No. 8 — March 1, 1996

Feature Article

U.S.-JAPAN ECONOMIC RELATIONS IN 1995: A LOOK BACK

Susan MacKnight

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Summary

"Night and day" and other stark comparisons offer a good initial cut at a recap of U.S.-Japan economic relations in 1995. During the year's opening half Washington and Tokyo seemed to be hurtling willy-nilly toward a complete rewrite of the conventional rules for managing transpacific economic problems in the process of searching for a solution to the psided U.S.-Japan trade in motor vehicles and parts. The late June automotive trade arrangement, which wrapped up the White House's primary market-opening agenda under the U.S.-Japan Framework for a New Economic Partnership, acted as the dividing line between the "before" and the "after." What traditionally has passed for normalcy in the complex, multifaceted bilateral economic relationship returned in 1995's csing half, the first extended period of relative quiet since the Clinton administration took office in January 1993 committed to a results-oriented Japan market access strategy.

Black-and-white contrasts, while useful as big-picture descriptive tools, are too simplistic in the U.S.-Japan economic relations context to capture the policy nuances on both sides that made 1995's two halves more alike than different. The White House's calm-inducing redirection of its Japan trade strategy from one aimed at gaining new market access agreements to one of monitoring implementation of already reached pacts actually started in the fall of 1994 rather than, as generally assumed, at the end of the automotive negotiations. Similarly, Tokyo's much-noted refusal during the protracted automotive talks to compromise on issues considered to involve matters of principle had precedents going back to the period in 1993 when the two governments were drafting the framework agreement.

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Looking For The Exit Sign

Clinton administration economic policymakers were more than ready in late 1994 to declare their signature results-oriented Japan market-opening strategy a success and move on to other less confrontational, possibly more productive approaches to winning a better Japanese business environment for American competitors — deregulation, for example — or even to abandon the White House's Japan-centric trade focus. Eighteen months of transpacific negotiating battles, first over the contents of the U.S.-Japan Framework for a New Economic Partnership and then over the market access issues assigned priority, had taken a considerable toll on the bilateral trade relationship as well as on the American participants' patience and stamina (see JEI Report No. 5A, February 10, 1995). Washington insiders reasoned that a White House-declared victory could be sold politically, despite a record-breaking U.S.-Japan trade gap and the public's perception that Japan still maintained a multitude of barriers to sales of U.S. goods and services. By its own count the Clinton administration had negotiated 10 market access agreements with Tokyo over the course of 1994 ane compared with a total of 27 pacts worked out during the 12 years of the Bush and Reagan administrations. More important perhaps in the White House assessment, the latest arrangements passed U.S. trade strategists' results-oriented test, including as they did "objective criteria" to track progress toward more open markets in Japan.

The inclinations of President Clinton's advisers notwithstanding, a victory announcement would have to wait for another day. Washington and Tokyo still had to settle the most important issue, politically as well as economically, on the framework's market access agenda: automotive products and how to expand access for imported vehicles in Japan, provide greater opportunities for foreign manufacturers to sell original equipment parts to the Japanese and American car and truck operations of Japan's automotive makers and deregulate the aftermarket for parts in Japan — plus, monitor progress toward achievement of the agreement goals in each of these three areas. Wrapping up this unfinished business, which took until the end of June (see JEI Report No. 24B, June 30, 1995), involved months of brinkmanship by Washington and Tokyo alike. As the very real prospect of unprecedented retaliation and counterretaliation materialized, all the talk over the previous 10 years or so about a "crisis" in U.S.-Japan relations retrospectively appeared to be of the "crying wolf" variety.

Why was the Clinton administration willing to risk permanent damage to the already frayed transpacific trade relationship and collateral strain on broader economic ties and common political and security interests to win a framework automotive trade agreement that charitably can be described as modest? Similarly, why was the Japanese government so inflexible when such a disastrous outcome was on the line, not to mention the big volume of sales that Japan's automotive industry would have st if the White House had made good on its threat to slap 100 percent penalty tariffs on Japanese luxury cars?

The answer for the United States starts with the reasons behind the Clinton administration's selection of automotive products for priority framework treatment. Cynics would say that the choice was dictated by politics of the vote-getting reelection kind. U.S. trade negotiators involved in picking the issues for the opening round of framework market access talks in the early summer of 1993 no doubt were oking down the road to a second term for the president. In the meantime, though, the White House had to appear to be doing something about the cause of roughly 60 percent of the already huge and expanding overall U.S. trade deficit with Japan. Vehicles and, increasingly, parts not only omed so visibly in the imbalance, but transpacific trade in automotive products was much more one-sided than in most other high-profile product groups where U.S. imports far exceeded Japan-bound exports.

Politics again influenced the Clinton administration's position last spring when the automotive negotiations, underway for 18 months, were going nowhere. By then the White House's definition of an acceptable deal generally bore little resemblance to the ambitious plan it had tabled in the fall of 1993. This show of flexibility, however, had not induced a corresponding response from Japan. Any more U.S.concessions, the president's senior advisers worried, would send a message to the American public — as well as to Japan and the rest of the world — that the Clinton administration really was not serious about its often-stated objective of opening markets overseas for competitive U.S. exporters, particularly in a country widely viewed as the biggest threat to America's economic well-being. U.S. trade officials additionally feared that all give and no take in the automotive talks might encourage other capitals in Asia allergic to Washington's market access agenda to emulate Tokyo's negotiating stance and stonewall. For domestic and foreign reasons alike White House strategists accordingly decided that the administration not only had to raise the specter of stiff sanctions on Japan but be prepared to make good on its retaliation threat — regardless of the falut on transpacific relations at various levels.

Matters of principle also stiffened the resolve of American economic policymakers to see the automotive negotiations through to either settlement on something approaching Washington's terms or, more likely in the late spring, sanctions. One was the conviction that a country of Japan's stature cannot be alwed to maintain a fortress economy. Said U.S. Trade Representative Mickey Kantor shortly before he announced in early May that the United States would retaliate against Japan barring an agreement and also would file an automotive-related complaint with the World Trade Organization: "This administration, from the president down, believes that csed markets — 'sanctuary markets' — have no place in an international trading system. They certainly have no place in the second-largest economy in the world, the country which has benefited the most from an open trading system."

In resorting to the use of Washington's ultimate bargaining tool — the prospect of retaliation under Section 301 of the 1974 Trade Act — the Clinton administration hoped first and foremost to break the protracted standoff in the automotive negotiations. If that tactic failed, the White House still saw the chance to demonstrate to largely unconvinced U.S. trading partners that the United States not only has the right to use its own trade law to tackle market access and other trade problems falling outside the purview of international trade rules but also has every intention to use that authority as a last resort.

That determination brought into play a matter of principle for Japan's government. Tokyo, like most other foreign capitals, has been a vocal critic of Section 301 and its variants, arguing that under this statute Washington functions as both judge and jury. When the Clinton administration unveiled the Section 301 weapon, Japan decided the time finally had come to take a stand — no matter what the potential cost to itself or to the transpacific relationship. For more than a month Tokyo made good on its ng-standing pledge not to negotiate with Washington under the threat of retaliation. It also asked for a quick verdict from the World Trade Organization on the compatibility of the pending U.S. sanctions move with international trade rules.

Principle already had contributed to Japan's hard-line position in the shape of Tokyo's refusal either to accept the "managed trade" solution that it portrayed Washington as advocating or to commit in any government-to-government agreement to any actions "beyond the reach of the government." These included directly helping foreign vehicle manufacturers to expand their Japan distribution arrangements and encouraging the Japanese vehicle industry to beef up its post-FY 1994 plans for sourcing production parts from foreign suppliers. This stance, backed up by an unprecedented public relations effort, enabled Tokyo to score some points internationally as the defender of free trade, even while it threatened a rupture between Japan and its single most important trading partner.

Practical considerations also made for Japanese intransigence. In Japan, as in the United States, the automotive industry is integral to the health of the economy — the biggest industrial contributor to national output and, as a result, a political heavyweight. That reality was conducive to inflexibility, particularly given the problems that weak domestic demand and a strong yen were causing car and truck manufacturers and, in turn, makers of production parts. The supplier core, in fact, was at a potentially double disadvantage since most of whatever money it makes comes from replacement parts.

In addition, Washington's demand for the deregulation of the aftermarket for parts threatened the considerable power of the Ministry of Transport. Then, too, Japan's top trade negotiator, Ryutaro Hashimoto, at the time minister of international trade and industry and now prime minister, apparently figured that a principled stand in the automotive talks also was good politics — a way to bolster his personal reputation among felw politicians as well as play to voters worried about their jobs and perhaps tired like many of their Diet representatives and the bureaucracy of the United States endlessly pushing Japan around.

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The Right Off Ramp?

The retaliation/counterretaliation scenario with its repercussions for the multiple U.S.-Japan relationships was a near miss — averted only by the ultimate demonstration of American flexibility, the eleventh-hour decision by the Clinton administration to abandon its bottom-line, previously nonnegotiable demand for an automotive trade agreement with numbers. Whether the White House made the right call in deciding to settle rather than impose sanctions in the hope of extracting a better deal from Tokyo no doubt will be the subject of many academic papers. For the record this country's trade negotiators maintain that the United States achieved as much as was reasonably possible from an obstinate Japan and more than the minimum needed to declare the automotive market access arrangement a winner for Detroit and parts suppliers alike and, by extension, the American economy.

The victory claim for the Clinton administration's trademark results-oriented Japan market access strategy — a record-setting 20 agreements in its accounting over the space of two-plus years and a surge in Japan-bound exports in the covered product areas — folwed in quick order. Then came the formal acknowledgement of what the White House already had done in the fall of 1994: shifted Japan trade policy gears from targeting new product and/or service areas for framework negotiating treatment to implementing and monitoring the market-opening agreements already reached.

This decision, too, will be much analyzed. U.S. economic policymakers understandably reject out of hand the charge heard on both sides of the Pacific that Tokyo's rigidity, even defiance, during the framework market access talks forced Washington to alter course. These presidential advisers publicly attribute the policy refocus solely to the achievement of the White House's primary market-opening agenda under the framework. In private, though, they might acknowledge that concerns about the damage to broader transpacific relations from the automotive and other framework negotiations factored into the shift. Clinton administration strategists also might admit off the record that a hard U.S. line on improved Japanese sales opportunities for American competitors was delivering less and less political mileage in an environment where the public no nger saw Japan as an economic juggernaut and the United States as an also-ran. Fears that a continued get-tough approach might trigger another bout of dollar weakness apparently were a marginal consideration in the White House's decision to redirect its Japan trade policy since the brinkmanship over a framework automotive arrangement in the spring of last year had virtually no impact on the simultaneous downward spiral of the dollar against the yen and major European currencies.

Whatever the dynamics behind the change, Washington's remodeled Japan market access strategy implies — but may not achieve — less fractious transpacific trade relations in 1996 than in the last two years. For starters, the folw-through process could turn noisy if government and industry in the United States do not see the market share results they expect from the framework agreements and other export-facilitating arrangements worked out by the Clinton administration and its immediate predecessor. The existence of objective criteria or their equivalent in most of these pacts is no guarantee of easy going, the intentions of U.S. negotiators aside, since the weight to be assigned to the various indicators is subject to differing interpretations.

The review process also takes on extra significance in this presidential election year (see JEI Report No. 8B, March 1, 1996). Not only is monitoring of market access pacts now the priority in Japan trade policy, it additionally is a primary thrust of overall U.S. trade policy. At the beginning of 1996 the Office of the U.S. Trade Representative set up a permanent unit devoted exclusively to tracking implementation of this country's trade agreements and compliance with U.S. trade laws. Moreover, the Department of Commerce expects to establish a comparable organization in the near future. These moves suggest that, whatever happens to trade as an issue in the Republican campaign, Mr. Clinton will cite his record of creating export-related jobs by opening markets abroad for American competitors. With that focus, the White House will be under pressure to show that the agreements negotiated with Japan are delivering the promised results.

Transpacific trade problems also will not sink bew the political horizon simply because the Clinton administration has shifted Japan trade policy gears. The White House already has two high-profile issues on its hands: the extension of the semiconductor trade pact beyond its current expiration date of July (see JEI Report No. 47B, December 22, 1995) and the investigation under Section 301 of Eastman Kodak Co.'s charges of anticompetitive business practices in Japan's consumer photographic film and paper markets (see JEI Report No. 29A, August 4, 1995, and No. 40B, October 27, 1995). Both have the potential to become near-term flash points in the U.S.-Japan economic relationship since, to date, Tokyo has refused to discuss either issue with Washington. A number of other problems could become irritants, big or small, depending on their handling. These possibilities plus the outcome of the review process could test the conventional thinking inside the Beltway that presidential election years are times of relative quiet on the U.S.-Japan trade front.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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APPENDIX

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Appendix: Chronology of U.S.-Japan Relations and Japanese Economic Development in 1995

January aaaa February aaaa March aaaa April aaaa May aaaa June aaaa July aaaa August aaaa September aaaa October aaaa November aaaa December

 The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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