The World Doesn't Need a U.S.-Japanese Divorce
International Herald Tribune
February 16, 1994
Philip Bowring    

Asian reaction to the breakdown of U.S.-Japanese trade talks has been muted. Editorials have expressed sorrow, not anger. Stock markets have taken a knock, but a modest one by recent volatile standards. Yet deeper down there is that tension that comes with not knowing what to expect next.

Nothing dramatic is likely to happen soon. But at the very least, nations have to consider the consequences of U.S.-Japanese frictions for themselves, and contemplate difficult choices should those deteriorate.

Last year's debates over the respective merits of Asia-Pacific Economic Cooperation and the East Asian Economic Caucus may appear less theoretical than they did then.

There is something visceral in Washington's attitude to Japan that cannot be explained either by trade specifics or by the economic outlook. Thanks to Presidents Ronald Reagan and George Bush, Asia may have misread the depth of antipathy toward Japan which exists in some influential quarters in the United States. Bill Clinton has taken the lid off this box of emotions by laying down targets that are not only impractical but contrary to traditional U.S. aversion to managed trade.

Mr. Clinton, the opportunist politician, may find it hard to put the lid back when he wants to. Logic is certainly missing from the present situation.

There is no doubt that the Japanese overall current account surplus of $130 billion is unsustainable, as is a $50 billion trade surplus with the United States. There is no doubt either that Japan's economy needs further stimulus if it is to enjoy a domestic demand- led recovery. Nor doubt that some of its markets have yet to be prised open. But this is a curious time for the United States to choose to threaten trade war.

The U.S. economy is recovering, jobs are being created. U.S. firms are widely acknow ledged to have enhanced their international competitiveness -through cost cutting, investment and technological excellence and not simply because of a weak dollar.

The Japanese surplus has probably peaked (despite low oil prices). Inflated last year by the rise of the yen, this year it should contract as export volumes are pressured by lack of competitiveness. Further yen strength will simply delay recovery in domestic demand. Nor will foreign threats do much to help Morihiro Hosokawa's reform and stimulus efforts.

Strong U.S. action a year ago would have been more rational than today. Now it almost looks as if the United States is kicking Japan when it is down - revenge for insults that flowed the other way two years ago.

It is this sense that the United States is being driven by its gut and not its head that is worrying others. Many in Asia are sympathetic toward U.S. complaints about Japan, feel that Japan deserves to be taught a trade lesson, yet worry deeply about the consequences of emotional and unilateral actions.

After all, the Bill Clinton now threatening Japan with sanctions is the same Clinton who was supposed to be so strongly behind multilateralism on trade as evidenced by efforts to conclude the Uruguay Round. This is the same Clinton who three months ago was hosting the APEC summit in Seattle, proclaiming the need for greater multilateral trade cooperation across the Pacific.

The Clinton who professes to believe in freer trade and macroeconomic objectives is the same one who wants to impose numerical targets on specific sectors when it is the totality of trade that matters.

In the short term, other Asian countries may well benefit from Japan's discomfiture. Korean and Taiwan companies are already exploiting the damage that the high yen is causing Japanese competitiveness. Southeast Asian subsidiaries of Japanese firms will do more exporting to the United States due to lower costs, while corporate Japan seeks all conceivable ways of reducing its surplus.

But the longer-term impact on Asia will be highly disadvantageous. Japan may seem the villain for now, but the United States has other trading partners in Asia whose trade is as lopsided and which have much more obvious barriers to imports than does Japan. China is the most obvious. Korea is still an almost closed market for items such as cars. Add in the human rights issues, and the potential for new trade barriers against East Asia is formidable.

In so far as the East Asian economies are linked, with Japan as supplier of capital and intermediate goods and the United States being the buyer of last resort for end pro ducts, any action against Japan will have eventual knock-on effect. This would not as great now as 10 years ago, when a higher proportion of Asian exports went to U.S. markets, and before non-Japanese Asian brand names established themselves in the West. But it is still a very real concern.

Friction with Japan will add to the relative merits of Latin America over Asia as a location for investment and product sourcing. Thanks to the North American Free Trade Agreement and bilateral pacts, Latin America will enjoy significant nontariff advantages over Asian producers - and political weight in the United States.

Much though it may in theory want to, the United States cannot isolate its trade relationship with Japan from those elsewhere in Asia. Likewise, if Asian countries see the trans- Pacific relationship deteriorating they will look more seriously at the proposal of Malaysia's Prime Minister Mahathir bin Mohamad for an East Asian Economic Caucus.

At present, they are far too dependent on the U.S. market to annoy a prickly Washington. At the same time, however, they rely heavily on Japan for capital. Logic dictates therefore that if there is friction across the Pacific they will want to strengthen their trade ties with Japan, which will anyway develop naturally from an over-strong yen.

Nor, despite the rhetoric, can trade be isolated from security. Given the importance of the U.S. presence to regional stability, that is another reason for Asian anxiety.

Without the timely alarms provided by the prospect of a North Korean bomb and Vladimir Zhirinovsky's musings, U.S. force reductions might be more imminent than is now the case. But the flag follows trade - not vice versa. Weakening of the trade relationship will erode the security one. That will happen over time anyway, but it needs to be controlled and gradual if it is not to be disruptive.

There is a gut instinct abroad that Mr. Clinton and Mr. Hosokawa, both politically weak, could lose control of events. That, not trade numbers, is the worry.

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