CHAPTER TEN
Trade with Japan
The Way It Works
NEVER BEFORE HAS A MAJOR DEBTOR country owed its foreign creditors in its own currency as the United States does today. All other major debtor nations today—Brazil, Mexico, Zaire—owe in their creditor’s currency, primarily in dollars. So, in the 1920s, did Germany and the other Continental European countries, the big debtors of those days. But the foreign debt of the United States today is owed in U.S. dollars.
The advantages to the United States are tremendous, and as unprecedented as the situation itself. For the first time a debtor nation stands to benefit both on its capital account and on its trading account from devaluing its currency. Historically a debtor country gains a competitive position for its products by devaluing its currency, though usually only for a fairly short period; its exports go up, its imports go down, and a trade deficit turns into a trade surplus—as it did in the Carter administration when American policy sharply forced the dollar down. But at the same time the country’s balance of payments deteriorates, because interest and principal have to be paid in the creditor’s currency. If the foreign debt is high, the balance-of-payments penalty may be greater than the balance-of-trade gain, which is, for instance, why the Germans in 1931 chose (wrongly, hindsight would say) to impose currency controls to maintain a grossly overvalued exchange rate for the mark rather than devalue it and boost exports and employment.
A sharp fall in the dollar’s external value, however, should both improve the American trade balance and sharply cut the burden of the United States’ foreign debt on the domestic economy and its real value to America’s creditors.
Why then has the Reagan administration waited so long before taking action to correct the dollar’s obvious overvaluation, especially against the yen? That the dollar’s overvaluation has been a major, perhaps the major, factor in the decline in the competitiveness of both American agricultural and American manufactured products had been universally accepted at least since 1983. Yet U.S. policy—and that means both the Federal Reserve Board and the Treasury—consistently, until late in 1985, aimed at maintaining the highest possible dollar exchange rate, to the exclusion, or so it seemed to most foreign observers, of any other economic-policy consideration or goal.
The answer is, of course, that the administration has needed massive foreign borrowings. The Japanese alone in 1985 were lending the United States between $50 billion and $60 billion, which they could obtain only through their trade surplus with the United States. They thus supplied the lion’s share of the money needed to finance the U.S. budget deficit. Faced as Washington was with the alternatives of sharply cutting government spending or borrowing domestically and driving up interest rates, a foreign-trade deficit with all its consequences for American jobs and America’s long-range competitive position might understandably have appeared as the least evil.
But as the U.S. foreign debt is in U.S. currency, the foreign creditor can easily be expropriated. It takes no legal action, no default, no debt repudiation, and it can be done without asking the creditors, indeed without telling them. All it requires is devaluation of the dollar. Indeed between June when the dollar peaked at a rate of 250 yen and February of 1986 the United States’ Japanese creditors—mainly the Bank of Japan, the major Japanese banks, and the big trading companies—lost a third of the value of their holdings of U.S. Treasury securities, the form in which most of the Japanese investment in the United States is held. (On this see also Chapter 1: “The Changed World Economy.”)
No one in the United States seems to know this—at least no one comments on it. But every policymaker I know in Japan—government official, banker, businessman, academic economist—is keenly conscious of this. And every one is quite convinced that this loss is inevitable. Although some Japanese, especially among the economists, worry lest such a loss endanger the solvency of the Japanese banking system, they all see it as a lesser evil compared with each of Japan’s other alternatives.
Seen from Japan there is no practical way to restore the trade balance between the two countries. For its major cause is neither the overvalued dollars, nor the weakness of American industry, aggressive Japanese exports, and least of all barriers to the imports of American goods into Japan (total elimination of which—and it is, of course, highly desirable and way overdue—would at most slice $5 billion to $6 billion off a $50-billion deficit).
The major cause is the worldwide slump in primary-products prices, and especially in the prices of farm and forest products. Measured against the prices of manufactured goods—and especially of high-value-added manufactured goods such as the autos, cameras, consumer electronics, and semiconductors that constitute the bulk of Japanese exports to the United States—primary products now sell at their lowest prices in history, lower even than during the Great Depression. Japan is the world’s largest importer of primary products, and indeed the only sizable importer of foodstuffs in the world (save the Soviet Union) now that Common Market Europe has itself become an exporter and China as well as India are in food balance. And Japan is the world’s largest exporter of high-value-added manufactured goods. The United States by contrast is the world’s largest exporter of farm and forest products. If U.S.–Japanese trade is adjusted for this—that is, if the ratio between primary-products prices and manufactured-goods prices is assumed to have remained where it was in 1973—at least one-third, maybe two-fifths, of America’s trade deficit with Japan disappears.
Yet no action either country could take will correct this imbalance: there is a worldwide surplus of primary products for the foreseeable future. Indeed, the only action that could be taken—and it might be taken were the United States to engage in a trade war against Japan—is for the Japanese to switch their primary-products buying (of cotton, tobacco, soybeans, wheat, corn, timber, and so on) away from the United States. They could do so within twelve months. They are already being offered ample quantities of all these products by other suppliers, and at prices lower than those payable to the American producers, except at much lower yen-dollar rates.
But then Japan sees no political alternative to pushing exports (and thereby financing the U.S. deficit at the risk of almost certain serious loss). Otherwise Japan faces unemployment of a magnitude—at least twice the current American 7 percent unemployment rate—that no Japanese government could risk. The domestic Japanese economy has been flat for five long years; none of the measures taken to revive it has had much effect. There is growing political pressure to reflate. Yet the Japanese government deficit is already so high that increasing it might reignite inflation. And the short but severe bout of inflation their country suffered from the mid-1970s convinced many thoughtful Japanese, especially in the Bank of Japan and the Ministry of Finance, that they have low resistance against that dangerous disease.
Export supplies something like 15 percent of Japanese jobs. Without the exports of its major customer, the auto industry, the Japanese steel industry would probably be sicker even than the American one; where Nippon Steel operated in 1985 at a low (and loss-making) 60 percent of capacity, it would fall below 40 percent. Proportionately the steel and automobile industries in Japan account for at least twice the blue-collar work force they account for in the United States. This problem is aggravated by postwar Japanese society’s being based on the promise of lifetime employment, by the inability of dismissed or laid-off Japanese workers to get new jobs because of the rigidities of the Japanese wage system, and by the country’s having no unemployment insurance. Small wonder, then, that the Japanese policymaker prefers the almost certain but future losses on the loans made to the U.S. government to the political and social—and immediate—risks of massive unemployment at home.
These are the economic realities of the American-Japanese relationship. They explain in large part why the Japanese so far have not been greatly impressed by U.S. short-run threats of protectionist retaliation against Japanese goods. They figure that the United States is unlikely to do anything that would both endanger its already deeply depressed farm economy and force America to take action on its government deficit. So far they have been right: the U.S. bark has been far worse than its toothless bite. But these realities would also indicate that the U.S. government fails to understand what it can do.
Action on the part of the Japanese to remove barriers to the entry of American goods and American firms would not materially affect the trade imbalance. But it might have significant psychological impact and remove a good deal of the emotion that threatens to poison relations between the two countries. Yet it is a plain misunderstanding of economic and political realities to believe, as President Reagan has been believing, that Prime Minister Nakasone, or any other Japanese political leader, can make voluntary concessions. He must have some “wicked foreigner” to blame, must be able to say “I had to yield at gunpoint”—especially as Japanese politics are so turbulent today that no one has a dependable majority.
But the real implication of the realities is that the key to the American-Japanese trade problem, and to the problem of America’s competitive position in the world economy altogether, does not lie in a cheaper dollar, and not even in higher American productivity and lower comparative labor costs. Higher primary-products prices would help greatly, but there is little prospect for them in the face of the worldwide overproduction and surpluses. The root of America’s problem is the U.S. government deficit and the resulting growing dependence on borrowing abroad.
(1985)