Stand up & fight - the problems with U.S.-Japanese trade policy

National Review, March 7, 1994 by Jim Kolbe

LAST JULY, the President summed up what he said was his basic negotiating approach with these words to students at Tokyo's Waseda University, "What the United States seeks--let me be clear-- is not managed trade or so-called trade by the numbers, but better results from better rules of trade."

Yet, last week the U.S.-Japan trade "framework" talks broke down with the Administration advocating the very managed trade--market-share targets in areas such as autos and medical equipment, telecommunications, and insurance--the President had earlier opposed. Mr. Clinton has given in to the temptation of placing more faith in the visible hands of Japanese bureaucrats than in the invisible hands of the free market.

Now, as retaliation in the form of restrictions on Japanese access to the American market looms, the U.S. may pay for his mistake through higher prices for Japanese goods and a deterioration in relations with one of our more vital strategic partners. And the "results oriented" approach of the Administration--even if accepted by Japan--would likely manage more American business out of than into trade with Japan anyway.

The changing political situation in Japan, if played right, could mean the substantive market opening the U.S. has sought for decades. Relying on the Japanese bureaucracy--whose major preoccupation the last forty years has been Keeping foreign trade and investment out of Japan--to "manage access" for the U.S. is naive. Doing so in the midst of a popular movement in Japan against that bureaucracy is tantamount to supporting the Soviet nomenklatura during perestroika.

If the Administration really wants to solve the "Japan problem" for American business once and for all, it should adopt a policy that targets the removal of regulatory, administrative, and structural barriers to free trade in Japan. The key to opening Japan is to get the Japanese government out of the day-to-day workings of the economy, not to expand its powers of intervention in hopes of increasing our market share. In a new round of negotiations the Clinton team should forget about trade by the numbers and insist that the Japanese government lay out a clear schedule for sweeping deregulation and structural harmonization. Then it should carefully monitor progress to ensure that--unlike in the past--talk is backed by action.

Japan's economy is riddled with regulations and procedures that both stifle imports and discourage domestic entrepreneurship. At last count there were over 11,000 government licensing and authorization processes affecting business activities in Japan. Almost all of these are subject to the nontransparent "administrative guidance" of the Japanese bureaucracy, whose power to restrain innovations that might "disrupt the market order" is legendary--especially when the innovator is a foreign company.

Even MITI Minister Hiroshi Kumagai agrees that excessive economic regulation in Japan largely explains why market-opening attempts in the past have proved futile. On his first day on the job in August he startled the Japanese press by bluntly announcing, "It's natural for the U.S. and Europe to think that Japan is strange. Our tariffs may be low but collusive practices and excess regulation effectively close the market."

Calling Adam Smith

IN CAPITALISM the fundamental freedom of capital flow is of obvious importance. But in Japan the freedom of capital flow is drastically restricted. This hurts consumers by giving them very low returns on their savings. At the same time it allows producers to continue making and marketing goods even in the face of sustained low net profitability and sub-standard returns on investment. Thus, financial protectionism is the key to what Western analysts have mis-termed the "Japanese style of capitalism" (which hardly constitutes what Adam Smith would call capitalism at all).

As Masasuke Ide, a senior researcher at Nomura Research Institute in Tokyo, writes in a recent paper, "It is often claimed that Japanese companies adopt a low-return strategy in the short run to drive out competitors so that they can obtain market dominance and leap to high profitability in the long run. This is not the case. Japanese companies do not have to aim at higher profitability even after they have won and gained market share. Rather, they force competitors to come down to Japanese profitability levels."

Ide believes that financial deregulation would prove to be the unmaking of the whole keiretsu system of insider cross-shareholding and cross-purchase agreements between large companies that is often cited as an impediment to greater foreign access to the Japanese market. In his words, "If financial institutions have to start seeking higher returns for depositors and investors, that will make it difficult for them to keep supporting the low-return strategy of their traditional corporate group partners." The problem is that to effect the type of substantive--not merely superficial--financial deregulation needed to end this system, the U.S. will have to aim at the heart of the closely protected powers of the Japanese Ministry of Finance (MOF).