East Asia: Pax Nipponica?

Future historians may well mark the mid-1980s as the time when Japan surpassed the United States to become the world’s dominant economic power. Japan achieved superior industrial competitiveness several years earlier, but by the mid-1980s its high-technology exports to the United States far exceeded imports, and annual trade surpluses approached $50 billion a year. Meanwhile, America’s trade deficits mushroomed to $150 billion a year. By late 1985, Japan’s international lending already exceeded $640 billion, about ten percent more than America’s, and it is growing rapidly. By 1986 the United States became the world’s largest debtor nation and Japan surpassed the United States and Saudi Arabia to become the world’s largest creditor.

In the past, the United States has been able to make up for its worldwide merchandise trade gap with trade in services, including interest payments. But as Japanese services expand worldwide and the United States begins paying out more interest than it receives, the United States suffers not only from a merchandise trade gap but a continuing current account trade deficit.

America’s GNP may remain larger than Japan’s well into the 1990s (depending on exchange rate measurements), but there are many reasons to believe that Japan will extend its lead as the world’s dominant economic power in the years ahead.

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Japan’s growing economic power is solidly based in three crucial areas: the "new industrial revolution" in manufacturing technology, the concentration on the service sector, and the expansion of research and development activities.

The Japanese are poised to take the lead in the "new industrial revolution" that is bringing new microelectronic and laser controls to the production process. Electronic controls greatly reduce the need for production-line workers and increase the flexibility of manufacturing. Technologies for replacing broken tools and parts automatically, for instance, permit increasing numbers of robots and other tools to operate untended all hours of the day. Companies and countries that install such technologies ahead of others are likely to gain great competitive advantage in reducing costs.