U.S. Merchandise Trade Deficit With Japan 

During the last four decades, Japan has become the No. 1 trade nemesis of the United States. Since 1965, the United States has never had a trade surplus with Japan. The merchandise trade deficit continued to increase from less than $1 billion a year in the early 1960s to more than $65 billion in 1994, indicating an average annual growth rate of about 17 percent for almost three decades (Figure 1). 

Moreover, the U.S. trade deficit with Japan accounts for a lion share of the total trade deficit of the United States. Figure 2 shows that about 40 percent, on average, of the U.S. total trade deficit in the last two decades resulted from trade with Japan. In 1991, the U.S. trade deficit with Japan was about 65 percent of the U.S. total trade deficit. In 1981, Japan's surplus with the U.S. was greater than its surplus with the world as a whole ($13.3 billion and $8.7 billion, respectively). In 1993, Japan's surplus with the U.S. was $50.2 billion, about 50 percent of Japan's total surplus with the world ($120.2 billion). 

How much of the U.S. trade deficit could be financed by U.S. exports to Japan? In the 1960s and early 1970s, the deficit was mostly less than 40 percent of U.S. exports to Japan. This ratio changed since the mid‑1970s, approaching 100 percent in the late 1970s and exceeding 100 percent in the 1980s and 1990s. In the mid‑1980s, the ratio was greater than 200 percent, meaning that the U.S. had to triple exports to Japan in order to make enough money to pay for imports from Japan. 

These statistics should provide some background information about the trade dispute between the U.S. and Japan. But, keep in mind, these statistics alone should not represent an absolutely unacceptable economic threat because it is not bilateral but multilateral trade balances that matter. 

Are American Products Competitive? 

It has been argued that the U.S. trade deficit is a result of competitiveness of foreign made products. 1 want to argue that American products are competitive, too. After all, the U.S. is the largest exporter in the world and the U.S. exports more to major industrial countries than Japan. Japan's exports to the world are about 80 percent of U.S. exports to the world. Germany, with an economy about half of the Japanese economy, actually exports more than Japan. 

In fact, many Japanese like American products. They are proud to have an American style breakfast everyday and many of them now sleep in Western style beds. When receiving presents, they prefer presents made in the U.S.A. and you may not want to give them something made in Japan. As a matter of fact. Japan's per capita imports from the U.S. is more than U.S. per capita imports from Japan! 

The international competitiveness of American products can be examined in terms of productivity and cost of production. From 1985 to 1992 U.S. manufacturing output per worker grew by‑2.9 percent per year, compared to 2.3 percent in Japan, 0.8 percent in Germany, and 2.8 percent in France. Production cost is heavily affected by labor cost and the fall of the dollar has contributed to the relatively low labor cost in the United States. In the later 1980s, U.S. unit labor costs rose at only 1 percent per year, while costs in Japan, France, Germany, Korea, and Taiwan rose at roughly 10 percent annually over the period 1985‑1992 (Parry: 1996). While productivity growth was high and labor cost growth low, the U.S. trade deficit still increased. 

How Open Is The Japanese Market? 

The fact that Japan's per capita imports from U.S. is more than U.S. per capita imports from Japan has been used by the Japanese to argue that Japan's market is open to the world, especially to the United States! But does this mean the Japanese market is open? 

The examination of tariff rates in most industrial countries indicates that Japan's tariff rates on industrial goods are, on average, lower than U.S. rates. Overall, most studies agree that Japan's explicit trade barriers are in line with other industrialized countries.

However, many observers point to Japan's nontariff barriers to trade as being key to the situation. For example, officials of the Ministry of International Trade and Industry (MITI) claim that the Japanese market for autos and auto parts has been fully opened because there are no tariffs. However, American automakers argue that the keiretsu system of interlocking ties between manufacturers and their suppliers and distributor makes it all but impossible for independent dealers to gain a foothold in Japan's market. Even Japanese automaker executives in the U.S. recently admitted that they would buy many more American parts, given their improved quality and low cost, but the company has to be concerned with maintaining employment at its suppliers' factories in Japan (Blustein, 1995b). Japanese auto makers also price cars more expensively at home to subsidize cheap sales abroad. This is reflected by the fact that U.S. sticker prices of Japanese cars remain stable as the yen appreciated against the dollar in 1994 and 1995. A former U.S. trade negotiator Clyde Prestowitz, Jr., in his book, mentioned that after a U.S. company finally received approval to sell aluminum bats in Japan. new standards for the required safety seal from the government were introduced that necessitated the use of a specific aluminum alloy as well as a base plug not found in U.S.produced bats. Through GATT's complaint procedures, the standards were revised to allow U.S. firms access to the Japanese aluminum baseball bat market. New restrictions, however, were then passed, requiring inspection of the factory and products to take place in Japan. Because the bats were produced in the U.S., Japanese officials individually inspected every lot of bats upon arrival in Japan (Butler: 1991). Japan is notorious for these kinds of standard requirements and testing and certification procedures. Japanese customs officials once decreed that each carton of Thai‑maid plastic food containers must be tested six times, once for each of three different‑size containers and their lids. Another regulation requires that liquid products must be boiled for 30 minutes abroad before importation. 

It is difficult to do business in Japan due to many regulations. Japanese law requires that stores take 24 days of "holiday" a year, closing its stores twice a month for no other reason. Retail stores can't give discount coupons for fear of violating laws designed to protect consumers from "confusion." To open a new outlet in Japan, it may take three years persuading farmers to sell their land and petition the government to rezone it for commercial use. Next. comes another two years of haggling with local merchants, who legally can demand concessions when new stores open nearby (Davis, Gumbel and Hamilton: 1995). Neighborhood shop owners were able to effectively block large (more than 5400 square feet) retailers from opening stores that could charge lower prices because of their economies of scale. While it is illegal in the United States for a company to require a distributor to sell only the company's line of products, this practice is permitted under certain conditions in Japan. As a result, many U.S. manufacturers have had difficulty finding distributors for their products because the existing distribution system is controlled by companies already in the market. Japanese fire codes were designed for cramped. multistory buildings. So, new shops must install fire shutters that lower automatically to contain a fire, even if you have a single‑story store. The codes also require an exit at the end of each aisle. These requirements would add 30 percent to construction costs. 

While these regulations may be considered unfair trade practice, new Japanese firms trying to enter these same markets encounter the same difficulty. Therefore, not all market access difficulties are to blame for discrimination against foreign firms. It should also be pointed out that all countries have regulations and barriers to market entry. The difference in market access fails to explain the trade deficit between the U.S. and Japan because the U.S. trade deficit with Japan continues to increase as more and more Japanese protective measures are removed or reduced through negotiations. 

The Case Of The Auto Industry 

According to a 1995 report, fully 60 percent of the immense Japanese trade surplus with the United States results from Japan's automobile and auto parts exports to the United States (Kuttner 1995). ft took about two years for both governments to reach an agreement in 1995. How much will this agreement help U.S. exports to Japan? My answer is not optimistic. 

The most important reason for not being optimistic is that Japan does have comparative advantage in the automobile industry. The U.S. produces less cars than Japan and exports less than Japan, Germany, France, Spain, and Canada. Japan holds title as the world's Motown, its world market share was 23.5 percent. compared to the U.S. share of 20.4 percent in 1990. Japan's output of passenger cars in 1993 was about 8.5 million, compared to less than 6 million for the United States. Whereas almost 50 percent of Japanese cars were exported in 1993, only 8.2 percent American cars were exported. Germany exported 54.8 percent of its cars. Japan's motor vehicle exports were $3.6 billion in 1973, $26.1 billion in 1983, and $58.4 billion in 1993. The growth is spectacular. 

Although Japan imposes no tariffs on imported automobiles and auto parts, this market is one of the most difficult to penetrate. The ratio of imported cars to domestically produced cars in 1993 was 2.4 percent for Japan, compared to Germany's 43 percent. The U.S. auto market has been wide open and Japan alone captured 27 percent of the U.S. market in 1993. When 1 toured a university campus in Japan, I failed to find any U.S. made cars. However, it is not impossible to increase auto sales in Japan. In 1992, Germany captured 58 percent of Japan's passenger car imports (104,680 units), the U.S. 20 percent (37,085 units), including cars of the Japanese companies made in the United States. It appears that the U.S. has to compete with both Germany and Japan to sell more cars and auto parts in the Japanese market. 

Those who have been to Japan know that it is very expensive to own and use a car. Since land is extremely expensive, car buyers must have proof of a parking space before purchasing a car. In Tokyo, many people, using personal car elevators, park their second car on top of their first. This high cost makes Japanese use much more public transportation than Americans. Travel on public transportation as a percent of all travel for Japan is 18 percent and only 1 percent for the United States. There are 571 cars for every 1000 Americans and only 250 for Japanese. In addition to other barriers, the lack of space and reliance on public transportation makes it difficult to increase auto exports to Japan (Wolff, Rutten, Bayers, and World Bank Research Team: 1992). 

The Ultimate Solution 

The U.S. government has negotiated with the Japanese government for many years to open the Japanese market. The U.S. proposed policies to reverse its deteriorating trade position to include reciprocity, industrial policy, results‑oriented trade talks, and reinvigorated American industrial competitiveness. There is no doubt that these negotiations have helped U.S. exports and made the Japanese market today more open than it has ever been. But, a trade deficit continues to loom. 

The emergence and persistence of large trade deficits indicate that if we are resolved to reduce or even eliminate trade deficits, we have to balance the relationship between saving and investment. Empirical studies have indicated that the savings/investment differential is the most important reason for the trade deficit. If a country's investment and government spending exceed the total savings, a trade deficit becomes inevitable because a net saving deficit leads to higher real interest rates, the appreciation of the dollar, and a trade deficit. The recent drop in the dollar‑from about 125 yen at the beginning of 1993 to about 87 yen in 1995‑increased Japan's demand for imports. Imports of cars made by Detroit's Big Three rose from 19,000 vehicles in 1993 to 34,000 in 1994, before the U.S.‑Japan auto trade agreement in 1995. 

Cohen has explained the U.S.‑Japan trade deficit this way: "the American system is weighted in favor of the individual and consumption. The Japanese system is weighted in favor of the corporation and production. American ideology favors the free market and cheap imports. Japanese ideology favors government enhancement of market forces, industrial self-sufficiency, and world‑class strength in the manufacturing sector. The United States prints money to finance the world's largest trade deficit and in turn consumes more as a country than it produces. Japan saves like mad, accepts relatively poor housing and an inadequate infrastructure, and continues sending massive amounts of capital earned from its trade surpluses back to the United States." (Cohen: 1995) 

No matter how successful the trade negotiations are, a trade deficit will live with us as long as we have imbalances in the saving‑investment relationship. As the U.S. trade deficit with Japan declines, the U.S. trade deficit with China or some other countries increases. Bilateral negotiations may help to reduce a bilateral trade deficit, but will not have much impact on the overall trade balance. The 1995 deficit with Japan finally turned around after years of unchecked expansion. Aided by a jump in exports of American cars and car parts, the deficit shrank to $59.28 billion from 1994's $65.67 billion. But for all of 1995, the trade gap reached a seven‑year record despite a long‑awaked shrinking of the deficit with Japan. For the year the deficit for goods and services increased to $111.04 billion from $106.21 billion in 1994, the largest gap since 1988's $114.8 billion. According to a Japanese estimate, the U.S: Japan trade deficit will continue to decline in 1996 and the U.S.‑China trade deficit will continue to increase. By the end of this century, the U.S.‑China trade deficit could be three times the U.S.‑Japan trade deficit. 

The U.S. trade deficit is also highly susceptible to the relative economic growth. The Federal Reserve Bank of Cleveland recently published some interesting data. As shown by Figure 4 the U.S. trade deficit increases as economic growth in foreign countries falls behind economic growth in the United States. The relative strong economic performance, combined with over consumption, always makes trade deficit worse. 

Conclusion 

There are several factors contributing to the persistent U.S. trade deficit. It helps to improve competitiveness of American products, to raise productivity of American labor, and to heir open foreign markets. To reduce the U.S. trade deficit, however, the bottom line is to balance the fundamental economic relationship between saving and investment. 

*The author wants to acknowledge the partial grant from the University Personnel Development Committee, University of Wisconsin‑Stevens Point. 

REFERENCES 

Blustein, Paul. 1995a. "The Dollar May Speak Louder Than Words: Who needs a trade war when lower prices are drawing Japanese buyers to imports?" The Washington Post National Wee Edition, May 22‑27. 

Blustein, Paul. 1995b. "The Trade Dispute With Japan Isn't About Cars" The Washington P National Weekly Edition, June 5‑11. 

Butler, Alison. 1991. 'Trade Imbalances and Economic Theory: The Case for a U.S.‑Japan T deficit.' Federal Reserve Bank of St Louis, Review, Vol. 73, No. 2, March/April, pp. 18‑31. 

Davis, Bob, Peter Gumbel and David P. Hamilton. 1995. "Red‑Tape Traumas to All U.S. Manage Upset by Regulations: Try Germany or Japan.' The Wall Street Journal, December 14. 

Kuttner, Robert. 1995. "Too Much for the WTO?" The Washington Post National Weekly Edition May 22‑27. 

Parry, Robert T. 1996. 'U.S. Trade Deficits and International Competitiveness,' Leading Econ Controversies of 1996, ad. Edwin Mansfield, W.W. Norton & Company, New York. 

Wolff, Michael, Peter Rutten, Alfred F. Bayers III, and the World Bank Research Team. 1992. When We Stand, New York: Bantam Books. 

Wall Street Journal, Various issues