press reports, MITI has singled out about 50 to 60 companies, such as auto and electronic manufacturers, which together account for 60 percent of Japan's exports. Those companies are being told to double their imports in three years. Auto companies, for example, plan to import cars made in their own plants in the US. MITI's plans are being opposed by the powerful Ministry of Finance and by elements of the LDP. Ministry of Finance bureaucrats oppose tax incentives for imports. They say such incentives will reduce tax revenues and will unfairly benefit one group of industries over another.

According to the senior official, many members of the LDP favor the quick fix of controlling exports. One method is to set ceilings on certain items, such as autos. Some favor a tax on exports.

Behind this position, the official says accusingly, is a political calculation to shift pressure from agriculture and the demand to open Japan's rice market. That would lose the LDP support from farmers, a key bloc for votes and funding. In addition, ``the LDP dislikes businessmen these days because they did not give enough money for election campaigns,'' the official suggests. Many aspects of the trade policy may not be decided, Japanese analysts say, until after the elections. If the LDP retains its majority, as now appears likely, it may be better able to make painful reforms.

The Bush administration has indicated a willingness to wait until then on a number of fronts.

The agenda of trade issues is long and complex. Last spring the Bush administration named Japan as an unfair trader under the ``Super 301'' clause of the Trade Act. The US cited three specific industries (satellites, supercomputers, and lumber products), where barriers to purchase of foreign goods existed, as items for negotiations. Aside from these, there are other industries in which talks are ongoing, including semiconductors and construction.

Failure to resolve problems in these specific areas could bring retaliatory sanctions, such as tariffs, next year.

The most daunting trade negotiation is the Structural Impediments Initiative (SII), an effort to remove basic barriers to trade in both economies. The US seeks changes in Japan's maze-like distribution system, its tightly knit industrial groups, land-use policies, and its high savings rate. At the last round of talks, the two countries agreed on comparative data showing that Japanese consumers pay substantially higher prices for most goods.

Japan points to the need for US action to correct its low savings rate, corporate fixation on short-term profits, its budget deficit, and poor education.

Two rounds of SII talks have taken place since September, with the next round scheduled for January in Tokyo. By the fourth round in mid-March, the two governments must complete an ``interim assessment,'' concluding with a final agenda of action by the summer. US congressional leaders are pressing for clear steps by the time of the interim report.

While Japanese officials say the fundamental problems addressed in SII require a long time to solve, they are also aware of the need to produce ``concrete steps'' by the spring. Those measures would be a down payment on structural reform, aimed at easing the pressure for anti-Japan sanctions.

The Japanese package could include a number of elements, a Foreign Ministry official says. Aside from import incentives, Japan would increase spending on social infrastructure, stimulating demand at home. The staff and powers of the weak Fair Trade Commission, which carries out antimonopoly laws, will be increased. Price-gap research would be regularized, adding pressure to open the distribution channels.

And finally, the government and LDP are considering a controversial move to remove the exemption from property tax granted to farmland in urban areas, which acts as a disincentive to put the land to other use. The US seeks that change to lower the high price of land, a barrier to new business and growth at home.

Japanese officials also intend to press the US to make comparable changes. But, says a MITI official, ``It's no good to just blame it on America.''

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