July 2, 1995
"The Trade War that Didn't Happen"
San Jose Mercury News
By Timothy Taylor
<< Back to 1995 menu

AT LEAST for public purposes, President Clinton and the trade negotiators from the United States and Japan appear jubilant and self-congratulatory about the trade deal they concluded last Wednesday. But the deal and the dispute were a failure for U.S. trade policy, no matter how you look at it.

This trade spat was launched rather suddenly on May 5, when U.S. Trade Representative Mickey Kantor declared that the trade talks with Japan on autos and auto parts were a failure. On May 16, the U.S. announced that unless Japan immediately opened its auto parts market to America's satisfaction, taxes would be imposed on Japanese luxury cars at a level high enough to wipe them out of the U.S. market. The tariffs were to take effect four days later, on May 20, but wouldn't be "final" until June 28.

The Clinton administration emphasized over and over that the Japanese government would have to guarantee a concrete and enforceable level of U.S. exports of auto parts. Since Japan refused to contemplate such a step, the U.S. tariffs seemed inevitable.

In the settlement, the U.S. diplomats folded. As the Wall Street Journal reported: "On paper, the U.S. got nothing when it came to goals and numbers."

It turns out that Japanese auto companies already have plans to buy more U.S. auto parts, and to increase their "transplant" production of cars in the United States, largely as ways of coping with the strong yen. The major Japanese concession was to stand in the room without openly complaining while Kantor announced the already existing plans of Japanese auto companies, and called it a victory for America.

However, both sides stated that they "recognize and understand" that the private company plans "are not commitments and are not subject to the trade remedy laws of either country."

Even with official goals and enforcement, this agreement would not have reduced the U.S. trade deficit. Unfair barriers to trade (and Japan has plenty of them) influence the amount of trade and which industries are affected by trade, but not the overall trade balance.

The Japanese market was far more closed back in the 1950s and 1960s - yet the U.S. managed to run trade surpluses every year through those decades. More recently, the Clinton administration has now completed 16 trade agreements with Japan, changing the trade rules for a variety of different industrial sectors, with essentially no effect on the overall U.S trade deficit.

Trade deficits are not caused by unfairness, but by macroeconomic factors. Japanese households are among the highest savers in the world, and their government is running budget surpluses. U.S. households are among the lowest savers in the world, and their government is deeply dependent on borrowing.

As long as the United States is a high-consumption economy, inhaling imports and borrowing the money to pay for them, it will inevitably have trade deficits, regardless of Japan's trade rules. The only answers to the U.S. trade deficit are to increase household savings and cut government borrowing.

This trade squabble has already damaged U.S. credibility in the world. For several years, the Clinton administration feverishly negotiated at the Uruguay round of trade talks for a new World Trade Organization. But as diplomats from Europe and around the world pointed out, the unilateral U.S. threats to impose tariffs on Japanese luxury cars were clearly in violation of WTO procedures.

In brief, the Clinton administration first negotiated a global trade treaty for the express purpose of settling trade disputes, and then immediately chose to ignore it. Then, after threatening unilateral trade retaliation unless the Japanese government committed to numerical trade barriers, the Clinton administration decided to backtrack and accept something quite different.

It's true that by backing down, the U.S. avoided the risk of escalation into a trade war. But if someone is running around their house flicking a flamethrower on and off, crisping a bush here and there, you don't give them a lot of credit because they managed to play with fire and not get burned.

The only way this trade dispute ever made sense was as a staged political event. Set the deadline soon after the forthcoming global economic summit, thus guaranteeing maximum publicity. Then, at the last moment, declare success, pose once more for the cameras, and go home.

Maybe this trade joust with Japan was good politics; I don't claim any expertise on how to play that game. But it's a confused, misguided, vacillating way to run America's trade policy.

<< Back to 1995 menu