CHAPTER ELEVEN
The Perils of Adversarial Trade
“WHY IS THE WEST OBSESSED WITH OUR EXPORTS”? every Japanese visitor asks. “The Germans export even more and their trade surpluses are also growing rapidly.” But there is a difference, though the Japanese are oblivious to it. The Germans do indeed top the Japanese as exporters of manufactured goods: only the United States exports even more of them than the Germans. But the Germans are also the world’s second-largest importers of such goods—again topped only by the United States. The Japanese, however, only sell; they do not buy. They practice adversarial trade.
The original eighteenth-century model of international trade—the one Adam Smith formulated—assumes complementary trade: warm and dry Portugal sells wine in exchange against wool to cool and wet England. Each side buys what it cannot produce itself and sells what it is ideally equipped to make. There are only winners and no losers.
But since the middle of the nineteenth century the growth sector in the international economy has been competitive trade between developed countries. Both parties buy from each other similar goods, which both are capable of producing. Thus the United States is both the world’s largest exporter and the world’s largest importer of chemicals. Per capita, the Swiss are the world’s largest exporters of machine tools and textile machinery, but also the world’s largest importers of both. Germany exports more motor vehicles (including trucks and buses) than does Japan; but for every five German motor vehicles sold abroad, the Germans import three. In competitive trade there are losers: the United States—or German, or British, or Swiss—manufacturer of weaving looms, for instance, whose technically inferior or more expensive product is being edged out of the market by the more advanced or cheaper make of his foreign competitor. But overall everybody gains: not only the consumer but also the competing producers who are being forced to concentrate on what they do best, thus optimizing both resources and returns. In fact, in competitive trade the foreign competitor of an industry is commonly also its best customer.
But in adversarial trade both sides lose—one side, the buyer right away, the other side, the seller, within a decade or so.
In adversarial trade the seller’s goods displace the goods produced by the manufacturers of the buying country without any compensating purchases from that country. No alternative markets for the foreign buyer’s manufacturers are thus being created, and no purchasing power either. Because there are no compensatory sales for the domestic manufacturer in the buying country he cannot earn the resources needed to modernize his plants and processes or to acquire the production volume needed to bring down his costs. To the extent therefore to which the seller in adversarial trade succeeds, he weakens rather than strengthens the buyer’s industry and productive economy. And if the seller in adversarial trade is truly successful, he eventually destroys the buyer’s industry. Twelve years ago, for example, there were more than a dozen American plants manufacturing forklift trucks. Today there is none—not even an assembly operation. The same has largely happened in consumer electronics, for example, in video cassette recorders and in many categories of machine tools and semiconductors. This then also means that in the end even the consumer in the buying country loses. The drop in his income as a producer, that is, in income, will eventually more than offset his gains through lower prices as a consumer. Indeed the effects of adversarial competition—no matter how unintended—are strikingly similar to what economist and lawyer both condemn as predatory pricing , that is pricing so low as to destroy competitors and establish a monopoly.
Yet the seller in adversarial trade may lose in the end even more than the buyer and be totally unable to prevent it. The seller has no defense against retaliatory action on the part of the buyer. He cannot counter-act by stopping his purchases: he does not make any. To be sure, the Japanese are among America’s best customers for agricultural and forest products. But although the American farmer’s political power is still formidable, U.S. primary-products exports have become far too small a part of the total to be a decisive factor, and they are steadily going down further. And there is little doubt that the United States could manage without Japanese manufactured-goods imports, and at fairly low cost. And so could Western Europe. But Japan without industrial exports to the United States would face a major depression with double-digit unemployment.
The seller in adversarial trade is also bound in the end to lose financially. He cannot be paid at all. Buyers can, after all, pay only if they have an income, that is, if they themselves get paid as sellers. The seller in adversarial trade, the seller who does not buy, will therefore find out in the end that he has given away his wares, though he cannot expect the recipient to appreciate the gift.
Japan now has the world’s largest-ever surplus of liquid funds, as large as anything OPEC ever had and soon to be even larger. Japan’s banks hold $640 billion in external assets, practically all in cash or in short-term securities such as U.S. Treasury Bills. This is many times what Japan needs to finance her trade, is indeed so large that Japan could for six years pay for all her imports without having to earn a single yen through her exports. The only parallel in economic history is America’s surplus in the years immediately after World War II, when the United States had the only functioning major economy in the world. Such a surplus can either be used to buy goods—something the Japanese are not willing to do. It can be given away, as the United States did in the years of the Marshall Plan. Or it will be taken away. The Japanese can, of course, continue to pile up more surplus. But this only means that they extend even more credit that will never be repaid. And eventually bad debts have to be written off.
Till now Japan has been the only practitioner of adversarial trade. It did not plan it, to be sure, though it is a logical outcome of the traditional Japanese approach to international trade—an approach, by the way, that made ample sense as long as Japan was still catching up, that is, until fairly recently, perhaps 1965 or so. Now, however, Japan’s neighbor, South Korea, is deliberately embarking on adversarial trade. And if mainland China ever develops industrially, she too—at least in her present frame of mind—will surely try to be only a seller and not a buyer, that is, to practice adversarial trade.
Some small steps to correct the imbalance created by adversarial trade are being taken. We will hear a good deal in the months and years to come of “voluntary quotas” but also of “Japanese dumping.” The Japanese, especially the Japanese automobile makers, are rapidly moving some production to the United States and to Western Europe to counteract anti-Japanese measures. But—something the Japanese are totally blind to, by the way—this is still seen as predatory in the buyer’s country because it replaces the domestic manufacturer whom Japanese adversarial trading had first damaged or destroyed. Moving production to the buyer’s country—unless accompanied by buying for export from that country—is at best half a loaf. More effective would be a “production consortium” in which manufacturers in the buying country supply the seller as subcontractors or partners—the way, for instance, in which Boeing has placed 30 or 40 percent of the development and manufacturing work on a new commercial aircraft with Japanese companies, or in which Rolls-Royce in Great Britain is brought in as the engine supplier for American-made planes sold to European airlines. So far, however, consortium deals have been resisted by the Japanese. They might also pay their share by taking over from the American banks the “problem loans” to developing countries—something that is beginning to be discussed in New York and Washington, though so far only behind closed doors.
But unless the Japanese take the initiative in such measures which somehow or other counteract the worst consequences of adversarial trade—and so far they have shown not the slightest sign of doing so or even of recognizing that a problem exists—political measures will be taken to abort, or at least to limit, adversarial trade, and pretty soon. Western Europe has already gone quite far in protecting itself against it, especially in respect to Japanese-made automobiles. And the United States is bound to follow suit. So far the president has opposed any kind of protectionism. But it would take only a small economic downturn or a small increase in unemployment for protectionist measures to be enacted by the Congress with overwhelming majorities—and with overwhelming public support; and there is no shortage of protectionist proposals.
There is need to stop, or at least to confine, adversarial trade. But there is also great danger that the measures taken to do so will do far more harm than good, and especially do harm to the U.S. economy and to U.S. manufacturing. None of the proposals being discussed today—the proposal, for instance, which is now before a subcommittee of the House of Representatives and which would ban foreign manufactured goods unless they had 30 or 40 percent “domestic content”—distinguishes between competitive and adversarial trade. They are all uniformly protectionist and penalize all manufactured imports. But this would seriously harm and perhaps destroy our exports to the countries that buy from us, that is, to our trading partners in competitive trade. The Europeans would immediately retaliate. And all our healthy industries—perhaps three-quarters of the country’s industrial base—are dependent for their growth, if not for their very survival, on exports to Europe: from aircraft and analytical instruments; through biomedicine, pharmaceuticals, and computers; to chemicals, robots, electrical machinery, and software. What we need is a measure that arrests the degenerative disease of adversarial trade without killing off the healthy tissue of competitive trade—perhaps by limiting whatever trade restrictions we might enact to imports from countries and industries that do not buy from other developed countries (including the United States) manufactured goods of a similar kind at least equal in value to 50 or 60 percent of their exports.
The Japanese assert that it is not their fault that we find their goods more attractive than what we produce ourselves and that their export strength is simply the result of their working harder and doing a better job, whether in design, in quality, in price, or in service. This is right on the whole—Japan Inc. is largely a figment of the Western imagination. But it is also irrelevant. Adversarial trade will not be tolerated very long. It was not planned as such; but it turned out to be a policy to beggar one’s neighbor. And that is always self-defeating.
(1986)