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The most important bilateral relationship in the world today is that between the United States and Japan. It was only 44 years ago that our two countries were at war. In the short span of time since 1945 we have constructed an enormously complex relationship that touches all aspects of both societies and much of international human endeavor. The victor and vanquished of World War II have become the cornerstones of the international economic system, together producing almost 40 percent of the world's GNP. That all this has been accomplished in only four decades helps to explain why we find that there are still details to work out in managing this critical relationship.
This relationship is of immense benefit to the peoples of both nations. The United States enjoys the support of a strong, loyal and democratic ally in the Pacific, which contributes greatly to regional peace and prosperity. Japan has the protection of the U.S. nuclear umbrella and enjoys great access to the U.S. market, the world's largest. The two countries' foreign policies and foreign aid programs complement and support each other. Our individual and cooperative scientific and technological achievements have brought about a new age of information, increased our knowledge of ourselves and of our world, and contributed to the welfare of all nations. The lives of both peoples are enriched by a vast and burgeoning network of educational and cultural exchanges.
In sum, two nations that historically have acted quite independently have become interdependent. Neither nation can survive at the current level of economic welfare and security without the active cooperation of the other.
This fundamental aspect of our relationship has been overshadowed in the media and in our bilateral dialogue by a seemingly endless series of disputes over market access and unfair trade practices. At times these frictions have spilled over and threatened to damage other areas of our economic partnership as well as our political, security and diplomatic cooperation.
I do not for a minute deny the importance of, and the need for, a fair and effective resolution of trade problems between the United States and Japan. But these frictions must be addressed in the context of an overall partnership that embraces all aspects of our relationship.
It was in March 1977 that I received a phone call from President Jimmy Carter that began a new life for my wife Maureen and me in Japan, after a full career in public service. Last December, after eleven-and-a-half years as U.S. ambassador in Tokyo, I left Japan to return to retirement. When we departed, both my wife and I were convinced that the individual destinies of Japan and America form a common structure vital to the future of both, as well as the rest of the world.
Let us examine the substance of this partnership.
Japan's postwar development owes much to the international free trade system, a system sustained primarily by the willingness of the United States to keep its market open, even at the cost of substantial dislocation in important U.S. industries such as steel and automobiles. The United States did not do this to be altruistic but rather out of the conviction that its economy would be strengthened through free trade and the laws of comparative advantage. Free trade has had and continues to have enormous benefits for the U.S. economy, but for too long Japan did not bear its fair share of the burden of maintaining the system by paying the short-term domestic political and economic costs of opening its own markets to foreign goods.
This is changing. In 1986 Japan established a framework for a major restructuring of its economy, prompted by altered exchange rates. It reduced the role of exports in stimulating economic growth by increasing domestic demand, thereby expanding manufactured imports and helping Japan to share the global economic burden. This has occurred at considerable political costs, resulting in some minor social and economic dislocations in Japan. But on the whole I believe that the Japanese economy and people have benefited.
Japan still has a considerable distance to go before its markets are as open as those of the United States, but the combination of the restructuring of Japan's economy, U.S. success in individual negotiations and the upward reevaluation of the yen are resulting in dramatic changes in the right direction.
Let us examine in detail the progress to date. In the last two years Japan's external sector was actually a drag on GNP growth. Instead, it was rapidly expanding domestic demand-up 5.1 percent-which boosted Japan's GNP growth rate to 4.3 percent in 1987 and an estimated six percent in 1988. The trade numbers also reflect this fundamental change. Imports to Japan, largely a function of domestic demand, are expected to be up roughly 28 percent this year, compared to a 16-percent increase in exports. Also, the prospects are good for about a seven-percent decline in Japan's current account surplus in 1988. The ratio of manufactured imports to Japan's total imports has increased from 31 percent in 1985 to 50 percent recently. Moreover, the U.S.-Japanese bilateral trade imbalance has been improving. The deficit dropped to $55.4 billion in 1988 from $59.8 billion the previous year. Particularly impressive has been the surge in U.S. exports to Japan-up 34 percent in 1988 to $37.7 billion. Although monthly trade numbers will continue to fluctuate, these figures indicate that we are headed toward a healthier balance of trade.
Progress on the serious issue of market access has also been impressive. Japan, on the prodding of the United States and other trading partners, has opened up to a significant extent its telecommunications, tobacco and pharmaceuticals markets, and reduced its tariffs to among the lowest in the world. In 1988 Japan acceded to the decision of a General Agreement on Tariffs and Trade panel, agreeing to allow freer trade in some categories of food products. Agreements providing for access to public works, and to beef and citrus markets, were also concluded. These market-opening measures are significant for the increased sales they will provide to U.S. suppliers-U.S. exports in these sectors are expected to increase by billions of dollars over the next few years-and also because they are concrete evidence of Japan's commitment to trade liberalization. Rice poses a special problem that both governments have agreed should be addressed on a multilateral basis in the Uruguay Round of GATT.
Investment. At the end of 1987 the United States had direct holdings in Japan worth $14.3 billion, making the United States Japan's largest foreign investor. There are only five countries in the world that host more American investment: Canada ($57 billion), the United Kingdom ($45 billion), Germany ($24 billion), Switzerland ($20 billion) and Bermuda ($18 billion). Moreover, the average annual return on American direct investment in Japan over the last five years has been a striking 21 percent-more than U.S. investment in any other region and, in my opinion, solid evidence of the rewards that can be reaped by American firms that commit themselves to establishing operations in the Japanese market. Start-up has not been easy by any stretch of the imagination, or cheap, but it is clear that the rewards are well worth it.
Japan at the end of 1987 had direct investments worth $33 billion in the United States, much of them due to the recent increase in value of the yen. Media attention regarding Japanese investments has triggered a debate in some quarters of the United States. What has not been mentioned in this debate is the fact that the $33 billion in Japanese investment is far less than the $75 billion in British investment and the $47 billion in investment by the Netherlands. I welcome Japanese investment, as do the 47 U.S. state governors who came to Japan during my tenure to seek new jobs, new capital sources, new tax contributions and development opportunities.
Investment benefits both countries. Japanese direct investment in the United States creates jobs, expands the tax base, provides healthy competition for American firms on their home turf, and often brings new technology and innovative management techniques into the U.S. economy. Japanese portfolio investment in the United States, which totals $160 billion, helps to finance the U.S. fiscal deficit and to keep interest rates from rising, while it provides Japan with a safe and profitable haven for excess capital.
Science and Technology. Japan's postwar development has been greatly assisted by access to U.S. technology through the traditional openness of the American scientific community, by study and research opportunities at American university research centers, and through licensing arrangements with U.S. firms. The flow of researchers and technical information has been generally one-way, but recently both governments have taken steps to increase U.S. access to Japan's scientific community through a new science and technology agreement. The Japanese government has also initiated a program to invite more than 200 American researchers for placement in Japanese research facilities. There are still some structural problems to be addressed. Research in the United States is based largely in universities, while in Japan it is largely based in industries. And we must confront the fact that few U.S. scientists and technicians are prepared to do research in the Japanese language. But here, too, we are moving in the right direction.
For all that the United States and Japan have achieved, both sides need to do more to achieve a better balance in their economic relationship. Japan must take further steps in its initiatives to remove impediments that hinder foreigners from doing business there or enjoying access to Japanese research and technology. It cannot afford to wait until foreign pressure builds up and a confrontation results. The Japanese government has already done much at the macroeconomic level to stimulate domestic demand and thus imports. The United States has also been successful in sectoral negotiations on such items as wood products, medical equipment, telecommunications, beef and citrus. Remaining barriers relate primarily to difficult, socially embedded areas such as Japan's labyrinthine distribution system, strong supplier-customer bonds and Japanese suspicions of the quality, safety and "after-service" associated with foreign products.
But old habits are crumbling under the impact of the high yen, with discount houses specializing in low-cost imports springing up all over Japan. Japan's leaders should work to continue removing these barriers until not a trace remains to support allegations of a closed Japanese market.
The United States, however, faces the greater challenge. As a nation we have become soft. We have allowed the technology and manufacturing base of our industries to languish, and we have neglected quality and service. This has allowed Japanese firms and others to capture much of our market. The emphasis in American industry has been on short-term profits rather than long-term market growth. This is the reverse of the Japanese approach. Thus, when the upward yen reevaluation created opportunities for U.S. manufacturers to gain back their markets at home and abroad, many companies took this opening to raise prices once again-a terrible waste of opportunity.
The United States must also confront its national budget deficit and its $140-billion global trade deficit, not only its $54-billion deficit with Japan. In an unsettlingly short time, the United States has gone from the world's greatest creditor nation to the world's biggest debtor.
Americans need to save more (the average Japanese saves 19 percent of the family take-home pay), produce more and consume less. Our primary and secondary education system desperately needs reform if we are going to produce young people able to compete technologically in the world. Higher education must be made affordable to all Americans who have the requisite ability and desire. We must use our technological capability to improve our own production system. And we must reduce our dependence on short-term profits and look instead toward long-term business and industrial strategies.
As the United States and Japan undertake these individual economic responsibilities it is equally important to reduce the rhetoric and political heat each directs toward the other. The United States, in particular, needs to find a less contentious mechanism to handle trade problems. There have been a number of suggestions along this line. Some have proposed the establishment of a bilateral businessmen's council that would take up trade disputes before they become issues in U.S. trade law or in GATT. I have also suggested that the United States should look at some variations of a free trade agreement to see if there are not ways of applying this approach to trade negotiations with Japan. As our two countries become more interdependent, friction will likely increase even further in areas of trade and the economy. We must therefore find a better way to address these disturbances.
Defense. Perhaps no other aspect of the U.S.-Japanese relationship is misunderstood as frequently as our security relations. What ought to be a source of pride for both nations as a brilliant achievement of international cooperation is sometimes dismissed as a "free ride" for the Japanese. Let us take a closer look.
Much of the debate focuses on Japan's defense spending. Some argue that Japan spends too little, yet the one percent of GNP that it spends on defense amounts to $30 billion. This is comparable to the $35 billion spent by the United Kingdom, the $32 billion spent by France and the $31 billion spent by the Federal Republic of Germany. Moreover, if one includes the additional $10-billion worth of pensions and survivors' benefits, which the Japanese handle in a separate budget (unlike the United States and European nations), Japan's defense spending considerably exceeds the expenditures of our European allies.
Japan uses this spending for the mutually agreed objectives of maintaining a defense capability to protect its home islands and two sea-lanes out to 1,000 miles, the first extending from the Bay of Tokyo southeast to the region of Guam, and the second from Osaka Bay southwest to the Bashi Channel.
This "small" defense budget buys Japan more destroyers and more antisubmarine aircraft than the United States deploys in the Western Pacific and more F-15s than the United States has for defending its homeland. The Japanese commitment to the joint development of the FSX fighter, to the production under license of 100 P3C antisubmarine aircraft, and to the purchase of such advanced warning systems as the Aegis ensures that its defense capability will be the best possible, that it will be compatible with American defense systems and that it will be developed in cooperation with U.S. defense industries.
This joint defense effort pays enormous dividends to both countries. The United States will defend Japan if the need ever arises. By the same token, the increased capabilities of Japan's own defense forces have allowed the United States to stretch its resources to other parts of the immense Pacific Basin area.
In addition to increasingly carrying the burden of its own defense, the Japanese government provides direct financial support for the upkeep of the 63,000 American military personnel stationed in the archipelago, military forces that play a vital role not only in Japan's defense but in the defense of the region as a whole. Japan currently contributes $2.7 billion of the total cost of $6.2 billion to keep these American forces in Japan. This amounts to about 40 percent of the total cost, or $45,000 per military person-the most generous support provided by any ally. This financial support, moreover, will increase in the years to come.
Joint weapons development projects such as the FSX aircraft program, which has been the subject of debate in the U.S. government, have much promise for the future. They ensure compatibility of U.S. and Japanese weapons systems. They assure participation in very large projects by U.S. industry and access to Japanese technological developments. And they assure that Japan and the United States continue to work together in providing for the defense of Japan and Asia. Some have argued that such programs transfer technology to Japan's defense industry, which at some future date might become a competitor to the U.S. defense industry. While there is some risk in this, Japan does not permit the export of military equipment at the present time and, in my view, is not likely to do so. Thus, it is far better to be a player and a partner with Japan than to force Japan to go it alone and develop an indigenous technology that would, indeed, compete with the United States.
When I was in Tokyo, I heard two sorts of complaints from visiting Americans about Japan's defense policy. The "free ride" group argued that the time had come for Japan to shake off its postwar constraints on defense and to take on regional responsibilities that the United States could no longer afford and which were dragging down our economy. A smaller group argued that there was a new nationalism awakening in Japan that would lead it toward becoming an independent military power and that the United States should therefore be wary of Japan's increasing military capability.
While there has always been a very tiny but vociferous minority in Japan in favor of an offensively armed Japan, such opinions have never been more than a media curiosity. The new Japanese generation is more confident. This is to be expected and is welcome. I remember a postwar America that tended to be rather cocksure that it was the center of the world stage. Perhaps this kind of self-assuredness is necessary for a new economic superpower to assume its legitimate role in world affairs. But this confidence should not be confused with a desire for a strong military role for Japan. The Japanese people remain strongly pacifistic and their attitudes have little in common with the prewar generation. Not only is war truly abhorrent to them; they are also perfectly aware that there are far better, humane and effective ways of pursuing legitimate international goals. They also realize that their Asian neighbors do not want a remilitarized Japan. Nor does the United States.
As we look at the many tangible benefits the United States derives from this fruitful security relationship, we should count our blessings to have as a close and loyal ally the strongest, most stable democracy and greatest economic superpower in the region. We need to remember that the U.S. forces in Japan are stationed there in America's interest as much as in Japan's. At a time when U.S. bases in other parts of Asia are under pressure, we must ask ourselves: If the United States were to lose its bases in Japan, where would we draw our new defense perimeter? How much would it cost to establish that new defense perimeter? And how could the United States maintain its strategic influence in the most dynamic region in the world?
In sum, the long-term benefits of the defense relationship must not be put at risk by shortsighted and ill-conceived demands for a greatly enhanced Japanese defense effort. Japan should and will do more to support joint defense efforts, but we must recognize what is already being done, how much the United States benefits from this relationship, and how much the United States will lose if cooperation is replaced by confrontation.
Cooperation between the United States and Japan, as the two largest economic powers in the world and as two important democracies, is essential to address development and political problems around the world. I do not mean to imply a U.S.-Japanese "condominium" in Asia or elsewhere, but these two countries by virtue of their economic strength will have to take a leading role along with like-minded states in creating and maintaining the kind of international environment that benefits everyone. Our current cooperation on trade in the Uruguay Round of GATT and on debt relief are examples. This aspect of the relationship is just beginning to be developed, but I believe that as the United States and Japan move into the next decade, global political and economic cooperation will replace bilateral trade confrontation as the watchword of the relationship.
Foreign economic assistance is one area for such cooperation. The United States has traditionally borne the greatest foreign assistance burden through its aid program and by keeping its market open to the agricultural and industrial products from the developing world, and it must continue to play a major role in this area. The United States must also acknowledge, however, that Japan's aid program will soon become the largest in the world. Japan already surpasses the United States in terms of the ratio of overseas development assistance to GNP (0.23 percent for the United States versus 0.31 percent for Japan) and aid per capita (the United States spends annually $39.60 per American and Japan spends $46.40 per Japanese citizen).
In 1988 Japan appropriated a total of $10.4 billion for economic assistance. Aware of the need to recycle its trade surpluses to the most needy nations, Japan pledged at the seven-nation summit in Montreal concessional flows totaling at least $50 billion over the next five years. It also promised to improve the "quality" of its aid by increasing the percentage of grants and untied assistance. Specifically, it announced that by 1990 all of its aid to the Philippines, Thailand and Malaysia will be completely untied. The United States can expect that this policy will be extended to loans to other countries as well.
Geographically, Japan's overseas development assistance remains strongly oriented toward the Asian Pacific region. There are obvious historical and political reasons for this orientation. Its assistance has been effective; the stable and prosperous environment in East Asia since 1975 owes much to Japanese aid and trade. But Japan is also currently one of the top benefactors of Pakistan, Turkey and Egypt, and has begun increasing assistance to Mexico, South and Central America, the Caribbean and sub-Saharan Africa. Japan recently indicated that it was prepared to provide substantial financial support for the return of refugees to Afghanistan-and to support peacekeeping forces-after the pullout of Soviet troops. And it has offered to do the same in Cambodia and elsewhere.
It is fortunate that Japan's foreign policy interests coincide almost completely with those of the United States; the recipients that the Japanese government selects for such aid are generally those countries that the United States would like to see receive support. Since the U.S. aid budget is unlikely to increase in the near future and because so much of its aid is "earmarked" for special countries such as Israel and Egypt, Japan can play a critical role in promoting economic development and political stability in regions that are important to the United States and the West as a whole.
Japan is also making a significant contribution in absorbing an increasing share of manufactured products from developing countries. Japan has increased its imports from Asia's newly industrialized economies by over 70 percent in the last two years, albeit from a very low level. Almost all of this represents manufactured goods such as textiles and electronics, making Japan an engine of growth for the region.
None of these developments should be regarded as an excuse for the United States to reduce its aid program further; diminishing aid means diminishing influence, and this is not in the U.S. interest, nor as the Japanese remind us, in the interest of Japan. But, in assessing our partnership, Japan's role in our mutual effort to promote economic security, well-being and development for less fortunate regions of the world deserves U.S. attention and acknowledgment.
Global cooperation between the United States and Japan extends beyond economic assistance. In the United Nations, the United States and Japan work as closely as any two allies in pursuit of shared interests. On regional issues, including Afghanistan, Cambodia, the Middle East and even Central America, Japan is an increasingly active player and contributor. Indeed, it could be argued that there is greater harmony between the United States and Japan on foreign policy issues than with any other country. In the years ahead Japan may take an active role in international peacekeeping activities and in finding other areas to contribute politically. I do not mean to suggest that a more active Japanese foreign policy will always produce initiatives to our liking, but as I noted, we share the same fundamental interests and objectives-a more secure, democratic and prosperous world.
A little over a year ago, some congressional representatives, to protest the selling by Toshiba Machine Company of high-technology equipment to the Soviet Union, took a sledgehammer to an audiotape player manufactured by a different Toshiba subsidiary. The photos of this event were printed much more widely in Japan than in the United States, and the picture remains etched clearly in the minds of many Japanese as an example of American contempt for Japan.
A new phrase was added to the Japanese language in the aftermath of this event, Nihon Tataki-Japan-bashing. The legitimate U.S. concern over the sale of vital defense-related technology to the Soviets by an ally was lost to the Japanese public in all this emotion. For their part, Americans ignored the stiff penalties meted out by the Japanese government to the Toshiba Machine executives involved, the resignation of the chief executive officer of the parent Toshiba Corporation (which was not involved in the sale), and the immediate steps taken by the Japanese government to tighten up the enforcement of regulations by the Coordination Committee for Multilateral Export Controls and to increase penalties for violators.
As a result, the facts were lost and events were distorted beyond recognition, but the images and the anger remain. It is not surprising, in countries that have proceeded from sworn enemies to close partners in little more than 40 years, that people occasionally allow emotion to overshadow reason. But I am concerned that emotional responses will erode the goodwill in both Japan and the United States. Self-restraint is needed on both sides. We know a great deal about each other, but we do not always understand.
This gap in understanding is narrowing. Fortunately, as healthy democracies we have a rich fabric of exchanges. The flow of travelers from Japan to the United States exceeded two-and-a-half million last year. The flow in the other direction was smaller but still significant. Future travelers will find their trips made a bit easier because our two governments just recently put in place a system of waivers so that tourists will no longer be bothered with the necessity of seeking visas to travel between the two countries for short stays.
Last year at least 20,000 Japanese came to the United States to attend high school or college. The number of high school exchange students would have been larger but there are simply not enough host families available in the United States to accommodate Japanese youngsters wanting to attend an American school.
In part because of the high value of the yen and language difficulties, the number of Americans studying in Japan is much fewer, under 2,000. Nevertheless, I am pleased to note that in 1986 over 23,400 U.S. college students were enrolled in Japanese-language courses and that nearly 100 American high schools teach Japanese. This is a significant step. It exposes children at an early age to a country that will be an important part of their future.
The Japanese government has also begun an innovative and exciting program that is now in its third year. It is called the Japan Exchange and English Teaching Program. Under this initiative, 3,000 college graduates from a number of English-speaking countries (the bulk of them from the United States) spend a year in Japanese high schools or prefectural offices serving as English-language resource persons and advisers on international projects.
There are also many joint university projects, centers and faculty exchanges under way. A very recent phenomenon has been the establishment of some 12 branch campuses of American colleges operating in Japan with half a dozen more in the offing. These campuses have a fine potential for contributing to educational exchange and greater understanding between young Americans and Japanese.
Many traditional programs that have for years contributed to our mutual cultural understanding now grow more important in this age of interdependence. The U.S.-Japan Conference on Cultural and Educational Interchange conducts a periodic evaluation of our cultural relationship and focuses both countries' attention on those areas which need help. The Japan-U.S. Educational (Fulbright) Commission continues to play a key role in the intellectual exchange between the two nations, as it has for 40 years.
More than anything else, this is what the past eleven years or so have meant: establishing one friendship at a time, treating others as we would have them treat us, arguing when necessary and doing so with firmness and without equivocation, but always keeping in mind that we are speaking with friends-the best friends the United States has in that part of the world.
What we have been able to achieve in these years will be for others to judge, but we leave with our heads held high and our arms swinging. The relationship is sound. In most areas the relationship is exemplary, notably in the areas of security, foreign policy cooperation, foreign aid and cultural exchange, among others. In trade, we still have much to learn, but we can build on our recent successes, and we will find that a better mechanism exists for keeping our disagreements from being blown out of proportion. I am optimistic because neither the United States nor Japan has the option of going it alone anymore. The ocean that divided us now unites us. Every year more and more individuals on both sides of the Pacific understand the importance of and are working for the betterment of the U.S.-Japanese partnership-the most important relationship in the world, bar none.