Between 1980 and 1985, the US trade deficit with Japan grew from US$10 billion to US$50 billion, which could be translated into about 500,000–800,000 lost jobs during a period of recession. My mission was to stop this sudden flooding away of American production, jobs, and technology in a manner that would also maintain free-trade rules and US competitiveness. In particular, my task was to open the Japanese market to American and other foreign imports and investment.
As noted above, the debate was kind of a standoff, with the US side arguing that Japan was acting unfairly, and Japan saying the problem was simply a matter of incompetence by US business and its US government champions (namely me). In fact, there was truth in the Japanese argument. For instance, it was often the case that US companies had fallen down on quality. In the auto industry, independent quality analysts like Consumers Union consistently found the reliability and quality of Japanese autos to be superior to that of the cars made by the “Big Three” Detroit-based US producers. Similarly, Hewlett Packard unleashed a firestorm in the early 1980s when it released a quality comparison study showing that Japanese semiconductors were of better quality, on average, than semiconductors made by US producers.
But this was far from the complete truth. For it was also the case that the Japanese economic miracle system that I had come to know so well had been specifically designed to keep foreigners out, and to promote production in and exports from Japan. While it was true that Japan had tariffs that were generally lower than US tariffs, it had huge tariff spikes on products like rice for whose production it was not competitive. Even more importantly, it kept the yen undervalued versus the dollar and maintained an intricate web of non-tariff procedural, regulatory, and structural barriers to market access. The keiretsu structure of interlocking shareholdings and directorships among companies itself had been constructed to prevent takeovers of Japanese corporations by foreign companies.
Distribution chains presented another formidable barrier. For example, in the United States, auto dealers are by law established as independent businesses whose sales cannot be controlled by the auto producers. Thus, a dealer can sell Fords, Hondas, Volkswagens, and any other brand that appears attractive. This structure meant that when the Japanese auto companies entered the US market, they did not have to build their own dealership networks from scratch. They just piggybacked on the existing Ford, GM, and Chrysler networks. Not so, however, in Japan; there Toyota dealers sell only Toyotas, and woe to the renegade dealer who tries to break suit. This structural difference in the two markets made it much more difficult to enter the Japanese auto market than to sell into the US market.
I could go on, but I’m sure you get the idea. The task of opening the Japanese market, which the White House had assigned to its trade negotiators like me, essentially meant restructuring the economic system that had produced the miracle and that seemed to be conquering all before it. Trying to change what all Japanese were convinced was a winning system was not our only handicap; many in Japan were certain that their economic system was a product of their culture and thus uniquely Japanese, and my colleagues and I were therefore perceived by many as attacking and trying to change that culture. Our final handicap was that many American economists and commentators didn’t understand the nature and structure of the Japanese economy and assumed that because it had low tariffs, and because Japanese officials insisted that theirs was a capitalist-market economy just like that of the United States, that it indeed was just like the US economy—with, to be sure, a few quirky Japanese elements.
As a result, many Japanese and American commentators criticized us for unduly trying to open a market that was already open. As lead negotiator, I, in particular, was branded as a “Japan-basher” by Hobart Rowen of the Washington Post, and that moniker stuck for a long time in both the Japanese and American press. It was a very troubling term for me because it implicitly tagged me as a racist. Consider for a moment that Rowen could have called me a critic of Japan. But criticism is intellectually and morally legitimate. “Bashing,” on the other hand, is emotional and irrational, full of hate, and with intent to harm for no good reason. Because it was a handy bit of shorthand, journalists thoughtlessly bandied the term about and it gained great currency, but it was deeply and fundamentally dishonest and misleading. It was intended to—and did—deflect the discussion of US-Japan trade from legitimate complaints about Japan to personal defamation.
This was a painful period for me both professionally and personally. Professionally, while I managed, along with other US negotiators, to drive a few deals like the US-Japan Semiconductor Agreement and the Telecommunications Agreement, which did actually open a couple of Japanese markets at least to some extent, most of our effort seemed to be in vain. On a personal level, it was extremely unpleasant to be personally subjected—and to have my family (especially my adopted Japanese son) subjected—to a constant stream of media stories calling me anti-Japanese or even anti-Asian. Some good friends in Japan attempted to rebut this line by writing letters to the editors of leading Japanese newspapers, but their passion was not sufficient to counter the bad image of me being fostered by media commentary.
I left the Reagan administration in 1986 and wrote the book Trading Places: How America Is Giving Its Future to Japan, in which I tried to explain the major insight I had gained from my years of working in and negotiating with Japan. It was that Japan wasn’t cheating and the United States wasn’t falling down on the job. Rather, the two sides were simply playing different games. The US was playing baseball while Japan was playing football. Japan wasn’t cheating or playing bad football, and the US was playing good baseball. The difficulty was that the Americans kept acting as if and insisting that both sides were playing baseball. Because they weren’t, and because the Americans (for reasons both of economic orthodoxy and geopolitical convenience) refused to admit that, and because football is a rougher game than baseball, the Americans were taking a beating.
Upon completion of Trading Places, I moved on to writing about other issues such as the creation of the World Trade Organization and the North American Free Trade Agreement, and became more and more detached from Japan. Indeed, the term “Japan passing” came to be used in the 1990s to describe the phenomenon of people passing by Japan on their way to China, Korea, and Southeast Asia, overlooking the Japanese market in favor of greener pastures elsewhere. I became one of the passers.
Ironically, despite appearances to the contrary, Japan would have been wise to have listened to the small band of “revisionists” (in addition to myself, these included Jim Fallows of the Atlantic, Chalmers Johnson of the University of California at Berkeley, and Karel van Wolferen of the Dutch newspaper NRC Handelsblad) who were calling for reform and opening in Japan. As things turned out, Japan’s waves of exports and huge trade surpluses were not so much signs of success as of trouble. The Japan, Inc. catch-up formula for achieving the “miracle” had worked. But it is sometimes possible to have too much of a good thing. The miracle had been based on high savings, high investment in manufacturing, relatively low domestic consumption, and ever-rising trade surpluses of manufactured goods. By the early 1980s, constant repetition of this formula was already creating overinvestment in excess production capacity in Japan.
The economy was becoming seriously unbalanced. Japanese consumers were falling further behind their peers in the United States and Europe as the country continued to expand its huge, modern manufacturing sector while neglecting its increasingly inefficient and outdated services and new business development capabilities.
The big trade surpluses were creating pressure on Japan to strengthen the yen versus the dollar, and eventually it did so in 1985. This should have resulted in a restructuring and rebalancing of the economy. But the Japanese government and industry pulled out all the stops to keep the old miracle machine going. The central bank flooded the markets with cheap money, and investment became easier than it had ever been. Indeed, for major