Wallis, W. Allen

English

Scholarship @ Cornell Law

Cornell International Law JournalVolume 22Issue 3 Symposium 1989 Article 3Economics, Foreign Policy, and United States-Japanese Trade DisputesW. Allen WallisFollow this and additional works at: http://scholarship.law.cornell.edu/ciljPart of the Law CommonsThis Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in CornellInternational Law Journal by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contactjmp8@cornell.edu.Recommended CitationWallis, W. Allen (1989) "Economics, Foreign Policy, and United States-Japanese Trade Disputes," Cornell International Law Journal:Vol. 22: Iss. 3, Article 3.Available at: http://scholarship.law.cornell.edu/cilj/vol22/iss3/3W Allen Wallis*Economics, Foreign Policy, and UnitedStates-Japanese Trade DisputesI. Introduction: Economics and Foreign PolicyThe most essential ingredients of foreign policy today are economic.This has been true for several decades, and increasingly is beingrecognized.In a report prepared for the recent presidential transition, theCenter for Strategic and International Studies (a respected Washingtonthink tank) asserted that "there is consensus about the need to placespecial emphasis. . .on international economics because of [its]increased importance . . . for a successful foreign policy. Thus [thisreport] has revised the classic notion of 'national security' to ensureinclusion of the economic ... dimensions of international affairs .... IThe report's chapter on "International Economic Policy" begins byasserting that "the importance of integrating international economicpolicy with other aspects of U.S. international involvement has becomecritical." 2 This illustrates how economics has become the dominantarea of concern in foreign policy.U.S. relations with Japan are discussed almost exclusively in eco-nomic terms. Furthermore, most of those discussions are characterizedby a great deal of animosity toward Japan. I want to urge that we con-sider our relations with Japan in a much broader context than simply aneconomic one, though of course without underplaying the importanceof economic relations. I want to urge also that we discuss our economicrelations with Japan in a friendly, not a hostile, manner, though ofcourse without underplaying the importance of the differences betweenUS.* Former Under Secretary for Economic Affairs, United States Department ofState; now Research Scholar at the American Enterprise Institute for Public PolicyResearch. These remarks are based on a Keynote Address delivered at the CornellInternational Law Journal Symposium, "The United States-Japanese TradeRelationship: An Interdisciplinary Approach for the 1990s, February 24, 1989,Ithaca, NY.1. CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES, PRESIDENTIAL TRANSI-TION IN INTERNATIONAL AFFAIRS 1 (Nov. 10, 1988).2. Id. at 42.22 CORNELL INT'L LJ. 381 (1989)Cornell International Law JournalII. Japan in the International CommunityJapan is already a major power and is destined to grow in importance forat least the next century. It has become the world's second largest econ-omy, an economic superpower, and is beginning to play a role commen-surate with that status.Until recently Japan kept a low profile in international affairs, sel-dom taking the lead and usually following our lead. In Japan, as in Ger-many, there remains (especially among educated people), a deep-seatedsense of guilt and shame for the period from 1930 to 1945. TheGermans, however, have more readily resumed their place in worldaffairs. This is perhaps explained in part by the fact that the Germansare active in a number of international organizations-for example, theEuropean Economic Community and the North Atlantic Treaty Organi-zation. Furthermore, the German place in world affairs had been estab-lished for centuries, whereas Japan began to participate only within thiscentury. Germany also has close geographic, cultural, and historical tieswith other leading powers, and people of German ancestry have longbeen included among the elites of North and South America, as well asEurope. Finally, many Japanese, especially of the generation now pass-ing from the scene, have deep feelings of gratitude, obligation, andadmiration toward America as a result of the way we behaved as con-querors-notjust because of the atrocities we did not commit, but morefrom the political, economic, and social enlightenment to which weguided them.All of these factors cause Japan to attach far greater weight to itsrelations with the United States than to its relations with any other coun-try. The historical, geographical, and political factors are strongly rein-forced by economic factors: not only are we the largest source of theirimports and the largest market for their exports, but we are their mainexternal intellectual resource for management, science, technology, andengineering.It is revealing to contrast the Japanese and German responses dur-ing the period two or three years ago when the U.S. began urging bothcountries to stimulate their economies. The U.S. sought to reduce itstrade deficits with these two nations. Whether this action in turn wouldbenefit Japan and Germany depended on what stimulative measuresthey used stimulate the economy. The results of fiscal and monetarymeasures would be fairly prompt, but they would be inflationary. Theresults of structural adjustments-reducing rigidities, reforming taxes,reducing regulations, opening competition, etc.-would be delayed, butbeneficial. The Japanese initiated both fiscal and structural changes,and made a point of informing the U.S. of their plans and progress. TheGermans suggested that we buzz off, or go fly a kite. (Both theJapaneseand German economies seem to have benefitted from these oppositeresponses, but our trade balance has not.)Vol. 221989 Keynote AddressM. United States Interests in the PacificEven though economics dominates our current relations with Japan, wemust never forget that we have major, growing interests in the Pacific,and that Japan is the most important nation in the Pacific.The most dynamic economies of the world are in the Pacific-notonly the four "newly industrialized economies" ("NIEs"),3 but alsoIndonesia, Malaysia, and Thailand are waiting in the wings. Australia isalready a very significant friend and ally; it has a strong and growingeconomy, and brings constructive good sense to world affairs. Withinthe U.S., the five Pacific states may some day be our most importantregion.In recent years, the Soviets have been increasingly active in thePacific. At Cam Ranh Bay in Vietnam, they have one of the world'sgreatest naval bases. Of their four fleets, the largest is in the Pacific,amply supplied with ballistic missiles. The Soviets fish extensively in theSouth Pacific, both literally and figuratively. In many of the islands, suchas Fiji, New Caledonia, Vanuatu, and Papua New Guinea, settlers out-number the indigenous population and dominate democratic elections,thereby creating fertile soil for political unrest. (Even Libya has stirredthe pot a little in Vanuatu.) In the Philippines, the communist insur-gency continues; demagoguery has a good chance of forcing out ourbases; and the long-run stability of the government is uncertain.In short, we have important political, security, and economic inter-ests in the Pacific, and we need friends there. Australia is our best andmost trusted friend and ally in the South Pacific; Japan plays the samerole in the North Pacific. There are serious economic issues between usand Japan. It is important that we resolve those issues, and no lessimportant to us than to Japan that we resolve them in ways that buildmutual confidence and friendship.IV. The United States and Japan in a Multilateral ContextUnfortunately, in international trade the United States has a reputationfor arrogance and bully-boy behavior. We say we want fair trade. Whocould object to that? But who defines "fair trade?" We do, unilaterally;and too often what we mean by "fair trade" is only that trade in whichwe sell and others buy. We charge unfairness, we pass judgment and weimpose penalties-again unilaterally. We're the biggest, so we can getaway with it. This "American Unilateralism" in trade, however, is uni-versally resented. That resentment affects all aspects of our interna-tional relations.In our defense, it must be recognized that internationally recog-nized rules of trade are few and feeble; enforcement of those rules isalmost nonexistent. In the General Agreement on Tariffs and Trade("GATT"), not only does it take forever to deal with charges of viola-3. Hong Kong, Singapore, Taiwan, and South Korea.Cornell International Law Journaltion, but the defendant can veto a guilty verdict. In such circumstances,occasional resort to frontier law is hardly surprising.It is critically important for the future of the world trade that theUruguay Round of GATT Negotiations be completed on schedule by1990; that it establish workable rules for trade in agricultural services,intellectual property, and trade related to investments; and that it createan effective means of resolving disputes. The United States and Japanwere prime movers in launching the Uruguay Round. The Europeans,especially France, were the main obstructionists, and in the currentnegotiations they are blocking efforts to abolish subsidies that distorttrade in agriculture over a ten-year period.V. The Bilateral Trade Relationship: The United States and JapanTurning specifically to trade relations between the U.S. and Japan, sev-eral important issues dominate the debate.A. The Trade DeficitThe size of our trade deficit with Japan is not important economically.Obviously it is of great importance to journalists and politicians.Through them it has acquired great symbolic importance to most lay-men and businessmen, in the same way that feeding hormones to beefcattle has acquired real psychological significance in Europe. But it isonly a "dagger of the mind, a false creation."The trade balance with any single country does not matter. Weshould expect to have deficits with some countries and surpluses withothers. Even the aggregate trade balance has little economic signifi-cance. Trade in goods is only part of the economic intercourse betweencountries. The total flow of considerations is always equal in both direc-tions. If a country has a large trade deficit, as does the United States,then it has an equally large surplus in its capital flow. In fact, the tradedeficit is essentially equal to the amount by which investment in theUnited States exceeds the amount saved in the United States.4 TheUnited States remains the best place in the world to invest, and theamount of American money invested abroad is far exceeded by theamount of foreign money invested here.5 In sum, our trade deficit haslittle to do with either our competitiveness or the trade barriers ofothers.B. Japanese Barriers to TradeIt follows from the first point that trade barriers in Japan do not havemuch effect on the size of our trade deficit with Japan. In fact, Japan hasbeen lowering its trade barriers. It is almost the only major country to4. Conversely, Japan's trade surplus equals the amount by which savings inJapan exceed the amount invested there.5. Those who claim, erroneously, that the United States is a debtor nation do sopartly by regarding all foreign funds invested here as money owed by Americans.Vol. 221989 Keynote Addressdo so; we have been raising ours. Yet despite lower formal barriers totrade, our trade deficit with Japan has risen. Japan's trade barriersmight more accurately be called "impediments," since with the excep-tion of agriculture, Japan has low tariffs and few quotas. These impedi-ments, however, are detrimental to the United States because theyseriously distort the composition of our exports to Japan. They preventthe United States from concentrating on products where we have thegreatest comparative advantage, and limit us to exporting those itemswhich, while advantageous, are not the most advantageous.C. The Inefficiency of Japan's EconomyThe impediments to the U.S. achieving maximum advantage from tradechiefly result from the fact that Japan's economy is astonishingly ineffi-cient. The gains to Japan itself from removing the impediments thatrestrict us would far exceed the gains to the United States.Japan's export sector success has created the illusion of a miracu-lously efficient economy. Notwithstanding that popular image, however,much of the Japanese economy is backward and inefficient. It is ironicthatJapan, which in its foreign trade has been so effective in directing itsresources and talents into the most productive areas, has not allowedthe same kind of efficiencies to operate in its domestic sector. Considersome illustrative examples.America's farmers are five times as productive as Japan's and couldprovide food to Japanese consumers at a much lower cost. In manycases quotas and high tariffs prevent them from doing so. Rice is a bul-wark of theJapanese diet, yet rice sells in Japan for approximately seventimes the world price. Soybeans also sell for about seven times theworld price. Because an inefficient sector is protected, the Japaneseconsumer suffers, as does the Japanese economy as a whole. But we inthe United States, and other countries with comparative advantages inagriculture, suffer also since we are unable to make the most of ouradvantages.Japan buys logs from the U.S., but if our sawmills, which are muchmore efficient than Japan's, process those logs into plywood or paper,Japan levies a high tariff on them. The result is that Japanese housesand furniture are excessively expensive. Every time anyone in Japanputs pen to paper or remodels his house, he is subsidizing an inefficientindustry. Again,Japan prevents the United States from making the mostof our efficiency, which would otherwise benefit both the U.S. and Japan.Japan's cumbersome distribution system increases the price anddecreases the availability of goods, especially imported goods. More-over, Japan's retailing law limits the size of stores, and can prevent alarger retailer from providing a greater variety of goods at a lower price.When industries in Japan become depressed,Japan subsidizes themby providing specific tax benefits and loan guarantees. It also protects anumber of them by cartels which bar lower-priced imports. Today,twenty-two industries inJapan-most of them in basic materials such asCornell International Law Journalpetrochemicals, fertilizers, paper, textiles, and aluminum-are classifiedas depressed. Industrial users are forced to buy the more expensiveproducts of inefficient domestic industries.Even aside from these cartels, many Japanese companies prefer tobuy products made by companies in their own "groups" with which theyhave been doing business for many years. Part of the reason for this hasto do with the nature of Japanese society. But the result is that outsid-ers, whether foreigners or Japanese, are excluded. This prevents theend-user from obtaining the best product at the best price. Though thispractice has not been unknown in our own country, deregulation, inten-sified competition, take-over threats, and foreign imports have reducedit to insignificance.Finally, Japan's surplus savings have been moving overseas. Manyold-line industries are able to block competitors who would invest thesavings in modernizing the industry, and this has limited opportunitiesfor investing Japan's large savings in Japan.D. Japanese Investment in the United StatesJapanese investments in the United States are very much to the UnitedStates' advantage. This is one respect in which Japanese inefficiencieswork to our advantage.As indicated above,6 Japan's balance of payments surplus is essen-tially equal to the excess of its domestic savings over its investment. Itssavings are large, but because its economy (except for export industries)is generally inefficient, only part of those savings is invested in Japan. Alarge part of the savings is invested abroad, especialy in the U.S. Thus,Japanese saving provides us with capital that makes our labor, our man-agement, our natural resources and our technology more productive,rather than benefitting Japan.E. Domestic Political InfluenceThe politics of trade issues are very much the same in Japan-or, forthat matter, in any democracy-as in the United States. Why, for exam-ple, did the Japanese put up so much resistance to opening their citrusmarket? Why did the U.S. campaign so aggressively to open the Japa-nese citrus market? The answer to both questions is the same. In bothcountries, a comparatively small group of producers was in a politicallystrategic position that gave it great leverage with the party in power.What are called international economic issues are mostly domestic polit-ical issues; they result from efforts of small groups to gain unearnedadvantages from other groups in the same country.F. Maintaining Good WillWe have brought strong and unrelenting pressure on Japan to liftimpediments to trade in one area after another. In virtually every6. See supra note 4 and accompanying text.386 Vlol. 221989 Keynote Addressinstance, eventually, Japan has gone a long way toward meeting ourobjectives. But, with the possible exception of semiconductors, thesteps taken have been at least as beneficial to Japan as to us. Marketopenings that we have achieved have been equally available to all coun-tries (except probably for semiconductors). These openings have dis-criminated in our favor only in the sense that the impediments we haveattacked may have been more important to us than to others. We havemade better progress in opening markets in Japan than in almost anyother country, and we must keep in mind the limits on Japan's fund ofgoodwill toward the United States. We must not overdraw that account.The United States's stake in future U.S.-Japanese relations is just asgreat as Japan's.VI. ConclusionWe have an important stake in the Pacific, and fortunately have strongand friendly ties with the two most important countries in the Pacific,Australia and Japan. With Japan we have serious problems arising pri-marily from impediments that limit our exports of the products whereour greatest comparative advantage lies. Those impediments are moredamaging to Japan than to us, and many Japanese recognize that. Theobstacles to lowering the impediments arise from the power of specialinterests-the "tyranny of minorities"-that characterizes democracies,perhaps all governments. Indeed, much of the pressure on Japan toopen its markets arises from special interests in the United States.Opening Japan's markets would be beneficial to both Japan and theUnited States. Competent officials should, therefore, be able to worktogether in a spirit of goodwill, and with understanding of each other'sdomestic politics, to advance our common interest in freer, more pro-ductive trade.

Economics, Foreign Policy, and United States-Japanese Trade Disputes

NELLCO Consortium Legal Scholarship Repository

Cornell Law Library

Cornell International Law Journal
Volume 22
Issue 3 Symposium 1989 Article 3
Economics, Foreign Policy, and United States-
Japanese Trade Disputes
W. Allen Wallis
Follow this and additional works at: http://scholarship.law.cornell.edu/cilj
Part of the Law Commons
This Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell
International Law Journal by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact
jmp8@cornell.edu.
Recommended Citation
Wallis, W. Allen (1989) "Economics, Foreign Policy, and United States-Japanese Trade Disputes," Cornell International Law Journal:
Vol. 22: Iss. 3, Article 3.
Available at: http://scholarship.law.cornell.edu/cilj/vol22/iss3/3
W Allen Wallis*
Economics, Foreign Policy, and United
States-Japanese Trade Disputes
I. Introduction: Economics and Foreign Policy
The most essential ingredients of foreign policy today are economic.
This has been true for several decades, and increasingly is being
recognized.
In a report prepared for the recent presidential transition, the
Center for Strategic and International Studies (a respected Washington
think tank) asserted that "there is consensus about the need to place
special emphasis. . .on international economics because of [its]
increased importance . . . for a successful foreign policy. Thus [this
report] has revised the classic notion of 'national security' to ensure
inclusion of the economic ... dimensions of international affairs .... I
The report's chapter on "International Economic Policy" begins by
asserting that "the importance of integrating international economic
policy with other aspects of U.S. international involvement has become
critical." 2 This illustrates how economics has become the dominant
area of concern in foreign policy.
U.S. relations with Japan are discussed almost exclusively in eco-
nomic terms. Furthermore, most of those discussions are characterized
by a great deal of animosity toward Japan. I want to urge that we con-
sider our relations with Japan in a much broader context than simply an
economic one, though of course without underplaying the importance
of economic relations. I want to urge also that we discuss our economic
relations with Japan in a friendly, not a hostile, manner, though of
course without underplaying the importance of the differences between
US.
* Former Under Secretary for Economic Affairs, United States Department of
State; now Research Scholar at the American Enterprise Institute for Public Policy
Research. These remarks are based on a Keynote Address delivered at the Cornell
International Law Journal Symposium, "The United States-Japanese Trade
Relationship: An Interdisciplinary Approach for the 1990s, February 24, 1989,
Ithaca, NY.
1. CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES, PRESIDENTIAL TRANSI-
TION IN INTERNATIONAL AFFAIRS 1 (Nov. 10, 1988).
2. Id. at 42.
22 CORNELL INT'L LJ. 381 (1989)
Cornell International Law Journal
II. Japan in the International Community
Japan is already a major power and is destined to grow in importance for
at least the next century. It has become the world's second largest econ-
omy, an economic superpower, and is beginning to play a role commen-
surate with that status.
Until recently Japan kept a low profile in international affairs, sel-
dom taking the lead and usually following our lead. In Japan, as in Ger-
many, there remains (especially among educated people), a deep-seated
sense of guilt and shame for the period from 1930 to 1945. The
Germans, however, have more readily resumed their place in world
affairs. This is perhaps explained in part by the fact that the Germans
are active in a number of international organizations-for example, the
European Economic Community and the North Atlantic Treaty Organi-
zation. Furthermore, the German place in world affairs had been estab-
lished for centuries, whereas Japan began to participate only within this
century. Germany also has close geographic, cultural, and historical ties
with other leading powers, and people of German ancestry have long
been included among the elites of North and South America, as well as
Europe. Finally, many Japanese, especially of the generation now pass-
ing from the scene, have deep feelings of gratitude, obligation, and
admiration toward America as a result of the way we behaved as con-
querors-notjust because of the atrocities we did not commit, but more
from the political, economic, and social enlightenment to which we
guided them.
All of these factors cause Japan to attach far greater weight to its
relations with the United States than to its relations with any other coun-
try. The historical, geographical, and political factors are strongly rein-
forced by economic factors: not only are we the largest source of their
imports and the largest market for their exports, but we are their main
external intellectual resource for management, science, technology, and
engineering.
It is revealing to contrast the Japanese and German responses dur-
ing the period two or three years ago when the U.S. began urging both
countries to stimulate their economies. The U.S. sought to reduce its
trade deficits with these two nations. Whether this action in turn would
benefit Japan and Germany depended on what stimulative measures
they used stimulate the economy. The results of fiscal and monetary
measures would be fairly prompt, but they would be inflationary. The
results of structural adjustments-reducing rigidities, reforming taxes,
reducing regulations, opening competition, etc.-would be delayed, but
beneficial. The Japanese initiated both fiscal and structural changes,
and made a point of informing the U.S. of their plans and progress. The
Germans suggested that we buzz off, or go fly a kite. (Both theJapanese
and German economies seem to have benefitted from these opposite
responses, but our trade balance has not.)
Vol. 22
1989 Keynote Address
M. United States Interests in the Pacific
Even though economics dominates our current relations with Japan, we
must never forget that we have major, growing interests in the Pacific,
and that Japan is the most important nation in the Pacific.
The most dynamic economies of the world are in the Pacific-not
only the four "newly industrialized economies" ("NIEs"),3 but also
Indonesia, Malaysia, and Thailand are waiting in the wings. Australia is
already a very significant friend and ally; it has a strong and growing
economy, and brings constructive good sense to world affairs. Within
the U.S., the five Pacific states may some day be our most important
region.
In recent years, the Soviets have been increasingly active in the
Pacific. At Cam Ranh Bay in Vietnam, they have one of the world's
greatest naval bases. Of their four fleets, the largest is in the Pacific,
amply supplied with ballistic missiles. The Soviets fish extensively in the
South Pacific, both literally and figuratively. In many of the islands, such
as Fiji, New Caledonia, Vanuatu, and Papua New Guinea, settlers out-
number the indigenous population and dominate democratic elections,
thereby creating fertile soil for political unrest. (Even Libya has stirred
the pot a little in Vanuatu.) In the Philippines, the communist insur-
gency continues; demagoguery has a good chance of forcing out our
bases; and the long-run stability of the government is uncertain.
In short, we have important political, security, and economic inter-
ests in the Pacific, and we need friends there. Australia is our best and
most trusted friend and ally in the South Pacific; Japan plays the same
role in the North Pacific. There are serious economic issues between us
and Japan. It is important that we resolve those issues, and no less
important to us than to Japan that we resolve them in ways that build
mutual confidence and friendship.
IV. The United States and Japan in a Multilateral Context
Unfortunately, in international trade the United States has a reputation
for arrogance and bully-boy behavior. We say we want fair trade. Who
could object to that? But who defines "fair trade?" We do, unilaterally;
and too often what we mean by "fair trade" is only that trade in which
we sell and others buy. We charge unfairness, we pass judgment and we
impose penalties-again unilaterally. We're the biggest, so we can get
away with it. This "American Unilateralism" in trade, however, is uni-
versally resented. That resentment affects all aspects of our interna-
tional relations.
In our defense, it must be recognized that internationally recog-
nized rules of trade are few and feeble; enforcement of those rules is
almost nonexistent. In the General Agreement on Tariffs and Trade
("GATT"), not only does it take forever to deal with charges of viola-
3. Hong Kong, Singapore, Taiwan, and South Korea.
Cornell International Law Journal
tion, but the defendant can veto a guilty verdict. In such circumstances,
occasional resort to frontier law is hardly surprising.
It is critically important for the future of the world trade that the
Uruguay Round of GATT Negotiations be completed on schedule by
1990; that it establish workable rules for trade in agricultural services,
intellectual property, and trade related to investments; and that it create
an effective means of resolving disputes. The United States and Japan
were prime movers in launching the Uruguay Round. The Europeans,
especially France, were the main obstructionists, and in the current
negotiations they are blocking efforts to abolish subsidies that distort
trade in agriculture over a ten-year period.
V. The Bilateral Trade Relationship: The United States and Japan
Turning specifically to trade relations between the U.S. and Japan, sev-
eral important issues dominate the debate.
A. The Trade Deficit
The size of our trade deficit with Japan is not important economically.
Obviously it is of great importance to journalists and politicians.
Through them it has acquired great symbolic importance to most lay-
men and businessmen, in the same way that feeding hormones to beef
cattle has acquired real psychological significance in Europe. But it is
only a "dagger of the mind, a false creation."
The trade balance with any single country does not matter. We
should expect to have deficits with some countries and surpluses with
others. Even the aggregate trade balance has little economic signifi-
cance. Trade in goods is only part of the economic intercourse between
countries. The total flow of considerations is always equal in both direc-
tions. If a country has a large trade deficit, as does the United States,
then it has an equally large surplus in its capital flow. In fact, the trade
deficit is essentially equal to the amount by which investment in the
United States exceeds the amount saved in the United States.4 The
United States remains the best place in the world to invest, and the
amount of American money invested abroad is far exceeded by the
amount of foreign money invested here.5 In sum, our trade deficit has
little to do with either our competitiveness or the trade barriers of
others.
B. Japanese Barriers to Trade
It follows from the first point that trade barriers in Japan do not have
much effect on the size of our trade deficit with Japan. In fact, Japan has
been lowering its trade barriers. It is almost the only major country to
4. Conversely, Japan's trade surplus equals the amount by which savings in
Japan exceed the amount invested there.
5. Those who claim, erroneously, that the United States is a debtor nation do so
partly by regarding all foreign funds invested here as money owed by Americans.
Vol. 22
1989 Keynote Address
do so; we have been raising ours. Yet despite lower formal barriers to
trade, our trade deficit with Japan has risen. Japan's trade barriers
might more accurately be called "impediments," since with the excep-
tion of agriculture, Japan has low tariffs and few quotas. These impedi-
ments, however, are detrimental to the United States because they
seriously distort the composition of our exports to Japan. They prevent
the United States from concentrating on products where we have the
greatest comparative advantage, and limit us to exporting those items
which, while advantageous, are not the most advantageous.
C. The Inefficiency of Japan's Economy
The impediments to the U.S. achieving maximum advantage from trade
chiefly result from the fact that Japan's economy is astonishingly ineffi-
cient. The gains to Japan itself from removing the impediments that
restrict us would far exceed the gains to the United States.
Japan's export sector success has created the illusion of a miracu-
lously efficient economy. Notwithstanding that popular image, however,
much of the Japanese economy is backward and inefficient. It is ironic
thatJapan, which in its foreign trade has been so effective in directing its
resources and talents into the most productive areas, has not allowed
the same kind of efficiencies to operate in its domestic sector. Consider
some illustrative examples.
America's farmers are five times as productive as Japan's and could
provide food to Japanese consumers at a much lower cost. In many
cases quotas and high tariffs prevent them from doing so. Rice is a bul-
wark of theJapanese diet, yet rice sells in Japan for approximately seven
times the world price. Soybeans also sell for about seven times the
world price. Because an inefficient sector is protected, the Japanese
consumer suffers, as does the Japanese economy as a whole. But we in
the United States, and other countries with comparative advantages in
agriculture, suffer also since we are unable to make the most of our
advantages.
Japan buys logs from the U.S., but if our sawmills, which are much
more efficient than Japan's, process those logs into plywood or paper,
Japan levies a high tariff on them. The result is that Japanese houses
and furniture are excessively expensive. Every time anyone in Japan
puts pen to paper or remodels his house, he is subsidizing an inefficient
industry. Again,Japan prevents the United States from making the most
of our efficiency, which would otherwise benefit both the U.S. and Japan.
Japan's cumbersome distribution system increases the price and
decreases the availability of goods, especially imported goods. More-
over, Japan's retailing law limits the size of stores, and can prevent a
larger retailer from providing a greater variety of goods at a lower price.
When industries in Japan become depressed,Japan subsidizes them
by providing specific tax benefits and loan guarantees. It also protects a
number of them by cartels which bar lower-priced imports. Today,
twenty-two industries inJapan-most of them in basic materials such as
Cornell International Law Journal
petrochemicals, fertilizers, paper, textiles, and aluminum-are classified
as depressed. Industrial users are forced to buy the more expensive
products of inefficient domestic industries.
Even aside from these cartels, many Japanese companies prefer to
buy products made by companies in their own "groups" with which they
have been doing business for many years. Part of the reason for this has
to do with the nature of Japanese society. But the result is that outsid-
ers, whether foreigners or Japanese, are excluded. This prevents the
end-user from obtaining the best product at the best price. Though this
practice has not been unknown in our own country, deregulation, inten-
sified competition, take-over threats, and foreign imports have reduced
it to insignificance.
Finally, Japan's surplus savings have been moving overseas. Many
old-line industries are able to block competitors who would invest the
savings in modernizing the industry, and this has limited opportunities
for investing Japan's large savings in Japan.
D. Japanese Investment in the United States
Japanese investments in the United States are very much to the United
States' advantage. This is one respect in which Japanese inefficiencies
work to our advantage.
As indicated above,6 Japan's balance of payments surplus is essen-
tially equal to the excess of its domestic savings over its investment. Its
savings are large, but because its economy (except for export industries)
is generally inefficient, only part of those savings is invested in Japan. A
large part of the savings is invested abroad, especialy in the U.S. Thus,
Japanese saving provides us with capital that makes our labor, our man-
agement, our natural resources and our technology more productive,
rather than benefitting Japan.
E. Domestic Political Influence
The politics of trade issues are very much the same in Japan-or, for
that matter, in any democracy-as in the United States. Why, for exam-
ple, did the Japanese put up so much resistance to opening their citrus
market? Why did the U.S. campaign so aggressively to open the Japa-
nese citrus market? The answer to both questions is the same. In both
countries, a comparatively small group of producers was in a politically
strategic position that gave it great leverage with the party in power.
What are called international economic issues are mostly domestic polit-
ical issues; they result from efforts of small groups to gain unearned
advantages from other groups in the same country.
F. Maintaining Good Will
We have brought strong and unrelenting pressure on Japan to lift
impediments to trade in one area after another. In virtually every
6. See supra note 4 and accompanying text.
386 Vlol. 22
1989 Keynote Address
instance, eventually, Japan has gone a long way toward meeting our
objectives. But, with the possible exception of semiconductors, the
steps taken have been at least as beneficial to Japan as to us. Market
openings that we have achieved have been equally available to all coun-
tries (except probably for semiconductors). These openings have dis-
criminated in our favor only in the sense that the impediments we have
attacked may have been more important to us than to others. We have
made better progress in opening markets in Japan than in almost any
other country, and we must keep in mind the limits on Japan's fund of
goodwill toward the United States. We must not overdraw that account.
The United States's stake in future U.S.-Japanese relations is just as
great as Japan's.
VI. Conclusion
We have an important stake in the Pacific, and fortunately have strong
and friendly ties with the two most important countries in the Pacific,
Australia and Japan. With Japan we have serious problems arising pri-
marily from impediments that limit our exports of the products where
our greatest comparative advantage lies. Those impediments are more
damaging to Japan than to us, and many Japanese recognize that. The
obstacles to lowering the impediments arise from the power of special
interests-the "tyranny of minorities"-that characterizes democracies,
perhaps all governments. Indeed, much of the pressure on Japan to
open its markets arises from special interests in the United States.
Opening Japan's markets would be beneficial to both Japan and the
United States. Competent officials should, therefore, be able to work
together in a spirit of goodwill, and with understanding of each other's
domestic politics, to advance our common interest in freer, more pro-
ductive trade.



bepress Legal Repository

https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1222&amp;context=cilj

Economics, Foreign Policy, and United States-Japanese Trade Disputes

Abstract

Similar works

Full text

Available Versions

Scholarship @ Cornell Law

NELLCO Consortium Legal Scholarship Repository

Cornell Law Library

bepress Legal Repository