US plays with fire in bullying Japan

Economic summits are generally all fanfare and no substance. Of late they have often degenerated into PR exercises for beleaguered leaders eager to cut a dash on the international stage.

Next week's meeting of the leaders of the Group of Seven leading industrial countries at Halifax, Nova Scotia could be different. It offers a rare opportunity for a G7 summit to achieve something: the resolution of the increasingly virulent trade dispute between the US and Japan.

The US is playing with fire in its unilateral threat to impose punitive sanctions on luxury car imports from Japan by the end of the month. For as all those participating in the summit have good cause to know, trade embargoes have an unhappy history in the West's dealings with Japan.

The US action could be designed to alienate the Japanese not just from the multilateral trading system but from the present structure of international relations.

It beggars belief that on the eve of the fiftieth anniversary of the ending of the war with Japan, trade hostilities should even be contemplated, let alone be about to break out. The disastrous trajectory Japan took in the inter-war years towards building its empire of the sun was directly linked to an equally disastrous American policy of trade tariffs and embargoes. An umbilical cord links the inter-war trade war and the Pacific War.

Fifty years on, the Americans have a grievance: that at least is beyond dispute. Cars and components accounted for over half the $69bn (pounds 43bn) bilateral deficit the US ran with Japan in 1994.

That deficit is currently running in dollar terms at an all-time high. Japanese exports account for more than 20 per cent of the US market,while the US "Big Three" manufacturers - General Motors, Ford and Chrysler - have only 1 per cent of the Japanese market.

The Japanese have answers to the US grievance but they are hardly compelling ones. They draw attention to the rise in imports from the US, but the bulk of these are from their own transplant factories. They cite the European manufacturers who have begun to build a presence in the Japanese market.

For all these protestations, most independent observers agree that Japan does not offer an open market in the Western sense. The question is whether the Americans should be using trade as a battering ram to make Japan more like the West.

It is not as if the Americans are taking on an opponent in the full vigour of economic health. Japan remains traumatised by the excesses of the bubble economy of the late 1980s.

Banks are laden with bad debts, which were estimated ealier this week to total a staggering 40 trillion (pounds 300bn), equivalent to a tenth of national output. Caution is the watchword both for consumers and for industry.

Superimposed on this is the latest yen shock, which has driven the currency up by almost a fifth against the dollar in the first half of the year alone. Acccording to the Economic Planning Agency, most companies are competitive at 108 yen to the dollar, as against the current rate of 80- 85.

It is of course true that break-even points have been monotonously broken in the past few years. But the gap between the current exchange rate and the break-even rate is unprecedented.

Small wonder that initial projections for economic growth of 2.5 per cent in 1995 are turning into predictions of a double dip into renewed recession.

Industrial output, the principal engine of the recovery to date, fell back last month and is expected to decline by 3 per cent by the end of June.

The authoritative quarterly Tankan survey by the Bank of Japan of business intentions on Friday is expected to show renewed signs of weakness.

The mounting economic pressures on Japan are now threatening its tradition of lifetime employment. Last week, Japan's unemployment rate rose to a post-war record of 3.2 per cent.

That may sound like nothing to us but it is a cause for grave concern in Japan. Furthermore, some analysts, such as Gerard Lyons of DKB International believe it will rise still further to 4 per cent or more by the end of the year.

There will be no dividend for the US if it is blamed for wrenching social change in Japan. Yet that is precisely what is likely to happen if it persists in acting as a trade bullyboy.

The American position is that the Japanese will do nothing unless they are given the third-degree treatment. But this under-estimates the magnitude of the changes already under way in Japan.

The US trade deficit with Japan may be at an all-time high in dollar terms, but it has peaked in yen values and in volume terms.

The rise in the yen has led to a surge in the volume of imports, which grew nearly 20 per cent in the last quarter of 1994 and 15 per cent in the first three months of 1995. Consumer attitudes to purchasing foreign goods are changing.

Exports continue to rise but much more slowly than before. And some of the increase may be more apparent than real, points out Lyons of DKBI. Capital goods are being exported to kit out new factories overseas as part of the "hollowing out" of the industrial base.

There is an increasing appreciation within Japan that the crisis now afflicting the economy is home-grown.

In particular, the rise of the yen to absurd levels is part of a vicious circle in which a risk-averse financial system is no longer willing to recycle the trade surplus given the huge foreign exchange losses that have been incurred on earlier investments.

The answer, most analysts agree, is to speed up the package of deregulation measures that the Japanese government has already agreed.

But there is a world of difference between opening up the economy of your own volition and opening it up under the threat of trade sanctions.

The danger in the trade dispute is that the US will take the blame for a downward spiral in the Japanese economy. Already, the 19th century slogan "leave Asia, enter the West" is being inverted by some politicians to a new watchword, "leave the West, enter Asia".

The grudging apology which the Japanese are finally drafting for the war they waged in the 1930s and 1940s is aimed mainly at Asian countries.

Our post-war prosperity has been grounded in an international order that has avoided the grievous errors of the inter-war years. We should not take Japan's present acquiescence in these arrangements for granted. War may be diplomacy conducted by other means. Trade isn't.