Economic textbooks teach that a system of checks and balances, sometimes referred to as the “invisible hand,” will operate to check Japan’s export strength; there is no need, therefore, for governments to set up safety nets such as tariffs and controls. Viewed from that vantage point, Japan’s behavior is quite rational and it is Japan-bashing that is unfair. But is reality adhering to textbook theory? Are these checks and balances operating between America and Japan? Did sales of Japanese goods decline when the value of the yen went up? Was the Japanese surplus erased and a trade balance achieved? After the dollar became cheaper, was the United States able to rapidly expand its exports to Japan?
Unfortunately, events have not transpired the way the textbooks say they should. The system of checks and balances that operates between the United States and Europe does not work between the United States and Japan. Why not? The answer seems to be, as Fallows says, that the customs and institutions within Japan—as seen from the American side—are “different.” Consequently, insofar as Western logic does not work in Japan, America must come up with some sort of national policy to take the place of the “invisible hand” in the form either of protectionism or of managed trade. This is what Fallows really means when he speaks of “containing Japan.”
The most recent (1989-90) round of bilateral trade negotiations, the U.S.–Japan Structural Impediments Initiative, took place against this background. The SII talks were based on the premise that an underlying factor in the trade imbalance between the United States and Japan was “structural differences”—fundamental divergences in the two countries’ economic and social structures. In an effort to ensure more transparent trade practices and a more open marketplace, American negotiators came to the bargaining table armed with a list of nontariff trade barriers that they claimed prevented U.S. access to the Japanese market. Indeed, many practices that the Japanese take for granted seem strange when looked at from outside and certainly do not conform with international rules. Contractors who meet together to decide which of them will get a certain job or companies that submit a bid of one yen in order to win a contract that will result in a long-term relationship and a virtual future monopoly—sleazy bidding practices such as these are carried out as a matter of course not by gangster-controlled syndicates but by top-ranking computer firms and the construction industry. Such practices would be inconceivable in other countries. Bringing them out into the open is highly embarrassing, but they must be exposed so that Japan can prepare for the future.
The Structural Impediments Initiative talks concluded with both sides promising major structural changes. Japanese concessions included promises to curb tax benefits for farmland owners in urban areas, to remove the right of small-store owners to veto the opening of large retail outlets in their neighborhoods, and to increase staff on the Japanese Fair Trade Commission. In return, the United States promised to cut the budget, increase federal support for research and development, strengthen export promotion, and require the adoption of the metric system for federal procurements beginning in 1993. Although the Japanese felt that U.S. interference in Japan’s domestic problems was unwarranted, they have more effectively addressed the compromises reached during the talks, whereas until recently under the Clinton administration the United States made no effort at all to comply with Japan’s demands to increase savings and decrease the government’s budget deficit. Although I do not believe the Structural Impediments Initiative talks produced any significant results, they have somewhat alleviated the tension between the two countries. If they have had the secondary effect of helping to bring Japanese rules in line with international rules, then they were valuable.
By adopting exactly the same policy toward Japan that it has toward its European trading partners, America has incurred a huge trade deficit and run up against an invisible wall that surrounds the Japanese archipelago. Under the circumstances it is not at all strange that Americans have concluded that there is something different about Japan and have decided to rethink their views. Reacting against this new U.S. position, some in Japan have argued that it is America that is different. Certainly, America would appear different from the Japanese perspective; this sort of nationalistic sentiment is quite understandable. But that does not mean Japan can force its rules on the rest of the world. And to believe that America ought to be the one to change is not only impractical but irresponsible. It is unreasonable to expect Americans to understand—let alone put into practice—such Japanese concepts as group solidarity or corporate groupings or to expect them to behave like the employees of Mitsubishi who will drink only Kirin beer. For better or for worse, the postwar world plays by America’s rules. That comes with the territory of world leadership, a subject I will discuss in more detail later.
America can manage quite well economically without Japan, but Japan cannot get along without the United States. Some Japanese commentators seem to be unaware that Japan does not exist independently of the rest of the world. They have projected a rosy-colored future for Japan and predict that the twenty-first century will be “the Japanese century,” but even if such prospects exist at the microeconomic level, I have my doubts about these optimistic scenarios. Since 1989, Japan’s attention has turned in on itself. That year many of Japan’s political elite were implicated in the Recruit shares-for-favors scandal and Prime Minister Noboru Takeshita was forced to resign. Voter wrath over the imposition of a 3 percent consumption tax led to the poor showing of the ruling Liberal Democratic party in the Upper House election that July and brought about the ouster of Takeshita’s successor, Sosuke Uno, who had been discredited by a sex scandal. While Japan was absorbed by the spectacle of three prime ministers succeeding each other within the space of a single year, the rest of the world greatly changed. The democratic movements in Eastern Europe, the collapse of the Soviet Union, and more recently the U.S.-led victory in the Gulf War after Iraq’s invasion of Kuwait have all been taken as proof of the correctness of U.S. foreign policy. As Eastern Europe and the former Soviet Union move toward a free-market economy, the world seems to be revolving around the American axis. Under the circumstances, it should come as no surprise that Americans have shifted their focus to the economic arena and that after the Berlin Wall the next barrier they hope will fall will be the one surrounding Japan.
Does Money Give Anyone the Right to Buy Someone Else’s Soul? Economic activities and trends inevitably have their own rules. Economics is the science of finding those rules. The problem is that sometimes an economy operates according to the rules and sometimes it does not. When the latter happens, measures must be taken to counteract events or trends that run counter to expectations.
In the late 1980s Japan was busily buying up American assets with the excess cash from its huge trade surplus. Logically speaking, this activity was a natural consequence wholly in line with the laws of economics. The question is: Should something be allowed to happen just because it accords with economic laws? Shouldn’t some consideration be given to whether the activity is ultimately in the best interests of the parties involved? Viewed in that light, the situation takes on a completely different complexion. This is what makes the laws of economics so much more unpredictable than the laws of physics or chemistry. The field of economics has recently come to make greater use of mathematical models and is becoming a more scientific discipline. In North America and Europe it is now regarded as having more in common with the sciences than with the humanities. Because economics deals with people and its testing ground is society rather than a laboratory, however, we should not insist that it is an exact science. Economic problems have a nasty tendency to develop into political and social problems.
When rain falls on a mountain, for example, and forms into a river, it waters the fields at the foot of the mountain and enriches the lives of the people who live there. This is referred to as the workings of nature. But if several inches of rain were to fall in the course of an hour, the river would overflow and the village at the foot of the mountain would be washed away. That, too, is a law of nature, but the villagers do not just sit