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. Last Updated: 07/27/2016

Follies of a Trade Feud

NEW YORK -- On the eve of President Bill Clinton's meeting with Prime Minister Morihiro Hosokawa this week, the United States and Japan appear to be on a collision course.


Both countries are preoccupied with internal problems: political reform and economic stimulus in Tokyo; health care, personnel problems and the deficit in Washington.


Both leaders have recently expended considerable political capital pursuing controversial free-trade policies that may make their respective America and Japan bashers all the more virulent and a reasonable deal all the more distant. And each side rightly blames the other's structural rigidities for their growing trade imbalance, which reached $50 billion last year.


Under these circumstances, there may not be much appetite for the kind of face-saving but superficial compromise that has long kept strained economic relations from poisoning the basic bilateral relationship. The administration has repeatedly warned that it is willing to walk away from trade talks if Japan fails to accept its demands.


Some of Washington's demands are reasonable: specific market-opening measures in the insurance industry, liberalization of government procurement policies in telecommunications and medical supplies and reduced barriers to the sales of U.S. autos and auto parts. These are in the Japanese national interest as much as in the interest of the United States.


But the core U.S. demand, in effect, that Japan should guarantee specific shares of its market for American-made imports, is ridiculous economics and questionable politics.


Every college economics student is taught that trade deficits reflect too little national savings and too much consumption, a condition that afflicts the United States, not Japan. Further, specific bilateral balances -- whether the U.S. deficit with Japan or the U.S. surplus with Mexico, so highlighted during the NAFTA debate -- are unlikely targets for government intervention, since they reflect the accumulation of thousands of decisions made by individual buyers and sellers.


And, finally, once the United States opens wider the Pandora's box of targeting specific levels of trade, the specious notion that some bureaucrat in Washington, Tokyo or elsewhere knows the right number of American-made mufflers or anything else the Japanese should buy is likely to spread. By any standard, that would be an open invitation for trade war.


If the administration persists in this demand and if the Japanese continue to be adamant in their rejection (justified by a newfound commitment to at least the rhetoric of free trade), then the long-anticipated rupture in the bilateral relationship will finally be at hand.


The obvious question is, so what? Even if the United States and Japan eventually imposed reciprocal trade sanctions on each other, the reality is that the basic fabric of bilateral commercial and financial interaction is so dense that it would probably not be seriously affected. But the impulse that would resonate from such a confrontation between the United States and Japan would go far beyond whether sales of Toyotas, Treasury bills or Hollywood movies can be sustained.


A confrontation would signal that the two great Pacific powers, whose regional influence is already being challenged by China, which neither country seems to understand, are not going to be able to agree on the political, military, economic and commercial framework within which the fastest-growing region of the world will continue to develop.


It would force countries in the region to choose between the United States and Japan -- or maybe between Japan and China. And it would collapse whatever promise the newly born Asia Pacific Economic Cooperation holds as a vehicle to assure American commercial access to the booming Pacific markets.


To risk all of this in the name of a flawed concept is foolish. This is not to deny the administration's understandable frustration with a persistently huge Japanese trade surplus or with Japanese trade policies that have resisted the conventional assaults of American trade negotiators.


But the Japanese decision to give themselves a lower standard of living than their economy is capable of generating, which is the inevitable result of protectionism is, after all, legitimately their decision to make. That this could be an underlying cause of the radical transformation of Japanese politics that seems to have begun only underscores the point that it is for the Japanese to decide how to organize their economy and then to deal with the consequences.


For his part, Clinton has to decide whether he really believes in free trade and the multilateral trading system he has just reinforced with the successful NAFTA and GATT negotiations. If he does, then he should stop trying to impose arbitrary targets for Japanese purchases of foreign-made goods or to micromanage Japanese economic change.


Instead, he should rely on the Japanese figuring out that the freest possible trade is essential to their national interest. And if they persist in failing to do so, then he should tell the Japanese leaders that this country, and the rest of the countries damaged by their actions, will aggressively seek protection through the GATT.


In other words, he should forge a multilateral response to a multilateral problem.


Clinton and Hosokawa could then turn to more appropriate and more promising matters for great-power summitry, such as building a stable relationship between the only two countries that can guarantee peace and prosperity in the most dynamic region of the world economy.





Alan Stoga is managing director of Kissinger Associates, a geopolitical consulting firm. He contributed this commentary to the Los Angeles Times.