Must we become Japanese?

National Review, Oct 27, 1989 by David D. Hale

Japan's indisputable economic success evokes enty-and tempts us toward imitati But we need to know more about the reasons for that success before we try to adapt japanese policies to our own circumstances.

WILL REVISIONIST HISTORIANs someday reclassify the American defeat in Vietnam as a strategic victory for trade policy? If the U.S. had vanquished the Communist insurgency twenty years ago, South Vietnam probably would have joined the ranks of Asia's newly industrializing countries during the 1980s. Assuming its bilateral per-capita trade surplus with the U.S. was mid-way between Taiwan's $650 and South Korea's $250, Vietnam's 35 million people would now be adding $10 to $15 billion per annum to America's trade deficit. Because of its trade surplus, Saigon would now be under constant pressure from the U.S. Treasury to revalue its exchange rate. As the exchange rate appreciated, Vietnamese insurance companies would inevitably have started gobbling up chunks of downtown Los Angeles and Seattle. The Harvard Business Review would now be publishing articles about how Vietnam had prospered by developing a unique export-oriented industrial policy blending elements of Confucianism with a dirigiste style of economic management inherited from the French.

It is doubtful that such a radically revisionist view of America's experience in Indochina will become popular until the lowa Democratic caucuses of the early twenty first century. But Japan's emergence as a major industrial power and the rise of other Asian nations as trade competitors have set in motion a revolution in the way Americans think about free trade, industrial policy, and the economic role of government.

The Reagan Administration itself signaled the start of the transformation. Ronald Reagan was the most protectionist President in modern American history, pushing the share of total imports subject to quota or official restraint from 12 per cent to 23 per cent. He also signed a trade bill in 1988 that authorized the U.S. Government to pursue trade retaliation policies unilaterally rather than through GATT; the U.S. itself pursues trade practices that would

require retaliation by other countries if their parliaments enacted similar laws. (Admittedly, President Reagan vetoed congressional efforts to increase import protection for textiles, but the disagreement with Congress was not over principle, but merely over whether the U.S. textile industry deserved even more protection than it already enjoyed under the multilateral fiber agreement.) Finally, the Reagan Administration laid the foundation for a de-facto industrial policy through a number of initiatives designed to bolster the competitiveness of America's high-technology industries, including the creation of a federally funded semiconductor consortium (Sematech). The Bush Administration appears likely to maintain the trend toward more interventionist microeconomic policiesas the decisions to extend steel quotas, renegotiate the FSX deal with Japan, and relax antitrust barriers to U.S. consortiums all demonstrate.

WHAT UNDERLIES this transformation? First, there is the sheer size of the U.S. trade deficit. By the mid 1980s, as the dollar rose and the trade deficit grew to 4 per cent of GNP, the political balance of power shifted toward protectionism. Secondly, the emergence of a trade deficit in high-technology products has stirred fears that America is suffering from competitiveness problems that extend beyond the exchange rate. The third factor is the emergence of a new economics literature arguing that governments can enhance national welfare by targeting investment on sectors capable of achieving oligopoly profits in the long term.

America is falling behind other countries, say the advocates of more aggressive trade and industrial policies, because the U.S. Government does not systematically guide macro and microeconomic policy in directions that enhance America's comparative advantage as an industrial power. These arguments are, of course, not totally new. Books praising Japanese experiments in industrial policy and export promotion began appearing eighty years

ago. By the late 1970s, there was another flurry of books heralding the emergence of a Japanese superstate. All of these books suggested that Japanese success resulted from an economic model quite different from the one familiar in America and other Anglo-Saxon societies. As Chalmers Johnson of the University of California explained in a major historical study of Japan's Ministry of International Trade and Industry MITI):

Japan's political economy can be located precisely in the line of deseent from the German Historical School-sometimes labeled economic nationalism," Handelspolitik, or neomercantihsm . .. In states that were late to industrialize, the state itself led the industrialization drive-that is, it took on developmental functions. These two differing orientations toward private economic activities, the regulatory orientation and the developmental orientation, produced two different kinds of government business relationships. The United States is a good example of a state in which the regulatory orientation predominates, whereas Japan is a good example of a state in which the developmental orientation predominates ...