US-Japan Economic Framework Splinters

Poor results in talks may force US to rethink approach

NEXT Tuesday, on his second trip abroad as president, President Clinton will arrive in Tokyo without having clinched a broad agreement from Japan to boost imports from the United States and thereby create hundreds of thousands of new American jobs.

Mr. Clinton and Japanese Prime Minister Kiichi Miyazawa had committed themselves at an April summit in Washington to reach an agreement by July 7 on a "framework" for negotiating their two nations' economic differences.

But Clinton trade officials left Tokyo this week in frustration after two days of talks in which Japan rejected a US proposal to cut its current-account surplus nearly in half by bringing in more imports through increased domestic demand and by opening markets.

Officials in Tokyo also gave a stern "no" to a US proposal to set "benchmarks" for measuring compliance in any trade agreement. Japan fears that failure to meet such targets would bring retaliation from the US.

"You Americans are results-oriented. We Japanese are intention-oriented," says Masaya Miyoshi, director-general of the Japan Federation of Economic Organizations.

Japanese leaders also bristle at any agreement that would force them to arm-twist companies into opening up markets to foreigners. "Is it reasonable for any government to ask its people to buy what they don't want?" asks Noboru Hatakeyama, a retiring trade official.

The Clinton administration adopted a results-oriented strategy in its approach with Japan, in contrast to what it calls a "process-oriented" approach of President Bush. "The ultimate test of any trade agreement is the changes it brings. It's difficult to see any other way to monitor progress than by looking at benchmarks," says Lawrence Summers, US undersecretary of the treasury for international affairs. Rethinking strategy

But the lack of substantial results in talks with Japan so far could force the US to rethink its strategy. Any change is unlikely before Clinton arrives in Japan for the July 7-9 summit of the Group of Seven leading industrial nations. He is to meet with Mr. Miyazawa on July 6.

A number of world leaders and think tanks, some at Japan's urging, have criticized the new US approach.

A study released this week by the Carnegie Endowment for International Peace suggests the US make its pitch directly to the Japanese public, who "more than politicians or the bureaucracy, may be the major force in setting the pace of Japan's market openings."

But Clinton officials appear impatient to create American jobs by the end of his four-year term. And Japanese leaders also note that their once-warm discussions with US leaders appear to be absent.

"There are so few people [in the US government] who I can talk to in confidence," says Minoru Makihara, president of Mitsubishi Corp. He says the new administration "is too much focused on the US-Japan economic imbalance."

If Japan were to take the US advice and reduce its current-account surplus from the current 3.3 percent of its gross national product to 1.5 percent, that would create room for more than $60 billion in additional imports from the rest of the world, says Mr. Summers. That would translate into an extra one to two million jobs, with the US likely to get hundreds of thousands, he says. Leaders divided

Many Japanese leaders are divided over whether to do anything about their trade surplus, which could top $130 billion this year. "A huge surplus is not good. We know that," says Yoh Kurosawa, president of the Industrial Bank of Japan.

"But it is due to macro-economic problems, not closed markets," he says.

Japan opposes the setting of targets in specific industries, such as telecommunications, to ensure foreign access, saying such action is "managed trade." The US, however, contends that decades of intervention in the market by the Japanese government needs to be corrected by "unmanaging trade."

"The charges of managed trade are ironic from a government which has long embraced industrial targeting, which has allocated market shares among a limited number of companies in selected markets, which pushes an active role for public policy in shaping private sector decisions in its dialogue with developing countries, and which continues to use indicative targets in its own medium-term plans," says Summers.

"What the world needs from Japan now," he says, "is a sustained period of domestic demand-led growth, a period when the demand for goods in Japan exceeds the domestic supply, so that Japan is a net provider of jobs rather than a net drain on jobs in the rest of the world."

Despite all these arguments, Japan's political scene is in such turmoil that the US has little hope of an agreement soon. Miyazawa is a lame duck after his ruling party lost a no-confidence vote in parliament, and he was forced to call for a lower house election on July 18.

Any decision on setting trade targets "is a political issue, and we don't have a political leadership right now," says Mr. Makihara.

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