Facing Up to the Trade Gap with Japan

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Last year, the United States ran an eight billion dollar trade deficit with Japan, and this year the figure is running 50 percent higher. As a key component in the overall U.S. balance-of-payments deficit, a recurring irritant in U.S.-Japanese overall relations, and a significant factor in the decline of the dollar over the past year, the state of trade between the United States and Japan is now a critically important problem.

As the deficit grows, so does, for many, discomfort with the long-held explanation of Japanese surplus. Japan did indeed achieve notoriety by promoting exports and restricting imports. But for some time Japan has been doing less promoting and restricting, yet watching its surplus embarrassingly grow. Further, to perceive the problem in these terms tends to emphasize the role of governments on both sides.

Yet, it is increasingly clear that the market mechanism, not distortions of it, is the main driving force in bilateral trade. This brings us to the United States. The more prolonged the mythology about Japanese behavior, the more deferred is analysis of the realities of U.S. competitive performance in Japan. It is appropriate now to examine this latter issue in some detail.

II

For a very long time and until very recently, Japan was utterly protectionist in every aspect of international economic interaction. All transactions - goods in trade, technology sale and purchase, capital inflow and outflow - were closely regulated and circumscribed. Japan had long been isolated, and has a keen sense of difference from other societies. It felt itself poor, and in fact both in resources and in accumulated wealth remains poor today. There was a real and sharp anxiety lest the nation be overwhelmed by stronger and wealthier foreign interests. A national policy of exclusion of foreign capital and products found a quite willing public.

This is history. Beginning slowly and cautiously in the mid-1960s, and accelerating steadily into the 1970s, the process of dismantling and relaxing controls and regulations was undertaken. It can be argued that the process took too long, and was too slow, even from the point of view of Japan's own interests. But against the historical background, the transition took place with what must be seen as extraordinary speed. At least in terms of official policy, Japan is now about as open in all aspects of transaction as other OECD member countries.