Car wars: the US strikes back

Japan has until today to decide whether to increase its imports of US cars or face a punitive 100 per cent tariff on the luxury cars it sells to the States.

It is an extraordinary situation. It is not just that the world's largest economy is on the brink of a trade war with the second largest. It is worse. The country which has underwritten the progressive freeing of world trade since 1945 is threatening to break the rules it has itself endorsed. And the country which arguably has benefited most from this liberalisation of trade has managed so to enrage its largest trading partner that it has pushed it to the brink of illegality.

How could these two nations so mismanage their relationship as to reach such an impasse? More important, whatever the outcome of the car wars, what are the long-term consequences of such a breakdown?

Until the late Seventies the trade relationship between Japan and America mirrored the political relationship: the US was the dominant force, and while individual US companies might show concern at Japanese competition in export markets there were little grounds for conflict. Progress of the Japanese economy was admired: the protege was not yet a prodigy. True, its motor industry was beginning to make inroads into the US market, but Japan was not in significant current account surplus and had been particularly hard hit by the two oil shocks.

As for Japan, its political and business leaders still saw it as starting from a weak competitive position. In the Fifties its industries had suffered from very serious labour unrest; in the Sixties its products were still of poor quality by comparison to their US and European counterparts (remember the jokes about cheap Japanese imitations?); while in the Seventies Japan's inherent weakness from its lack of raw materials was highlighted by the surge in oil and commodity prices. In fact the positive response to the oil shocks - cut energy costs and export like fury - laid the basis for Japan's economic surge in the second half of the Seventies and the Eighties, but even in 1980 the country was still in current account deficit. The perception of Japanese weakness still seemed appropriate.

So too was the perception of American friendship. The US, after all, had guaranteed Japan's external security; why should it not guarantee commercial security by allowing it continued access to its market? Even when Japan's large structural surpluses began to pile up in the Eighties, it saw no need to be concerned. After all, Japanese investors loyally piled their money into the US, buying American property, building plants and, above all, financing the US budget deficit. The US, in its wisdom, wanted to run a deficit. What was more natural and supportive that its ally should help by financing it?

This apparent identity of self-interest concealed a clash of ideologies, a completely different way of thinking about the world. This clash, in essence the difference between individualism and group identity, exists at many different levels but did not matter while the two countries were in broad current account balance.

The contrast starts at the very beginning with childhood. Thus American children are brought up to think that copying other people's work is wrong; Japanese that there is no shame in copying the best, indeed that is the only sensible way of organising anything from an exam to an economy.

Above all, the difference in attitudes shows in a different use of language, even a different perception of truth. In trade negotiations the American side frequently finds itself infuriated when confronted by statements that are patently absurd. Anyone who goes to Japan regularly will have their own examples. I have had it explained to me that the reason why there were no self-service petrol stations in Japan was because it was dangerous for unskilled people to put an inflammable liquid into a car.

But of course these explanations are not meant to be taken at face value. They are a ritual, a way of cloaking a desire not to change with a semblance of rationality.

To American trade negotiators this is all deeply frustrating. It would not matter if the two countries were in rough current account balance, but the sustained imbalance through the Eighties and the consequences for the net asset position of the two countries has led to a rougher approach. The US has moved from being the world's largest creditor to the world's largest debtor; Japan from being a net debtor to the world's largest creditor.

Rational economists may argue that this swing is more the result of the failure of the US to save enough and the excess savings of Japan, but this is not the way it seems. So America has lashed out in a way that it simply never occurred to the Japanese leadership that it might. Their admired big brother, their protector and friend, has suddenly become the class bully. The fact that the rest of the world has tut-tutted at the American action reinforces this feeling of victimisation.

So what will happen? There have been trade rows before, though not with such intensity. If past form is any guide, eventually some accord will be reached. This could happen now, or may take some months of ill-tempered debate. The possibility of deterioration into an escalating tit-for-tat trade war is almost unthinkable.

But the row has a significance that will last long after it is patched up. There are two crucial decisions which Japanese economic policy-makers face. One is whether it is in the country's self-interest to pile up large surpluses; the other, to what extent Japan should reorientate its trade and investment relationship away from the US and Europe and towards East Asia.

The price of becoming the world's largest creditor has been a spiralling yen, which has in turn hastened the process of de-industrialisation rather in the same way that the strong pound hastened the decline of British manufacturing in the early Eighties. Yet these foreign assets have self- evidently not brought Japan gratitude in the US, nor have they been very well invested. Her property investments have plunged in value, while all non-yen assets have depreciated in yen terms with the change in exchange rates. Perhaps half the accumulated surpluses of the past 15 years have been dissipated in this way. When Japan decides it is not in its self- interest to run a large current account surplus it will stop doing so. That decision has been brought closer by the experiences of recent months.

So too has the decision to re-balance Japan's trade links. The US will remain its principal trading partner for many years, but already there are signs of a shift towards the rapidly-growing nations of East Asia. Much more direct investment - foreign plants - is now in this region. But that is mainly just a question of taking advantage of cheap labour at satellite plants in not-very-important countries. The really important relationship will be with the other regional giant, China. Japan is in the early stages of redefining is policy to China. Getting that right is central to Japan's prosperity and security in the next century. The trade row with America makes that an even more urgent task.