A U.S.-Japan Trade Agenda: Despite Recent Reverses, Japan is Still a Huge Market that Needs to be More Open

Judging from the American press, Japan has become yesterday’s problem. With the collapse of Japanese stock and real estate prices in the early 1990s, very slow economic growth from 1992 to 1995, and revelations of large amounts of bad debt in the banking sector, longstanding U.S. concerns about trade with Japan seem simply to have slipped the minds of many Americans. Even the Clinton administration, which pursued a high-prole and active stance on trade issues with Japan in its first term, shows little inclination to continue a high-pressure campaign now.

But though Japan no longer seems an unstoppable juggernaut, it nevertheless remains one of the world’s leading industrial nations. Its economy is recovering: growth was 3.6 percent in 1996 (outpacing the United States) and is likely to be at least 2 percent this year. Japan also remains a big part of U.S. trade. In 1995, Japan was the second largest U.S. export market, taking 11 percent of all U.S. exports, and was the source of 15 percent of U.S. imports. And leading Japanese corporations are still the chief global competitors in many industries for American firms. Japanese markets are large, affluent, and growing—all reasons for American firms to be involved in them.

To be sure, these individual trade problems are not linked in any major way to macroeconomic balances. Solving market access problems will not materially alter Japan’s global trade surplus or the bilateral imbalance between Japan and the United States. Large declines in the value of the yen against the dollar in the past two years will result in sharp increases in Japanese trade surpluses this year and next. But those surpluses should not be the reason for increasing pressure on trade issues. Market access issues have a separate justification, growing out of the intellectual concept of free trade and the official support that notion has garnered from major nations—including Japan.

An active market-access approach to trade with Japan will involve disputes and tension. But more open markets increase economic flows of trade and investment and ultimately strengthen the U.S.-Japan relationship. Temporary antagonisms that are during trade disputes are less dangerous than long-term ill will engendered by a lack of access to many Japanese markets. Though the Clinton administration shows a certain amount of fatigue on Japan after four active and contentious years, it should nevertheless persevere. The following modest agenda would keep trade issues moving forward.

Running through these suggestions is an implicit theme—the need for more fiscal and human resources. Only a handful of people work actively on these issues within the U.S. government. Too often in the past the U.S. government has been at a disadvantage when negotiating with the many, well-prepared officials representing the Japanese government. Reinforcing the U.S. team is not a major financial issue. The size and importance of Japanese markets to American businesses and the seriousness of some of the problems justify the added expense and effort.

The WTO

In June 1996, the United States Trade Representative (USTR) chose to take a dispute over access to the color lm market to the World Trade Organization. The dispute, a landmark case, raises fundamental questions about the nature of industrial policy in Japan, the continuing existence of opaque and unusual regulatory controls over the distribution sector, and the ability of the WTO to handle such complex issues. In essence the case argues that Japanese industrial policy operated informally to keep the color lm market closed despite agreements to eliminate quotas and reduce tariffs. It also argues that regulations in Japan were not designed or administered in a manner to guarantee national treatment for foreign firms, and that administrative processes were not transparent. The Japanese government will probably settle with the United States before the final decision in October rather than risk losing and thereby setting a precedent. But even if a definitive decision on the case is unlikely, the U.S. government should pursue it vigorously and bring more cases to the WTO that challenge the impact of industrial policy in Japan on market access.

The WTO provides additional advantages. If or when Japan loses a case, the demand for change (or authorization of U.S. retaliation) comes from a multilateral source, helping to diffuse Japanese rancor, which is usually directed solely against the United States. The WTO also promotes useful coalition-building (for example, European Union cooperation on the current color lm case). Convincing a multilateral panel in Geneva of the legitimacy of U.S. complaints about market access in Japan is obviously harder than simply convincing U.S. government agencies in Washington. But the detailed exposure of Japanese trade barriers in a public forum, as is happening with the color lm case, is critical to gaining international understanding and support for American trade policy toward Japan. Therefore, a key aspect of policy should be to make more active use of the WTO to pursue trade problems with Japan.

Bilateral Cases

Not all problems concerning market access in Japan t within the framework of the WTO. Sometimes the industries or the behavior involved are not covered by WTO rules. Sometimes the dispute concerns creating new rules for market access rather than disagreement over behavior under past commitments. Except when large multilateral negotiating rounds are under way, the WTO assumes that nations will engage in such negotiations bilaterally, with the stipulation that the results be applied on a most-favored-nation basis to other WTO members. U.S.-Japan bilateral negotiations meet this requirement.

In bilateral cases the key is finding and applying leverage in the form of costs to Japanese commercial interests that can be imposed when negotiations fail. Why should a sovereign nation comply with requests for market liberalization in the absence of international rules? Sometimes governments agree because they, too, desire to sweep away market impediments, to satisfy domestic consumer and business pressure for lower costs and greater efficiency. Rarely, however, do matters happen this way in Japan. There the voice of consumers is weak. Even businesses harmed by protection often fail to press hard for liberalization with their own government—as has been the case in the current dispute over harbor services, where the collusive system raises costs to Japanese shipping companies as well as American ones. Japan’s government does, however, respond when faced with a realistic probability of American retaliation in the form of punitive actions against Japanese economic interests in the United States. An early step in any non-WTO bilateral issue must be to determine what leverage of this sort can be brought to bear. Among potential sources of leverage are section 301 (although its use is problematic in the wake of the GATT Uruguay round agreement), regulatory authority, federal contracting rules, and even antitrust prosecution. If these tools are to be effective, they must be used on occasion. The recent decision of the Federal Maritime Commission to impose fees on Japanese shipping lines using U.S. ports, for example, spurred the Japanese government to address the question of restrictive practices at Japanese ports.

Monitoring Agreements

Results matter. Trade agreements need to be fully implemented after they are negotiated, and they should lead to increased market opportunities for foreign firms. Setting targets for foreign penetration, as in the case of semiconductors, may be unavoidable when all other approaches fail, though adopting managed trade as a general principle is neither desirable economically nor feasible politically. As a general principle, vigorously monitoring implementation and outcomes without preconditions can help convince the Japanese government that implementation must occur in good faith.

Monitoring does not require a commitment written into bilateral agreements. The Clinton administration spent too much negotiating time in the first term haggling over the terminology for these commitments, especially over language expressing the goal of increased sales and market share for foreign products. What matters most is that implementation be watched closely, statistical data collected, and analysis done on the causes of market outcomes. Should the statistical evidence suggest that problems still exist, the government can determine what approach is needed, such as negotiations to strip away other impediments.

The Public Message On Trade

The public message on bilateral trade issues, especially in a vigorous market-access campaign, should remain low-key. There is no need to portray the trade relationship in dramatic terms, nor to tout successful negotiations as great victories. Even restrained rhetoric, of course, will garner considerable unfavorable attention in the Japanese media. But there is no need to contribute unnecessarily to the Japanese perception of excessive pressure.

Accompanying the low-key rhetoric should be a steady stream of factual information. Simply responding to media questions or holding (infrequent) formal press conferences leaves U.S. policymakers on the defensive. In the color lm case, release of the brief led in Geneva last February provided the media and public with great detail on American allegations, carefully documenting factual evidence and how the Japanese government and industry worked to impede market access. That approach should be the model for all trade disputes.

Japanese Firms Abroad

Continued Japanese direct investment abroad raises new issues for U.S. government scrutiny. Are collusive patterns of behavior at home being replicated abroad? To what extent do large amounts of bilateral foreign aid grease the way for Japanese firms investing in developing countries in Asia? Are American firms disadvantaged by such behavior? To what extent does the increase in Japanese imports represent purchases from manufacturing subsidiaries abroad rather than from independent foreign firms (implying that Japanese markets are not really more open despite rising imports)? These questions do not yet have clear answers, but they will become increasingly important. Focusing exclusively on the bilateral context will miss many of these issues, ranging from questions of preferential access in developing country markets to the rather unrestrained movement of Japanese firms into the Burmese market (in contrast to both Japan’s official stance on human rights in Burma and U.S. policy objectives). These issues are particularly salient in Asia, which is now absorbing a rising share of the foreign direct investment of Japanese firms.

Avoid Overarching Themes

Large overarching themes, such as the Market-Oriented Sector Selective (MOSS) talks of 1985-86, the Structural Impediments (SI) talks of 1989-90, and the Framework Agreement of 1993-96, are to be avoided. They lead the Japanese government to assume that the Americans have been gripped by another short-term enthusiasm—one that they can ride out with minimal concessions. They also oversimplify U.S. policy, which should be just as complex and multifaceted as the relationship itself.

One particular organizing theme to avoid is deregulation. The two governments have already agreed to upgrade the level of dialogue on deregulation. In theory, this will engage both sides in discussing an issue that has public support in Japan. But deregulation is unlikely to proceed with any vigor in Japan, and a primary focus on it would trap the administration in a discussion of an extraordinarily broad topic, which the Japanese government would try to keep at a high level of generality. The administration should certainly remain engaged on this issue, but not as the central, high-prole focus of policy. Most deregulation issues are better pursued when they arise in the context of particular trade issues, as with the color lm dispute (which challenges the existence of the Large Scale Retail Store Law). At least the administration appears to have chosen to discuss only a few issues under the rubric of deregulation, based on existing sectoral access problems.

Short-term Tension, Long-term Gain

The approach sketched above would continue or accelerate progress in lowering trade barriers in Japan. It will certainly yield further tension, since it proposes an active pursuit of market access problems that the Japanese government will vigorously oppose at the negotiating table and in the media. Tension is unavoidable, but it can be managed with greater attention to the public message. The long-run gain to the bilateral relationship from greater market openness is a compelling reason to accept the short-term perceptions of tension (and any temporary harm to other aspects of the bilateral relationship) that this active agenda would bring about.