Time to make firm stand on Japanese surpluses

Press, 25 January 1986, Page 23

Time to make firm stand on Japanese surpluses

By

GREGORY CLARK,

a professor of international business and economics at Sophia University, Tokyo

NZJN Tokyo The time has come for the rest of the world to do itself, and Japan, a favour. It should tell the Japanese that if their trade surpluses continue then the principles of free trade do not continue. If, in the process, a few of the myths cherished by our free trade terrorists have to be destroyed, then so much the better. The Japanese did not build their economy on the basis of free trade. They did not ruthlessly excluding all and any imports that threateneddomestic industries,' and by exporting the surplus out of these industries. They got to where they are today on the basis of other people’s free trade. The theorists say that today all this is changed. Japan is now a mature economy committed to free trade principles. No longer can it demand infant industry protection for its industries. Like the rest of us, now has to operate on the basis of comparative advantage, they say. In other words, it has to buy cheap ' labour-inten-sive manufactures from the developing nations. And it has to exchange sophisticated manufactures with the developed nations. If it doesn’t the trade surpluses will mount

up and the natural appreciation of the yen will solve the problem. Meanwhile, the trade surpluses continue to mount up and it is clear that only the most unlikely appreciation of the yen to quite absurd levels will solve the problem. What went wrong? The theorists ignored three points: The Japanese have found a neat way to prevent trade surpluses causing a severe appreciation of the yen: they export the surpluses. The massive outflow of capital from Japan keeps the yen permanently undervalued. This allows more exports of goods, which allow more capital to be exported. The theorists overlooked the existence of this destablishing cycle, partly because they failed to foresee the budget deficit policies of President Reagan. In this situation the obvious solution is for Japan to impose on export tax, to the amount that the yen is undervalued. In 1982 just such a measure was put forward by a Finance Ministry committee here of which this writer was a member. It was vetoed by a very

short-sighted Ministry of International Trade and Industry, however. The Japanese economy may now be very mature, but the infant industry approach is still ingrained into the Japanese mentality. They still take it for granted that any industry in trouble — and a few others as well which have political connections — should be protected from the cruel blasts of foreign competition. In any case, total removal of all protection would not cut the trade surpluses greatly, as the Japanese like to point out. For there is yet another factor at work, namely that the classical rules of comparative advantage no longer work. Take the case of Japan. Through intensive automation it can now beat even the developing nations in most labourintensive manufacture. One proof is the pullback to Japan of many assembly-type operations once farmed out to SouthEast Asian countries. Even in textiles, the Japanese now say they can hold their own much better than before. But the main problem is in trade with developed

nations — with the United States and West Europe. In theory each nation should specialise in the production of those goods where it has some natural advantage, or where it happens to have got an early start. But what happens when one nation — Japan — has an advantage in the production of almost all leading-edge goods? And what happens when, thanks to natural aggressiveness and skilful Government protection, that nation is also guaranteed an early, or at least an equal, start in the production of these goods? What happens is a complete breakdown of free trade principles. The theorists play with their classical models that say that if Britain exports wool then Portugal must export wine. But the Japanese say they should export both wool and wine. The theorists say that someone who tries to export too much runs into problems of increasing costs. The Japanese realised long ago that we live in a world of decreasing, not increasing, costs. In other words, if Japan produces all the wool and all the wine, its production costs will be much

lower than for someone who is just beginning to produce one or both. The Japanese obsession with market share has some very practical under-pinnings. The more one produces and sells the lower one’s unit costs and the easier it is to produce and sell even more. In the process one’s competitors are conveniently wiped out. In this situation the piecemeal efforts by the United States and the E.E.C. to restrict Japanese Imports seem quite ineffective. In a world of decreasing rather than increasing costs all imports are damaging. For more than a century now the Japanese have built up their economy on the basis of “export or perish.” They' have created an export machine without parallel. But to any outside observer it is obvious that Japan should now be paying a lot more attention to domestic industries, housing and urban infrastructure, in particular. The Government cries poor, but it would quickly, change its tune if a setback to the export industries deprived the economy of its impetus. If only for the sake of the long-suffering Japanese worker and consumer, the rest of the world should deliver that setback — quickly.