Japan Still Matters—A Lot

International Economy, The, Jan, 2001 by Max Baucus

A leading U.S. Senate voice on trade warns that the United States can't afford to ignore Japan.

It is conventional wisdom that Japan no longer matters to the United States. Its economy is stagnating, the political system is paralyzed, and its markets and culture remain closed. Future growth in American exports and investment will be in China. Security concerns in Asia center on the Taiwan Strait, the Korean and the Indo-Pakistan border.

Nothing can be farther from the truth. Japan is the second largest economy in the world. With a few European exceptions, Japan and the United States account for virtually all cutting edge technology being developed in the world today. The U.S.-Japan alliance forms the cornerstone of the U.S. security presence in Asia and is at the core of stability in the Western Pacific region.

"Japan-passing," skipping over Japan to other Asian countries more amenable to U.S. business, is simply the wrong way to describe the American relationship with Japan. The American Chamber of Commerce in Japan continues to grow. Two-way trade has increased from $140 billion in 1991 to $188 billion last year. Over one million Americans visit Japan every year. Japanese is the third most studied foreign language in the United States, after Spanish and French.

It is true that Congress spent much more time dealing with China over the last eighteen months than with Japan. Chinese accession to the World Trade Organization (WTO) and granting China permanent Normal Trade Relations status are critical. We have a unique opportunity to bring China into the world trading system and its rule of law. The long-term implications are enormous. But this does not mean that we have chosen China as our focus in place of Japan.

A decade of economic stagnation has convinced many in Japan, leaders, as well as average citizens, of the need to change the Japanese economic model. The "developmental state" as Chalmers Johnson characterized it in his classic work, MITI and the Economic Miracle, was effective in transforming Japan from utter devastation in 1945 into unprecedented prosperity by the 1970's and 1980's. However, that model clearly does not work in an advanced industrialized nation in this fast-paced Internet era. But it is a huge challenge to move from recognition of the problem to a transformation of the economic, political, and cultural system that has developed in Japan over the past fifty years.

Japan's economy will recover. The fundamental sources of growth continue to exist--high savings rate, high literacy, a dedicated workforce, development of cutting-edge technology, high quality manufacturing. The question is when recovery will occur, and there are many indicators demonstrating how difficult the challenge is.

First, cumulative foreign direct investment in Japan, as a percentage of GDP, remains the lowest of any industrialized country. It was 0.7 percent in 1998, compared to 9.3 percent in the United States and 10 percent in France.

Second, intra-industry trade in Japan is lower than that in most other industrialized countries. In fact, intra-industry trade is even significantly below that in the newly industrialized economies of South Korea and Taiwan.

Third, only 0.2 percent of Japan's work force is foreign or foreign-born. The next lowest of the G7 countries is Italy at 1.7 percent.

France stands at 6 percent and the United States is close to 10 percent.

There are many historical and cultural reasons for the absence of foreign workers in the Japanese workforce. But what worked in the Nineteenth and Twentieth Centuries will not work in the Twenty-first. Immigration is a fundamental measure of a society's openness to the world.

Fourth, despite the creation earlier this decade of a new electoral system designed to sustain a multi-party system, little policy differentiation has developed among the political parties. Narrow interest groups continue to obstruct much of the political decision-making process.

The contrast between the restructuring taking place in China versus Japan is striking. Even after China formally joins the WTO, the United States and other nations will still have a lot to do to penetrate the Chinese market for our goods, services, and investment. Nevertheless, it is clear that the senior Chinese leadership has decided that it is willing to face enormous short-term dislocation because of the need to restructure. They understand that they have no alternative. Japan, on the other hand, wants to restructure while minimizing dislocation and social and economic costs. It is possible that Japan can succeed at this, but the costs will be high. It will take much longer for Japan to emerge from its economic stagnation. And, as in the past, Japan's trading partners will bear the burden. Some will be able to export less to Japan than they should. Others will suffer the consequences of trade diversion.

Japan, the European Union, and the United States have a special responsibility to strengthen the consensus for open markets and trade expansion. I, along with many in Congress and Administration, have been fighting to end the use of unilateral trade sanctions, to change our law on the Foreign Sales Corporation (FSC) to come into compliance with a WTO decision, to end our embargo on Cuba, to stop the excesses of the Helms/Burton legislation that make our closest political and economic allies the subject of attack because of our own outdated and misguided Cuba policy.