What To Do About the U.S.-Japan Economic Conflict

C. Fred Bergsten

From Foreign Affairs, Summer 1982

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Summary:  We are now experiencing the third episode of major economic conflict between the United States and Japan in the last 12 years. The first of these episodes led to the U.S. import surcharge of August 1971, viewed in Japan as the second of the ?Nixon shocks? aimed at that country, and a U.S. threat to invoke the ?Trading with the Enemy Act? against its chief Pacific ally. The second episode produced major U.S. pressure on Japan during 1977-78 to boost its domestic growth rate, with lasting damage to Japanese confidence in its American connection and immediate impact on the political career of the then Prime Minister, Takeo Fukuda. The third, current, episode promises to be the nastiest yet?with the United States joined as demandeur by the European Community, with racist overtones already creeping into the rhetoric and frustration on both sides of the Pacific, and with obvious spillover onto the reemerging issue of security relations between the two countries.

C. Fred Bergsten is Director of the new Institute for International Economics in Washington, D.C. He served as Assistant Secretary of the Treasury for International Affairs from January 1977 through January 1981, as a Senior Fellow at the Brookings Institution during 1972-76, and as Assistant for International Economic Affairs on the Senior Staff of the National Security Council from January 1969 through May 1971. He is the author of eleven books on a wide range of international economic issues.

We are now experiencing the third episode of major economic conflict between the United States and Japan in the last 12 years.

The first of these episodes led to the U.S. import surcharge of August 1971, viewed in Japan as the second of the "Nixon shocks" aimed at that country, and a U.S. threat to invoke the "Trading with the Enemy Act" against its chief Pacific ally. The second episode produced major U.S. pressure on Japan during 1977-78 to boost its domestic growth rate, with lasting damage to Japanese confidence in its American connection and immediate impact on the political career of the then Prime Minister, Takeo Fukuda. The third, current, episode promises to be the nastiest yet-with the United States joined as demandeur by the European Community, with racist overtones already creeping into the rhetoric and frustration on both sides of the Pacific, and with obvious spillover onto the reemerging issue of security relations between the two countries.

To be sure, there has been fairly steady tension between the United States and Japan over economic issues ever since Japan emerged as a major industrial power. Japan's amazing success in penetrating an increasing number of key global markets, ranging from the original textiles through shipbuilding and steel to automobiles and high-technology electronics, has won it grudging admiration but also growing hostility as a disruptive force in American economic life and brought repeated charges of "unfair" competition. Its apparent reluctance, or even inability, to expand substantially its imports of manufactured products has produced steady charges that Japan is itself highly protectionist, a "free rider" on the open trading system from which it benefits so greatly but within which it seems unwilling to provide others with truly reciprocal opportunities.1

These ongoing problems have been the subject of virtually continuous negotiations between the two countries for over two decades. Such discussions have centered sometimes on U.S. demands for Japanese export restraint, sometimes on U.S. demands for Japanese import liberalization, sometimes on U.S. demands for freer access for U.S. investment in Japan. In most cases, they have produced positive, albeit frequently modest, results in terms of both Japan's policies and subsequent economic relations between the countries-results, moreover, which have sufficed to maintain a basically cooperative framework for U.S.-Japanese relations and the respective roles of the two countries in the world economic system.

Nevertheless, the level of U.S.-Japanese tension has escalated severely on three occasions in just over a decade. The first question, therefore, is why it has done so. One answer can be found by tracing the course of the bilateral balance on merchandise trade between the two countries:

- From 1966-67 to 1971-72, the U.S. deficit rose from an annual average of $0.5 billion to an annual average of over $3.5 billion.

- After falling back to an average of about $1.5 billion in 1973-75, the U.S. deficit in 1976-78 rose to an average of over $8 billion.

- After dipping modestly in 1979-80, the U.S. deficit reached a record high of ...

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