Japan has become increasingly competitive rather than complementary in relations with the United States. Its impact on the U.S. economy stems from structural and policy sources. An important structural source is the vertical anatomy of Japan's foreign trade, which in turn is largely determined by its unbalanced physical endowment. On the policy plane, Japan has pursued a supply-side strategy that is specifically linked to the doctrine of dynamic comparative advantage. Its objective is to achieve international competitive power in U.S. markets, among others. Japan's supply-side approach is thus a precursor of that of the United States. The U.S. version, however, differs from the Japanese in having domestic rather than international priorities. The U.S. response to its persistent trade deficits with Japan has tended to be bilateral and protectionist. The various “voluntary” export restraints Japan has adopted under U.S. pressure have dark implications because of the cartel arrangements by which they are enforced. These arrangements revive and nourish Japan's cartel tradition, similar to that thriving in major European Economic Community (EEC) nations. In the event of serious economic difficulties, Japan and the EEC would be strongly inclined to internationalize and combine their cartels. This would have adverse repercussions on the domestic and external sectors of the U.S. economy.
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References
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1. Recently, the ratio of the Japanese government deficit to its budget—general account—has greatly exceeded that of the United States. The consequent volume of national bonds issued to finance the deficit greatly exceeds the absorptive capacity of the bond market. Japanese banks are increasingly unwilling to take up the slack by accepting bond subscription quotas assigned by the Ministry of Finance. In monetary policy the government shows a consequent tendency to retreat from Keynesian in favor of monetarist principles.
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2. Japan's military “free ride” is one of the principal military-political-economic issues outstanding between the two countries. At present, however, the Japanese government pays about $750 million annually in support of U.S. military forces in Japan.
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3. Indeed, for the sake of long-term balance of payments security, in 1980-81 the Japanese government took steps conducive to a short-term reduction in the balance of payments surplus. In 1981, it may be added, reflecting confidence for the moment in its increasing international competitive power, the government became more concerned about domestic inflation than about the state of the balance of payments.
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4. This was the second “Nixon shock.” The first was Nixon's trip to China in February 1971.
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5. Textiles, for example, formerly Japan's principal export, now constitutes less than five percent of its total exports.
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6. President Nixon gratuitously abetted this policy by his soybean embargo of June 1973, the third “Nixon shock.” Prior to that date, nearly 90 percent of Japan's soybean consumption had been supplied by the United States. Thereafter, Brazil greatly expanded its production and sale of soybeans to Japan.
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7. In 1950, Japan accounted for only 4.1 percent of total U.S. exports, while by 1980 its share more than doubled to 9.5 percent. In 1950, the United States imported only 2.1 percent of its total imports from Japan, while in 1980 Japan supplied 12.5 percent of total U.S. imports. During the same interval, the U.S. share of Japan's exports has varied from approximately one-quarter to one-third. However, it is notable that whereas 43.3 percent of Japan's imports were received from the United States in 1950, the United States was the source of only 17.4 percent of Japan's total imports in 1980. These data are from the Ministry of Finance and the U.S. Department of Commerce.
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8. Much of U.S.-Canadian trade, however, consists of in-house transactions between U.S. multinational firms and their Canadian branches or subsidiaries.
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As in the recent automobile case, these violate the spirit, if not the letter, of the U.S. antitrust laws. It may also be remarked that during the Kennedy administration, pressure was placed on Japan to accept quantitative restrictions on its cotton textile exports to the United States, even though the United States had a substantial bilateral trade surplus with Japan at the time. See testimony of Gary Saxonhouse, House of Representatives, 96th Congress, 2nd Session, Committee on Foreign Affairs, Hearings on United States-Japan Relations, 29 Sept. 1980, p. 248.
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10. See Melvyn B. Krauss, The New Protectionism (New York: New York University Press, 1978).
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11. Japan's Fair Trade Commission, which normally supervises the anticartel provisions of Japan's antitrust laws, is relatively weak and understaffed, especially in the enforcement of international anticartel regulations. It is not in a position to resist this sort of development, should it emerge.
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12. In 1980, for example, according to the American Iron and Steel Institute, more than 10 percent of output in the protected U.S. steel industry was still produced by open-hearth furnaces. In Japan, open-hearth furnaces disappeared years ago.
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13. In 1980, Japan's total purchases of agricultural commodities from the United States amounted to $6.1 billion.
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14. In the opinion of Dean Kenzo Hemmi, Faculty of Agriculture, Tokyo University, as expressed to me in a conversation on 30 May 1981, the Japanese government will have rescinded all subsidies and import protection to agriculture by the end of the present decade.
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15. Robert E. Herzstein, prepared statement, U.S. House of Representatives, 96th Congress, 2nd Session, United States-Japan Economic Relations, Hearings and Markup Before the Committee on Foreign Affairs, 18 Sept. 1980, p. 137. Recent arguments about Japanese import barriers have concerned procurement practices of the National Telegraph and Telephone Co. (NTT), drug-testing standards, pricing policy for imported tobacco, and nontariff barriers to imports of automobiles.
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16. In 1978, the U.S. surplus in services transactions with Japan amounted to $1.8 billion; in 1979, it amounted to $2.6 billion. Bank of Japan, Balance of Payments Monthly Bulletin.
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17. In 1965, merchandise exports accounted for 66 percent of dollar receipts from Japan, according to U.S. balance of payments statistics; that proportion fell to 46 percent by 1980. Merchandise imports, which accounted for 78 percent of total payments to Japan in 1965, accounted for only 69 percent of total U.S. payments to Japan in 1980. These data are from the Japan Economic Institute, JEI Report, 27, 17 July 1981. Controversial matters include unfair competition in the terms of trade offered for export financing, aviation and maritime issues, banking issues, and issues concerning professional services and tourism.
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For a demurral concerning Japan's investment in the United States, see Leon Hollerman, “Japanese Direct Investment in California,”Asian Survey, 21 (Oct. 1981).
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19. Thomas D. Willett, “Policy Research Issues in a Floating Rate World” (Paper prepared for the Division of Policy Research and Analysis—National Science Foundation, Sept. 1980), p. 30. He remarks further, “I do not believe that we have a good idea of the quantitative relationships between exchange rate and domestic price changes, despite the number of studies which have reported estimates of these effects.”
