Order Before Peace
Kissinger’s Middle East Diplomacy and Its Lessons for Today
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.
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.
Japan continues to introduce about as many industrial robots as the rest of the world combined, several times the rate of introduction in the United States; its dominance in numerically controlled machine tools is even greater than in robots. Although progress in introducing computer-controlled modules and flexible manufacturing systems is more difficult to measure, Japan continues to extend its substantial lead in these areas. Why is Japan doing so well in applying the new manufacturing technology? Automation requires detailed work by vast numbers of electrical engineers, and Japan turns out more such engineers than any Western country—about 50 percent more each year in absolute numbers than the United States. Furthermore, a far higher proportion of electrical engineering graduates go into manufacturing in Japan than in the United States.
Senior Japanese managers who personally took part in the introduction of basic technological changes that took several generations to install in industries in the West are more knowledgeable than Western managers about how to administer large-scale industrial change. Japanese workers have learned that they do not lose jobs with fundamental technical change, and that firms which introduce new technology quickly are the stronger for it. With lifetime employment, Japanese workers are not frightened by new technology and want innovations that will keep their companies strong in the future. Needless to say, the low cost of Japanese capital and the almost universal training in science and math among Japanese workers reinforce these advantages.
Although the growth in Japanese productivity began to slow down in the 1970s, the introduction of increased automation in the 1980s allowed the pace to pick up, and Japan’s rate of productivity increase in manufacturing now far exceeds that of other industrialized countries.
In the mid-1970s, the Japanese began targeting the service sector, along with high technology, as the most promising growth area. They have started concentrating financial resources and talents into services with the same systematic determination that they once applied to manufacturing. Rapid expansion can be seen in areas like fashion, movies, television programming, publishing, consulting, real estate, design, construction, leisure, tourism, advertising, insurance and finance. Domestic companies in these sectors are already sufficiently established that exports are beginning to grow rapidly.
Expansion in the service sector is facilitated by the rapid accumulation of capital and by technological breakthroughs, particularly the new Japanese word processor, which makes possible for the first time the widespread capacity to type in phonetic syllables and achieve outputs of Chinese characters. The unrivaled information networks of the world’s six largest general trading companies, all of them Japanese, greatly assist worldwide expansion in the service sector. The continued growth of Japanese manufacturing companies will pull along their affiliates in the service sector because of the tight linkages between Japanese companies. Universal and high-quality training in math and science provide ample skilled manpower for the service sector, and governmental efforts to standardize communication networks will in the future provide a sound basis for the growth of service-sector companies.
Finally, the Japanese are rapidly expanding their research and development efforts to stimulate technical progress with commercial applications. The proportion of GNP devoted to R&D will virtually double this decade, rising from two percent of GNP in 1980 to an expected 3.5 percent by 1990. The United States has stabilized R&D expenses at about 2.7 percent of GNP. However, if military research is excluded, Japan is already devoting about as many man-hours to R&D as the United States and will soon be spending about as much for it. If present trends continue, Japan will take the lead in non-military R&D spending by the early 1990s.
Just as Japan built state-of-the-art industrial plants in the 1960s while America maintained its stock of older facilities, so Japan is now building state-of-the-art R&D facilities while America maintains many older laboratories. Most Japanese research is done in large companies that use the new technology for their own manufacturing. Much of America’s R&D, by contrast, is done in small, innovative companies that sell their technology to others, including the Japanese. American R&D is more accessible to Japan than Japanese R&D is to the United States, since much of it is done in open universities as well as these small companies, and since Japanese scientists can easily follow American R&D literature. Japanese government aid to research is significant not so much for its magnitude as for its capacity to ensure that the nation adapts quickly to promising leads and fosters cooperation and specialization among firms to make better use of national resources.
What are the implications of these successes for the global political balance? Will Japan use its economic dominance in world affairs to become a military superpower?
After World War II Japanese leaders, convinced that they could not continue to enrich their country through military expansion, began single-mindedly devoting their energies toward economic competitiveness. Like the Venetians and Dutch in their heydays, the Japanese conceived a vision of economic power without military power; their subsequent economic success has not altered this vision. They hope that nuclear weapons have rendered all-out warfare untenable and that, unlike seventeenth-century Holland, they will not suffer for their modest level of military preparedness.
Japanese believe their national welfare has profited by placing priority on economic affairs, and that a greatly expanded military would detract from the willingness of trading partners to welcome their businessmen and their products. They see no need to change their American-imposed "peace" constitution, which prevents them from sending troops or selling arms abroad. Living in the world’s most densely industrialized territory, Japanese consider themselves uniquely vulnerable to nuclear attacks and are convinced that possession of nuclear weapons would increase their vulnerability.
Many Americans believe that Japan enjoys a "free ride," taking commercial advantage of opportunities provided by a stable world maintained largely at American expense. Japanese, however, argue that they pay for their own military defense and contribute substantially to America’s forces in Japan, thus freeing the United States to concentrate its energies elsewhere. They believe that Americans spend excessively on defense because they exaggerate the Soviet threat and that they are unnecessarily provocative. For all their dislike of the Soviet Union, Japanese believe that if they remain firm in negotiations, avoid provocations and modestly increase military preparations, the risks of conflict can be reduced. They do not believe that the more they arm the safer they are.
Although worried about being drawn into conflicts through excessively intimate ties to a belligerent United States, most Japanese believe it is in their interest to maintain the military alliance with the United States. Many scientists and engineers would prefer an independent science and technology policy and fear the constraints that Americans might impose on defense technology developed jointly, but some are ready to cooperate with the United States in weapons development, especially if it opens doors to new American defense technology.
In any case, Japanese are unlikely to spend as much as two percent of their GNP for defense by the year 2000, but they are prepared to increase their contributions to maintain world security as Americans feel less able to afford the expense. They will, of course, use their contributions to gain leverage to represent their own interests. They are already the world’s seventh-largest military power, with highly sophisticated weaponry, and their military power will grow. But at least for this century, Japan will in the military sphere accept a Pax Americana, perhaps eventually growing into a Pax Americana-Nipponica.
As an alternative to military power, internationally minded Japanese have begun to envision their country becoming a world leader by assisting the southern tier of developing countries and championing their cause in international meetings. Japanese economists have argued in influential Japanese journals that Japan should rapidly increase its "contributions to the world public good." Cosmopolitan journalists, aware that the world has criticized the lack of Japanese contributions to Vietnamese refugees, have worked to dramatize the problems of African hunger and Mexican earthquake recovery so as to increase private as well as public Japanese aid. Some ordinary Japanese citizens who lived as youths in China, Korea and Taiwan during the Japanese occupation have worked to establish person-to-person relations with people of these countries. Idealistic young technicians have volunteered for a Japanese version of the Peace Corps. Development planners are guiding the planning and construction of modern facilities in China and Indonesia. Political leaders, aware of international pressures for Japan to uphold its fair share of world burdens, have argued for an expansion of Japan’s role in these areas rather than in military affairs. And they realize this can only be achieved with the cooperation of their closest and most important ally, the United States. Japan is now beginning to increase rapidly its aid contributions.
Japan has considerable resources, aside from capital, to play such a role. Japanese bureaucrats bring great skills in careful planning, long-term continuity, integrity and enforcement of high standards of job performance. Japanese trading companies have the capacity to put together international development projects on a commercial basis. Japanese are ready to send corps of specialists abroad to take part in these projects.
Japan has consistently lagged behind other industrialized countries in the proportion of GNP devoted to international aid efforts. Despite the intentions of many idealists, elemental nationalism that has resisted aid-giving abroad, especially outside Asia, has proved to be much more powerful. As individuals, Japanese have unsurpassed capacity for hospitality, but as a nation Japan has tended to pursue its own narrow interests. At least until now, in battles within Japan between nationalists and internationalists, power has tended to gravitate to the former. The highest Japanese leadership regularly makes commitments of aid on the occasion of foreign state visits. Although officially strings are no longer attached, terms are generally not attractive, feasibility studies often lead to delays or postponements, and locals often feel compelled to purchase products from Japanese companies attempting to expand local markets. Some cynics have charged that Japanese foreign aid is given less from genuine human compassion for the needy than from a desire not to appear overly selfish compared to other countries.
Moreover, anti-Japanese sentiments remain strong in Asian countries and are emerging in other developing countries. In part this is the inevitable remnant of World War II and the result of envy. But it is also fueled by the perceived arrogance, exclusiveness and discrimination of Japanese toward others at home and abroad, and by questions about promises made to gain contracts and hidden problems that later emerge to increase costs to the purchaser. Expression of such sentiments is muted by foreign leaders who want Japanese technical and financial assistance, but it is a powerful force that has explosive potential.
At some point, foreign pressure for Japan to assume a larger burden, and growing Japanese sympathy for the plight of the Third World poor, may lead to a further speed-up of aid even beyond the substantial increases already projected. Prime Minister Yasuhiro Nakasone has already outlined a vision of 100,000 foreign students studying in Japan by the year 2000, and comparably bold plans are being enunciated by prominent Japanese to assist foreign nations. Many Japanese educators realize that they must do a great deal more to open their educational and research institutions and technology to foreigners.
Recently, Japan has shown a remarkable ability to forge a consensus on new public issues such as pollution and social welfare, evidence that in Japan a fundamental sea change can occur in a short time. It is therefore possible that, before the end of the century, Japan will undergo a similar sea change in its commitment to international aid programs and its receptivity to foreigners in Japanese society. If so, it is likely to be generated from Japan’s own initiatives. Although cosmopolitan Japanese are prepared to cooperate with other donors in foreign aid, many officials and much of the public believe Japan is now strong enough that it does not need to ingratiate itself with the United States by aid-giving in the pursuit of strategic interests defined by U.S. priorities and objectives.
For the foreseeable future Japan is likely to make steady and sizable incremental increases in foreign aid. In a country where consensus is important and must involve many groups, a pattern of consistent incremental increases of aid, like military spending, is easiest to manage. Given rapid Japanese economic growth, these increases in foreign aid may be large enough to make Japan the largest single aid donor by the mid-1990s and to permit a number of significant new initiatives. These will not be large enough in this century to embrace worldwide development efforts in a Pax Nipponica.
Until now the Japanese have not had a clear vision of a new world trade order. They have essentially accepted existing international institutions and learned how to promote their national interests within that framework. They are not yet sufficiently comfortable with their newfound economic success to consider reshaping the international trade order.
However, for the first time since 1853, when Admiral Matthew Perry forced the opening of Japan’s ports to foreign trade, the Japanese feel strong enough to achieve their long-cherished patriotic dream: to resist—with all due politeness—foreign pressures to accept arrangements that give advantages to other countries. Through long decades of subservience to the United States, the Japanese have learned how to develop and use whatever leverage they have to achieve their goals. They have learned how to delay and postpone while being polite, yielding only when all other choices seem absolutely exhausted. They are prepared to make pragmatic adjustments where necessary, but the prevailing consensus is that they should yield to American pressures on trade as little as possible.
In the Japanese view, America’s wants and demands are endless. Any concession leads to endless demands by U.S. congressmen and other groups for more. It follows that the best way to respond to American pressure is to lengthen and complicate the solution of any problem, to find ways to slow down implementation while maintaining an overall friendly climate.
Underlying Japanese attitudes on international trade is the conviction that it is in their interest to produce goods for their own consumption and for export, and to buy as few manufactured foreign goods as possible. Many Japanese now have confidence in Japan’s ability to buy needed resources and imports, but policies and attitudes are still conditioned by the desperation they felt in the wake of World War II shortages and the 1973 oil shock. Japanese leaders can conceive of future emergencies caused by difficulty in importing needed resources or loss of competitiveness in international markets to newly industrializing countries. It follows that they must continue their neomercantilist policies of manufacturing as much as possible at home and importing only a minimum of manufactured goods from abroad. Most foreign specialists are convinced that Japanese efforts at "import promotion" do not yet represent a fundamental change in attitude but are more an effort to persuade foreigners that Japanese markets are already open.
Japan’s neomercantilist policies after World War II centered on export promotion to acquire needed resources. Knowledgeable Japanese are proud that they developed their own unique strategy, but they bristle at the charge that it was unfair. Why should Europe and the United States presume to set the standards of what is fair and unfair in world markets? In their view Japan has, by and large, followed international laws and won in international economic competition by producing higher-quality goods at better prices. Other countries have controlled imports in pursuit of national goals—why should Japan be singled out because it has done so more successfully? If anything, Japanese believe they have learned the rules as played by the West, and have beaten the West at its own game.
In the early decades after World War II, Japan became accustomed to protecting infant industries and nursing them to international competitive standards. Only when there was virtually no danger of foreign products competing successfully in their home markets would they slowly and reluctantly reduce formal tariff barriers. They made it virtually impossible until the 1970s for foreigners to own their own subsidiaries in Japan or to have even indirect economic control over firms in Japan. They established vertical linkages between companies that made it very difficult for foreign companies to penetrate Japanese markets even when foreign products had competitive advantages. Japanese officials found ways to slow down the approval process for competitive foreign products. Japanese industrial-sector associations found ways to work with officials in setting standards, allowing fees for pharmaceutical and medical products, restricting procurement of foreign products and delaying the entry of such goods until domestic makers could make competitive products.
Despite tatemae (general statements of principle) and the growing conviction of some Japanese leaders that these practices must go, Japanese economic power is sufficiently decentralized that it is largely in the hands of working-level professionals, many of whom still believe that these practices remain in Japan’s interest.
Most American trade officials see their responsibility as keeping a "level playing field." But Japanese trade officials are the same ones who are responsible for maintaining the competitive success of Japanese products in their jurisdiction. They therefore fight to protect areas where they are not competitive, e.g., soda ash, timber, agricultural products, telecommunications, medical instruments and pharmaceuticals. The Japanese government enjoys a great continuity of bureaucrats who see their responsibility not as keeping the playing field level but as achieving and maintaining the market superiority of their products and restraining foreign imports while maintaining an appearance of fairness.
Many formal barriers to trade have been removed, and many Japanese genuinely believe that they are as open to competitive foreign trade as other powers. They believe that they have fewer tariffs than most other nations, and that the ones they do have are among the world’s lowest. In their view the European Economic Community has more barriers than Japan; even the United States has far more barriers than most Americans know about, including various state regulations that make importing difficult. Many Japanese are convinced that if all tariff and non-tariff barriers in Japan and the United States were lowered, the trade imbalance with the United States would actually increase. They believe that if voluntary restraints on textiles, televisions, cars, semiconductors and other products were lifted, they would have far greater sales to the United States, but that even if all restraints on foreign products were lifted in Japan, few American products would be able to compete successfully in the Japanese market.
The Japanese worry about American protectionism, but they sense that American moods go in cycles, and they therefore adopt strategies to overcome temporary American outbursts. Observing congressional voting proclivities with great care, they are convinced that Congress will have great difficulty uniting to impose any serious protectionist measures that Japanese businessmen cannot get around. They also see strong American pressures against protectionism: the consumer movement; the interest of the American defense establishment in purchasing goods around the world; the desire of American leaders to maintain goodwill, not only with Japan but with the rest of the world; the desire of economists who want to keep world markets open; the concern of certain American businessmen to protect their niche in the Japanese market, however small, or their marketing of Japanese-made products.
To represent their interests within congressional and administration circles in Washington, Japanese hire former high American government officials of both parties as lawyers, consultants and public relations specialists. They send and receive goodwill missions. Prime ministers make speeches urging Japanese to buy foreign goods, which frank Japanese acknowledge may be aimed more at foreign than domestic audiences. Japanese bureaucrats in JETRO (the Japan External Trade Organization) help arrange "import fairs" of boutique goods, food products and other goods that have at best minor significance in the trade balance. New trade packages and concessions are announced, often timed to forestall American actions.
Now that the Japanese have achieved what they consider superior economic performance, ardent nationalists are prepared to explain to foreigners that if they want to succeed in Japan they must work harder, improve their products, their prices, their commitment to the market, their after-sale service. And even government officials who act with diplomatic restraint are now proud that Japan is strong enough to resist endless rounds of pressures.
Lacking a vision for a new world trade regime, Japanese are still uncomfortable thinking of themselves as the dominant economic power, let alone as capable of imposing a Pax Nipponica over world trade. But the combination of their superior competitiveness, their dominance in financial circles as the world’s leading creditor, their superior information network, and the dependence of others on Japanese products and technology creates great de facto power. This power will enable Japan to dominate world trade and use its power, as it has in the past, to serve its national interests and enhance the well-being and economic security of its people.
Japanese, by habit and design, are reluctant to call world attention to the full scope of their international economic success. Americans and Europeans understandably find it difficult to acknowledge the extent to which their global economic power has declined at the expense of their competitor in East Asia. The international problems that arise from increasing Japanese economic power have therefore not received the attention they deserve. Let us enumerate some of the problems that the rise of Japan poses for the United States.
Can the United States stem its relative economic decline? A careful analysis of Japan’s competitive advantages suggests that the problem is far deeper and requires a far more concerted effort than most Americans realize. Public discussion of these issues has unfortunately been dominated by economists who take far too narrow a view of the problems and think chiefly in terms of exchange rates, interest rates and savings rates. The problems are much larger. Japanese managers have access to lower rates of capital and a less costly, more committed and better trained work force. For example, over 94 percent of Japanese complete high school compared to less than 80 percent in the United States, and Japanese students have much higher average math and science scores than their American counterparts.
Japanese government and private business collaboration makes it very easy to move flexibly in concentrating national resources on important, commercially relevant research and development. Japanese business makes constant surveys of manpower needs. Cooperation between government and business makes for more rapid adaptation to changing training requirements.
The Japanese government’s neomercantilist policies help keep savings rates high, the cost of capital low, the commercialization of new inventions rapid, and trade barriers in line with national strategy. Cooperation between government and business and the relatively low reliance on regulation and unpredictable litigation reduce investment risks. Retraining and incentive programs provide new job opportunities for those displaced by a changing economic structure, thus helping to maintain a social fabric in which the overwhelming majority of people identify with and share national goals.
It is clear that a commitment to focus on these areas is desirable for achieving American foreign policy objectives, as well as for improving American welfare. It is not yet clear that America has the political will to overcome the decades of complacency that stemmed from the unique period following World War II, when, as the only major power not severely damaged, it could succeed economically without special efforts.
Can U.S. and Japanese macroeconomic policies solve the trade imbalance? Western economists hope the trade gap might be substantially narrowed by the appreciation of the yen, but past experience is not encouraging. Since 1971, when the exchange rate was 360 yen to the dollar, every time the yen appreciated significantly, American trade balances maintained a temporary plateau but did not significantly improve. Japanese firms simply restrained price increases to retain their share of the market. Then, as Japanese firms gained further productivity advantages, their market share again increased. Once manufacturing plants and skills moved to Japan and the newly industrialized countries, the depreciation of the dollar did not lead to a substantial return of manufacturing to the United States. Exchange rate adjustment, in short, is an adjustment to superior Japanese improvements in productivity, and does not solve the problem of continuing American economic decline.
Some Western economists note the disparity between Japanese and Western savings rates and believe the problem could be solved if the Japanese would stop sacrificing and spend more. They vastly underestimate Japanese consumption and naïvely hope that more Japanese consumption would increase Japanese imports or at least restrain Japanese exports. But the "sacrifice" of Japanese consumers, except for the problem of housing in metropolitan areas, is a myth. The Japanese have gained far more improvements in living standards in recent years than the citizens of any Western country. Although not yet caught up with the most advanced Western countries in housing space, indoor plumbing and car ownership per capita, Japan’s general consumption levels have already surpassed West European levels.
Given its population density and excellent rail transport, the number of automobiles in Japan may already have reached an optimum. In personal electronics and cameras, specialized clothing and many luxury items, Japan has already surpassed the United States in per capita consumption. Japanese spend far more on weddings and other ceremonies and more than twice as much on tourism per capita than Americans. Even in housing, during the 1970s and 1980s the Japanese made about 50 percent more housing starts per capita than Americans. Even affluent Japanese do not wish large entertaining space at home, preferring to use hotels, restaurants and special centers where facilities far surpass those in the West.
In sum, Japanese consumers do not feel they are sacrificing, and if they were to spend still more there is no indication they would buy significantly more foreign products. Nor will the Japanese government greatly stimulate further spending, since Japan has a large budget deficit and Japanese leaders have formed a powerful consensus that long-term national prosperity requires putting a cap on government spending. In short, Japanese trade surpluses with the United States are not likely to be resolved by changes in the exchange rate or by changes in Japanese macroeconomic policy. The reasons for Japanese economic success are much deeper.
Can the United States encourage the Japanese to make it easier for foreign companies to operate in Japan? The pressure on Japanese to open their markets further has had considerable impact since the mid-1960s, but over the last several years the improvement has been modest at best. Part of the problem is that the behavior of sectoral associations and the vertical connections between firms make it difficult for foreign firms to penetrate. The complexity of trade issues leaves great opportunities for loopholes for those who do not consider it in their interest to open the market more thoroughly.
Although specialists disagree on how much difference it would make to the trade balance if Japanese markets were thoroughly open, it is generally agreed that American exports to Japan might initially increase only several billion dollars a year. However, decisions by American firms to locate in Japan, to build up their staff and presence there, would give them a base for further expansion; they would be ready to take advantage of new opportunities that would undoubtedly have a much larger effect in the long run. Furthermore, the opportunity of foreign companies to achieve economies of scale by selling in both the large Japanese and American markets would improve their long-run competitive positions in many products, even if it did not have a large immediate impact. Clearly, American firms should be playing a larger role in the Japanese market.
The export of American manufactured products to Japan has, in fact, increased in recent years. A further opening of the Japanese market would have a very important long-range political significance. When Japan was weak, other countries were willing to tolerate considerable protectionism in the Japanese market. Now that Japan is stronger, political antagonism not only strengthens anti-Japanese feelings but strengthens protectionist pressures in the United States and elsewhere. Given these pressures, which are rooted in real economic adjustment difficulties and compounded by a sense of unfairness on the part of the Japanese, it is unlikely that the White House and the State Department can contain the political pressures for long. Perhaps a greater danger than an American administration implementing or supporting restrictive trade legislation is the danger of emotional outbursts in Congress and elsewhere that would trigger similar emotional reactions in Japan. The challenge for an American administration is to press Japan with sufficient vigor to reduce such outbursts, while containing pressures for more sweeping protectionism.
It is unlikely that Japan will open its markets significantly without American pressure to require it as a condition for continued access to important parts of its own domestic economy. Some thoughtful internationalists in Washington and Tokyo have suggested that it would be useful for Tokyo to undergo a consensus-building process of developing a new open-market strategy, much as it developed a new consensus after the first oil shock of 1973. But given current Japanese attitudes, such a consensus-building process is unlikely to bring about major change unless there is an urgent worry about Washington’s capacity to deny significant market access without a substantial expansion of foreign access to Japan’s market. The question for Washington is how to stimulate this consensus-building while avoiding the dangers of protectionism. Given all the problems of inspection and regulation, perhaps some arrangements specifying total amounts or market shares in certain key sectors in exchange for comparable shares in the Japanese market are the most promising. Indeed, confronted with possible American legal action in the case of alleged dumping of semiconductors, the Japanese have proposed just such a solution.
How would an economically dominant Japan reorder the international trade regime and how might America best adapt? Given the ability of certain large Japanese companies to invest in excess capacity and engage in forward pricing to increase market share, in strategically important products it will be difficult for medium-sized foreign companies concerned with near-term profits to avoid being wiped out. In critically important areas like steel, ships, cars and semiconductors, therefore, Japanese market advances may be limited only by de facto cartel arrangements that set limits on market share. In effect, this is what the United States has asked Japan to enforce through voluntary restraint agreements in sectors like textiles, television sets, steel and cars. Within Japan, the government and sectoral associations have been able to manage cartel-like arrangements that restrain the largest companies and strengthen the advancing companies so as to maintain competitive pressures and protect the consumer. Being accustomed to such arrangements at home that limit market share and specify specialization and location, Japanese, despite natural desires to expand international market shares wherever possible, would not find it difficult to agree to international cartel-like arrangements in many products.
The issue for the future international trade regime is not likely to be free markets or protectionism, but the nature of a mix that provides some cushioning for a nation’s industries and populations against sudden disruption, while encouraging international trade and providing opportunities for developing countries to expand their manufacturing exports. It may well be that the multi-fiber arrangements which set limits on national textile exports, with all their difficulties, provide a more accurate and feasible vision of the shape of international trade than the American vision of an open and level playing field. The question is how to create agreements with sufficient flexibility to allow newly emerging countries to increase their share gradually and to maintain the benefits of competitive market pressures. Given the declining competitiveness of American business and the political pressures from U.S. business, labor and Congress, America may have no choice but to work toward such agreements. It is in this sense—the capacity of Japanese competitiveness to dictate such a solution—that the international trade regime may well be moving toward a Pax Nipponica.
The prospects for the next few years, therefore, are for a pattern of limited and uneven Pax Nipponica, led by a country of modest military strength, of limited ability to attract a foreign following and to give foreign aid, but of great economic leverage. It is surely in the interests of Japan, as well as the United States and Europe, to work toward the expansion of partnerships and multilateral intertwining in the Pacific basin and elsewhere. In the foreseeable future, no matter how extensive this intertwining, the economic leverage of Japan, the world’s most competitive economic power and biggest creditor, is likely to grow and to be used in pursuit of neomercantilist objectives.