Japanese-American trade relations increasingly resemble a good cavalry fight. Here are the Japanese ambushing every American industry in sight. Suddenly, over the hill, comes Bob Strauss leading his troops to the rescue.
So far, it is a standoff. As Strauss, the President's Special Trade Representative, indicated yesterday, the concessions that trade negotiator Nobuhiko Ushiba brought from Tokyo fall far short of what the United States wants. A good guess is that the Japanese proposals fail to provide sufficient relaxation of quotas on food products (most importantly, beef and citrus), although it is possible that proposals to cut tariffs on manufactured goods (such as film, cars and computers) may also be inadequate for U.S. officials.
The temptation to cast this conflict as a national contest of wills is strong, but there is much more to the story than that. The important thing to remember is that events are rapidly drifting beyond the point where the Japanese can easily control them. Ample evidence now exists that Japan's economic strategy is self-destructing. Japan's massive trade surplus, estimated to be $8 billion alone with the U.S. in 1977, cannot long continue without inflicting as much damage on the Japanese as on its trading partners.
Either other nations will be driven to slap trade restrictions on Japan's exports, or, if they don't the rising value of the yen will tend to price Japanese products out of world markets. Japan could defend the value of the yen, but doing that would require tight credit policies which would further stifle the country's internal growth and aggravate unemployment.
So, Strauss or no Strauss, the Japanese have to do something or watch it done to them.
The mechanics of the process are straightforward. Japan's current account surplus - including exports and imports, plus services such as transportation, tourism and royalty payments - is expected to hit $10 billion in 1977, up from $3.7 billion last year. The surplus means that more traders want to buy yen (to pay for Japan's exports) than to buy dollars or other foreign currencies. Consequently, in the past year, the yen's value has risen nearly 20 per cent. It now takes only about 240 yen to buy a dollar compared with about 297 a year ago.
This squeezes Japan's exporters. With most products priced in dollars, exports earn fewer yen, but most exporter costs (such as labor) are in yen. Already low profit must rise. Continued too long, that process would erode Japan's competitiveness.
Classic economics, of course, dictates that such payments imbalances be self-correcting. Ultimately, rising export prices and failling import prices should reduce exports and increase imports. Or, if that doesn't work, the balance of payments surplus creates an inflow of money that increases demand for imports or, by creating inflation, overprices exports.
But this logic won't work smoothly if Japan hampers its imports or restricts the domestic economy. In that case, export growth would slacken, the surplus would linger and domestic unemployment would increase. Already, the physical volume (but not dollar earnings) of exports has stagnated, and unemployment is higher than in 1974.
Against this background, what America urges Japan to do - liberalize trade access and increase growth - is basically for its own good. Of the two, faster growth is more important. Listed below are Japan's largest exports to the United States and the major U.S. exports to Japan last year, when Japan's surplus was $5.4 billion (in billions of dollars):[TABLE OMITTED]
The U.S. chief gripe against Japan is its low proportion (about 20 per cent) of manufactured imports. But realistically, as the table indicates, the U.S. trade balance will long continue to rely heavily on basic commodities. Grain prices (as much as volume) determine that component. And, if the United States restricts Japanese steel exports, coal shipments to Japan - used heavily in steel production - probably will drop. Only a sustained Japanese domestic expansion, creating internal demand for steel, can buoy U.S. exports.
But this has been Japan's biggest problem. The Japanese collectively seem to fear tomorrow. Therefore, both as individuals and as a nation, they prefer to produce more than they consume, stashing away the surplus against some ill-defined future catastrophe. Japanese consumers save nearly 25 per cent of disposable income (the comparable U.S. rate is 5 per cent to 6 per cent), and high savings have impeded domestic expansion.
Likewise, the payments surplus and rising foreign exchange reserves (up to $22 billion from $17 billion a year ago) provide import insurance. Japan is almost totally dependent on imports for energy and much of its food and raw materials.
The prospects for changing this are unclear. The economy is expected to grow about 6 per cent or less in the current fiscal year, which may seem healthy but which is less than the government's 6.7 per cent target and much less than the 10.1 per cent average between 1950 and 1971. By contrast, U.S. growth - expected to be about 5 per cent - exceeds the long-term average.
Whether Japan can accelerate growth remains to be seen, Japan's problems are genuine. A vast, inefficient traditional sector is threatened both by import liberalization and slow growth. But these problems evoke little sympathy abroad. And if the Japanese can't relieve their massive payments surplus, the outside world - in the form of its Bob Strausses and its impersonal exchange rate movements - will try to do the job for them.