US Must Exploit New Realities at Japan Inc.

It is actually Japan's disarray rather than its cohesion that poses a major challenge to solving trade disputes

iT'S a showdown born of frustration. President Clinton has been stonewalled on the $60 billion United States-Japan trade imbalance by four different governments in Tokyo.

Now the administration has set a Sept. 30 deadline to retaliate unless Japan starts opening specific markets. But the White House is executing a flawed strategy of confrontation that should be regeared to new Japanese realities.

Mr. Clinton and his advisers have been stymied by their misreading of Japanese strength. They took office convinced that Japan had become a virtually unstoppable economic force. They felt that Tokyo's tightly knit leadership had been spared all-out US economic pressure during the cold war. And they figured that Japan Inc. would accommodate targeted US demands for larger slices of the Japanese market in such key sectors as auto parts, financial services, medical equipment, and telecommunications.

Instead, a politically and economically weakened Japan has said no. It is actually Japan's disarray rather than its cohesion that poses a major challenge to US interests. The end of decades of one-party Liberal Democratic rule has created a scramble for political realignment likely to continue for several years. If so, a weak coalition government may fail to make the internal adjustments needed to reduce Japanese trade surpluses to tolerable levels.

Volatile political shifts are only part of the picture. Japan's private sector is divided. Front-line exporters, hammered by the rise of the yen, are being forced to reconsider their cozy relationships with domestic suppliers and their lifelong employment commitments. As Japan emerges from its worst postwar recession, these core elements of its business culture are no longer untouchable.

Japan has other concerns

Japan's traditional power centers are in flux. A US strategy that pins too much on any of them is unlikely to produce results. US negotiators have learned this the hard way as they have shuttled inconclusively between politicians, bureaucrats, and business leaders.

Meanwhile, the single-minded US focus on reducing the bilateral trade deficit does not match up with Japanese preoccupations. Domestic economic and political problems, as well as a bitter struggle between hawks and doves over Japan's international role, rivet the attention of most Japanese. These concerns overshadow trade friction with the United States, which is widely regarded in Tokyo as part of the landscape after more than two decades of disputes. Therefore, US market-opening demands do not loom as large as in past years.

Overlooking these realities, the Clinton administration staked too much on a negotiated, near-term improvement of US trade performance vis-a-vis Japan. Even with an upturn in the Japanese economy, this bet has been lost. The modest market-access package that Tokyo manages to cobble together will fall far short of the initial US objectives.

However, American economic brinkmanship is unlikely to pay much of a dividend. The renewal of confrontation is almost certain to spark another crisis of confidence in the dollar, throwing the White House on the defensive. Clinton could be forced to settle for just the kind of watered-down compromise that he once vowed never to accept. His retreat, as with health-care reform, will be more vividly remembered than any marginal gains.

What the US can do

Three steps must be taken to put US strategy on track:

* The Clinton administration ought to stop compartmentalizing its policies toward Japan. The White House thinks that the separate pursuit of economic, foreign-policy, and security issues ensures the primacy of its economic objectives. In fact, such an approach has only reduced US options and diminished US credibility. A comprehensive approach that reflects the full range of US-Japanese mutual interests has a much better chance of building negotiating strength than a slingshot strategy.

* US priorities for opening the Japanese market should shift from numerical targets to structural change. The White House has not only failed to reach its goals of measurable sector-by-sector results but has undermined its free-trade credentials by seeking a managed-trade deal. A much wider field of opportunity will open up if the US concentrates on deregulation, antitrust enforcement, the freeing up of distribution channels, and tax reform.

* The US should move off the defensive on exchange rates by making clear that the dollar problem is fundamentally a yen problem. The recent run on the dollar resulted principally from Japan's failure to recycle its huge trade surplus and from the failure of Japanese consumers and industry to reap the gains of their increased purchasing power. If Japan increased imports and invested more overseas, the yen would weaken and pressure on the dollar would ease.

Japan isn't 10 feet tall anymore. The US needs a strategy geared to Japan's current disorder rather than its past strength. The Opinion/Essay Page welcomes manuscripts. Authors of articles will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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