IP: MITI viewpoint on US-Japan relations

[Dave Farber <farber () central cis upenn edu>]

From: joelwest () uci edu (Joel West)




[UCSD IR/PS recently had 30-year MITI veteran (and former international
vice minister) Sozaburo Okamatsu as visiting adjunct professor to teach two
classes on Japan policy-making and trade.  For his final international
trade class, he invited two of his former subordinates to talk about
US-Japan relations.


I think it captures fairly completely MITI's current position on US-Japan
relations and enclose my notes for DFS readers. Note that most of the
grammatical mistakes are the typist's rather than the speaker's -- JWW]




Future of US-Japan Relations, 11/30/95


[Masakazu Toyota graduated Todai 1973, joined MITI, got a master's at
Princeton.  Worked in Paris for 3 years for IEA (under OECD).  Secretary to
MITI minister, member of task force for preparing for APEC.  Director of
tariff section for MITI, involved in negotiation in Geneva for Uruguay
Round.  Specialist on anti-dumping.  Spent 1 year director of
aircraft/ordinance section of MITI.  Current position as head of US desk of
MITI, held for 2.5 years.]


The relationship between the two countries is at a crossroads.


Unfortunately, in recent days and years many people have started to say
US-Japan relationship is at its worst point in the past 50 years.  One
example is contentious auto negotiations, and there were unhappy reports of
CIA spying on Japan.


We had an unfortunate political explosion in Okinawa.  Now, the security
relationship between the two countries is being scrutinized.


Now, the American subsidiary of Daiwa bank had a scandal.  This could end
up with the potential disappearance and demise of one of Japan's oldest
banks.


According to public survey conducted by Asahi Shimbun and Harris Survey one
month ago, only 30% of respondents in both countries think the relationship
is positive, more than 50% answered quite negatively.  We get nervous when
we think that 50% answered positively just 5 years ago.


Reasons for Conflict
====================
Why?


There could be several reasons for this drastic change in terms of the
relationship between these two countries.  I can point out at least 4
reasons:


1.      The US and Japan have gotten heavily interdependent, intertwined in
various areas - finance, trade, technology.  With these contact points,
frictions inevitably increase.  If you look at the handout, for trade, the
United States is the largest exporting partner for Japan; Japan is the
largest for the US (after) Canada, so both  countries need each other.  If
you take financing, the U.S. government has treasury bonds to finance its
budget deficit; if you look at the last 5 years, 10-20% of the bonds
purchased by Japanese firms.


"The budget deficit in the United States is being financed by Japanese
institutions."


2.      Many people say the end of Cold War has complicated the situation.
The end of Cold War has prevented us from having a broader view, that takes
into account economic and security aspects.  Because of the end of the Cold
War, vested interests on economic fronts have great influence on domestic
politics.  In the past, Dept. of State or Defense played a more important
role in US-Japan relationship.  Now, DOC and particularly USTR play a major
role in the relationship with Japan.


3.      Insufficient understanding of mutual economic, social political
systems confused our disputes unnecessarily.  As you know, Japan and the
United States have a very long history of interactions over 100 years.  It
is true, at times we had confrontation, other times cooperation.  Each
other know quite well their own political social backgrounds,.  Now it is
getting more fashionable to emphasis, exaggerate the differences between
the two countries rather than try to appreciate the commonalties.


4.      Last but not least, only a limited number of people have noticed
that the US and Japan are undergoing a fundamental change of their
relationship.  The two countries have reached a stage where we moved from a
sr. partner/jr. partner relationship to a more equal relationship.  I think
this is a psychological change, and thus it is difficult to prepare for
acceptance of the change.  Japan does not prepare to accept its
responsibility, and thus the US people get frustrated that Japan is still a
free rider.  At the same time, US people are not pleased to see that Japan
voices its own opinions and stands up for its own values.  American
industry sometimes feels an unnecessary sense of threat in terms of
Japanese industry in the sense of competitiveness; they seem to have a
distrust of the Japanese.   At the same time the Japanese people have a
mixture of a sense of arrogance and lack of confidence.  So both sides do
not accept that this is changing.


There is a great danger.  I think efforts are needed to promote mutual
cooperation.  Otherwise, US-Japan economic frictions could be over-elevated
to economic confrontation between the two largest economies in the world.
This could involved other Asian economies, and the US-Japan security
relationship could be threatened.  This could effect Asian security and the
overall stability of the world.


Ways to Change It
=================
1. More Facts
-------------
Correct diagnosis of the problems should be made on an objective, factual
basis.  That is why I've provided you some up-to-date facts.


For instance, few people know that the Average Japanese imports about 50%
more from the United States than an average American imports from Japan.
It is true there is a sizable trade deficit, but if you think about the
differences of population, it is quite obvious.  Unless the average
Japanese imports at least twice as large as the average American does, it
cannot be rectified.  This is a simple fact but it is not well-known.


US exports to Japan are almost the same as to the biggest European
countries - UK, Germany, France.


Substantial increase in US trade deficit to Japan in the early 1990's was
simply a reflection of savings and investment imbalance, as well as the
depreciation of the dollar.  When people refer to the savings and
investment imbalance, people get confused and stop thinking.


In the middle of the fact sheet, you see three charts and three tables (for
Japan, US and Germany), that show how the IS balance has changed over the
past 20 years.  You see how savings, government deficit, investment almost
exactly match current account balance.  In the early 1990's, Japan overcome
the budget deficit.  On the other hand, the current account deficit
increased because of the increase in budget deficit.  In Germany, they had
a current account surplus for a long time because they had a balanced
budget, but because of the reunification they had a budget deficit and the
current account surplus substantially decreased.


So if we understand the current problem on a factual basis, we can avoid
unnecessary misunderstanding of what's happening, and we can provide right
proscriptions.


2. Deepen Understanding
-----------------------
We should deepened our understand of historical, political and social
background of our partner.  In many occasions, we should communicate and
discuss with each other.  We should be straightforward like this.  At all
levels, at all sectors we should promote communications with each other -
industry, government, academia, students, consumers - to understand each
other in a fuller manner.


3. Multilateral Instead of Bilateral Mechanisms
-----------------------------------------------
Multilateral external pressure should be utilized instead of bilateral
external pressures.  Bilateral pressures include pressures based on section
301 of the trade act.  Bilateral pressures are likely to be politically
distorted away from international rules and common sense.


If the complaint on one side is valid, the party should be able to get
consensus in a multilateral forum.  The economic and political system
between the two countries should be harmonized.


Economic opportunities should be expanded to share a larger pie, and this
opportunity should be shared by other pacific countries.


4. Need for Dispute Resolution Mechanisms
-----------------------------------------
We should take the best advantage of multilateral dispute resolution
mechanisms as disputes occur.  WTO and OECD provide good mechanisms for
this.  Most know about WTO; not many realize that OECD can do this.  The
difference is that WTO has an automatic mechanism to resolve the problem:
if one party requests consultation, the other party cannot reject.  In
OECD, the other party can reject so we need to strength en OECD.


In order to cover areas not covered by WTO and OECD, we should endeavor to
formulate a sort of Japan-US dispute settlement mechanism, which could be
similar to that of US-Canada.  When I was involved in framework talks, auto
negotiations, I was working with Okamatsu we suggested to have some sort of
mechanism, but we could not get support from the US side.  But we need some
kind of mechanism or we will continue the vicious cycle of criticizing each
other.


According to the US-Canada dispute settlement mechanism, there are several ways:
1.      Between US and Canada there is NAFTA, so either side [can use this
as a basis]make a judgment on this.  Between US-Japan there is no similar
agreement.


2.      But if you look at the US-Canada, there is a very interesting way
to solve the problem in the area of anti-dumping.  The two countries do not
have common rules, but if the problem takes place in US, it is solved in
terms of US anti-dumping law; if it happens in Canada, it is solved under
Canada anti-dumping law.


        You have heard Kodak is complaining against Fuji that there is a
violation of anti-trust law in Japan, and Fuji is saying there is no
violation.  If we have a dispute mechanism, and can get neutral judgment
(balanced?) based on the basis of Japanese law, then I think Kodak's
complaints can be resolved.


APEC
====
If you look at the history of APEC, Japan played an important role.  It is
Australia that advocated it, but behind the scenes Japan played an
important role.  It is the United States that initiated the leader's
meeting.  Thanks to that, the activity of APEC has been elevated to the top
level.


I think the US and Japan could share initiatives to realize the goal of
APEC by utilizing our different abilities.  The US is good at promoting
trade liberalization, while Japan is good at providing economic and
technical assistance to deal with environment or energy problems.  Japan
seeks trade liberalization on MFN basis, while US seeks reciprocal basis.
Japan prefers consensus approach, US prefers legalistic approach.  Japan
prefers industrial policy while the US highly values laissez faire.  The US
and Japan could work together and mix these capabilities to address the
problems arising in APEC in a more realistic way.


If you read what was agreed in the Osaka meeting, it says you should cover
all sectors, but said you should have flexibility in light of diverse
conditions.


In having these two different approaches, we can find not American way, not
Japanese way, we can find an APEC Way.


Conclusions
===========
The US-Japan are at a crossroads.  This could lead to either a collision
course or an opportunity course.


Supplement: Hideichi Okada
==========================
[Hideichi Okada, graduated Todai 1976.  Passed law exam, but joined MITI
instead of being lawyer.  Got one year Master's at Harvard law.  Worked in
defense agency of Japanese government.  Then worked in the field of
computer and telecommunication, lead fights against MPT involving
deregulation.  Then he became MITI's liaison to Diet.  Now he is in New
York on loan from MITI to JETRO, but his playing field is in Washington,
DC.]


A description of my work with Okamatsu and Toyota is as a cheerleader.
Don't give up, work hard, there should be a better solution.


There is a lot of perception gap between the US and Japan, and even between
Washington and other cities.  I'll give you some stories.


When I had a chance to visit some of the Japanese transplants, Kentucky,
Tenn., Ohio.  I visited Toyota, Nissan and Honda and their suppliers.
While Okamatsu had sleepless nights over the negotiations, I met with them.
They said after Clinton took office, the first two years was one of the
calmest since they established transplants.  Perhaps because big three were
booming, relationship with suppliers, community were so good.  They
questioned why the relationship was so bad, they can't believe there is a
problem.


One of my classmates stayed in the US for seven 7 years in LA, Chicago and
then he came to Washington has representative of Japanese company.  After 3
months, he confessed that Washington is a horrible place - at meetings,
there is someone accusing Japanese companies of something and he has to
defend his company.  I told them Washington is that kind of place, you have
to enjoy that kind of game.


In Washington, only those who have some kind of complaint go to Washington.
Those that do not have any complain will stay in San Diego and Los Angeles.


If I look at the headline, that will send the wrong signal to the Japanese
people - we have to prepare to fight another competition with the United
States.  That may be true in Washington or Tokyo, but the newspaper
reporter ignore good news.


What I tried to persuade the Japanese negotiators was that you are just
participating in a part of the US-Japan relationship.  We have some tense
trade negotiations, but some very good business cooperation.


There is a saying in Japan, that 7 or 8 blind people try to figure out what
an elephant looks like.  Some say like a trunk some say like a nose, or an
ear.  It is important to keep a broader viewpoint of the US-Japan
relationship.


Q&A
===
Q: You said US had twice the population of japan. You said the deficit has
depended on the decreasing value of the dollar.  I would think it should be
the opposite.
A (Toyota): You may look at the deficit in terms of the dollar, but we look
at it in two terms, yen terms and dollar terms.  If you look at the figures
in terms of dollars, you have to count a particular number by reduced
dollars.


In terms of quantity of exports and imports the trend is close to the yen terms


Q: You said there should be a bilateral dispute mechanisms similar to
NAFTA.  Is APEC working towards providing that?
A (Toyota): There is a proposal for such a mechanism with APEC, but there
is one country that is opposed to that, and that is the US.


The US government believes that in order to have a dispute mechanism like
with Canada, we need to have a free trade agreement first.  They believe
that without an agreement, there is no standard to judge against.  But for
me, if we try to have a free trade agreement between two countries, unless
we have much fuller understanding with each other, much more of coordinated
economic systems, it is almost impossible.  There is now a sense of
distrust - at least as Okada pointed out, between Tokyo and Washington, if
not Tokyo and San Diego.


There is a group in APEC that wants to have a dispute resolution mechanism.
The US thought it could be disadvantageous for the US, because there could
be a United front against section 301.  All countries except US think
Section 301 is an imposition of one values on other countries.


Mr Bergsten is the chairman of eminent persons group, but he has been
advocating to introduce a mechanism.
Q: What about WTO?
A (Toyota): Perhaps.  At time of GATT, before WTO was introduced, it was
the US that used GATT used most frequently.  But because of the
automaticity introduced with WTO, and fuller agreements among countries -
particularly a rule against Section 301 - the US government has become
rather reluctant to use WTO.  The coverage of WTO is still limited: it
doesn't cover competition policy, or trade and environment (which is very
important


Q: You mentioned Daiwa Bank.  I don't see the link to US-Japan economic
relationship.
A (Toyota): It is not simply a problem of one bank.  It is a sort of
cultural conflict.  I don;t think the US government to decision is wrong: I
think the US government decision was right. T hey wanted to simply stick to
international rules, transparency rules that is prevailing in the United
States.  But from the standpoint of Japan, it is very different.  The rules
and regulations that is prevailing in the United States or the rest of the
world it is quite different.


It is a cultural conflict.  From your standpoint, it is [normal]; from the
standpoint from Japan, it is quite surprising.  Many think in Japan it is
too much, but most of us in Japan think it is correct.  But most of us
think it is quite surprising, because the punishment is quite strict


In the context of various issues- auto, CIA spying, Okinawa issues - this
is also to be regarded as one of the issues.  But gradually the Japanese
people understand why the US made the decision.  But it is, temporarily at
least, a cultural conflict between the two countries


The other day I met with a colleague who is working in the banking
business.  He understood the decision of the US government; but if he were
in the same position as the manager of Daiwa Bank in NY, he would have done
the same thing.  But because of this shocking treatment, I think we
understand each other much better.


Q: How do you feel about "managed trade"?
A: (Toyota) If you talk about numerical targets, we are strongly against
that.  Japan agreed to that in the semiconductor agreement - Okamatsu is
the responsible person for agreeing to that.  We didn't think of it as
managed trade, not as a commitment to these figures.  But again and again
it is discussed as a numerical target.


This is a third time we discussed this, and we decided that we shouldn't
make any compromise to avoid any future problem.  So I think our position
is quite clear now.


Q: I agree with your assessment of Japanese business in America [being
optimistic].  Are American businessmen in Japan equally optimistic?
A: (Okada) It depends on how well they are doing.  Some of the companies
like Compaq, IBM, Coca-Cola, other countries doing very well, may
contribute a lot to Japanese local communities, and establish a good
relationship with local communities.  Those who are not successful have a
difficult time, may become easy, have complaints.


It is really very hard for a newcomer to penetrate the Japanese market,
whether it is a foreigner or a Japanese firm.  In that sense, there is no
discrimination between foreigners and domestic companies.
Q: Why?
A: (Okada) Expense, people in Japan tend to put more value on long-term
mutual friendly relationship, even if they find newcomer that will underbid
a lot.


Now, in the past 2-3 year, the word "price destruction" is prevailing in
the Japanese economy.  This will lower the entry barriers for newcomers,
both foreigners and Japanese.