*EPF403 02/08/01
Byliner: Senator Baucus Stresses Japan's Importance to U.S.
(Japan central to U.S. economic, security interests) (2120)

(This byliner was published in the January-February 2001 issue of International Economy. Persons who intend to redistribute this byliner should give credit to the International Economy as the source.)

Japan Still Matters -- A Lot
By Senator Max Baucus

(The author is a Democratic senator from Montana.)

It is conventional wisdom that Japan no longer matters to the United States. Its economy is stagnating, the political system is paralyzed, and its markets and culture remain closed. Future growth in American exports and investment will be in China. Security concerns in Asia center on the Taiwan Strait, the Korean Peninsula, and the Indo-Pakistan border.

Nothing can be farther from the truth. Japan is the second largest economy in the world. With a few European exceptions, Japan and the United States account for virtually all cutting edge technology being developed in the world today. The U.S.-Japan alliance forms the cornerstone of the U.S. security presence in Asia and is at the core of stability in the Western Pacific region.

"Japan-passing," skipping over Japan to other Asian countries more amenable to U.S. business, is simply the wrong way to describe the American relationship with Japan. The American Chamber of Commerce in Japan continues to grow. Two-way trade has increased from $140 billion in 1991 to $188 billion last year. Over one million Americans visit Japan every year. Japanese is the third most studied foreign language in the United States, after Spanish and French.

It is true that Congress spent much more time dealing with China over the last eighteen months than with Japan. Chinese accession to the World Trade Organization (WTO) and granting China permanent Normal Trade Relations status are critical. We have a unique opportunity to bring China into the world trading system and its rule of law. The long-term implications are enormous. But this does not mean that we have chosen China as our focus in place of Japan.

A decade of economic stagnation has convinced many in Japan, leaders, as well as average citizens, of the need to change the Japanese economic model. The "developmental state," as Chalmers Johnson characterized it in his classic work, MITI and the Economic Miracle, was effective in transforming Japan from utter devastation in 1945 into unprecedented prosperity by the 1970's and 1980's. However, that model clearly does not work in an advanced industrialized nation in this fast-paced Internet era. But it is a huge challenge to move from recognition of the problem to a transformation of the economic, political, and cultural system that has developed in Japan over the past fifty years.

Japan's economy will recover. The fundamental sources of growth continue to exist-high savings rate, high literacy, a dedicated workforce, development of cutting-edge technology, high quality manufacturing. The question is when recovery will occur, and there are many indicators demonstrating how difficult the challenge is.

First, cumulative foreign direct investment in Japan, as a percentage of GDP, remains the lowest of any industrialized country. It was 0.7 percent in 1998, compared to 9.3 percent in the United States and 10 percent in France.

Second, intra-industry trade in Japan is lower than that in most other industrialized countries. In fact, intra-industry trade is even significantly below that in the newly industrialized economies of South Korea and Taiwan.

Third, only 0.2 percent of Japan's work force is foreign or foreign-born. The next lowest of the G7 countries is Italy at 1.7 percent. France stands at 6 percent and the United States is close to 10 percent. There are many historical and cultural reasons for the absence of foreign workers in the Japanese workforce. But what worked in the Nineteenth and Twentieth Centuries will not work in the Twenty-first. Immigration is a fundamental measure of a society's openness to the world.

Fourth, despite the creation earlier this decade of a new electoral system designed to sustain a multi-party system, little policy differentiation has developed among the political parties. Narrow interest groups continue to obstruct much of the political decision-making process.

The contrast between the restructuring taking place in China versus Japan is striking. Even after China formally joins the WTO, the United States and other nations will still have a lot to do to penetrate the Chinese market for our goods, services, and investment. Nevertheless, it is clear that the senior Chinese leadership has decided that it is willing to face enormous short-term dislocation because of the need to restructure. They understand that they have no alternative. Japan, on the other hand, wants to restructure while minimizing dislocation and social and economic costs. It is possible that Japan can succeed at this, but the costs will be high. It will take much longer for Japan to emerge from its economic stagnation. And, as in the past, Japan's trading partners will bear the burden. Some will be able to export less to Japan than they should. Others will suffer the consequences of trade diversion.

Japan, the European Union, and the United States have a special responsibility to strengthen the consensus for open markets and trade expansion. I, along with many in Congress and Administration, have been fighting to end the use of unilateral trade sanctions, to change our law on the Foreign Sales Corporation (FSC) to come into compliance with a WTO decision, to end our embargo on Cuba, to stop the excesses of the Helms/Burton legislation that make our closest political and economic allies the subject of attack because of our own outdated and misguided Cuba policy.

The United States cannot be the only nation holding up the integrity of the world trading system. Where are our counterparts in Japan and Europe?

Unfortunately, Japan and the EU have taken repeated actions that undermine public, business, and government confidence in the WTO.

The EU has failed to implement the repeated dispute settlement panel decisions on beef hormones and bananas. While the EU technically follows the rules of the WTO, it snubs its nose at the spirit. It fails to lead by example. The EU has refused to address its massive trade-distorting agricultural export subsidies that hurt not only American farmers and ranchers but also the world's poorest nations.

Japan opposed the advanced tariff liberalization process at APEC last year, killing an initiative that could have benefitted the entire world trading system. Japan is pushing very hard on WTO initiatives that attack American trade rules, and is continuing to prevent agricultural liberalization. What we don't see is Japan taking a leadership role in promoting trade liberalization, other than trying to increase exports. A mercantilist trade policy is not appropriate for a six trillion dollar economy.

The United States is not making effective use of the WTO dispute settlement process to deal with Japanese trade barriers. The United States has brought fifty-six distinct complaints to the WTO since its inception, including fourteen against the European Union, but only five involved Japan. In fact, we have brought as many disputes against Korea as we did against Japan. Even Mexico, Argentina, and Canada, economies a fraction of the size of Japan, merited three cases each.

Why has our government chosen not to use the WTO to deal with the serious market access problems in Japan? Japanese barriers against foreign goods, services, and investment are generally non-transparent. The Japanese government has a long history of using administrative guidance and other subtle measures to implement and enforce the government's industrial and economic development policies. The so-called "iron triangle" of business, government bureaucracy, and Liberal Democratic Party defined much of post-war Japanese economic history, yet rarely left a paper trail. These measures are as stifling to market access as the formal trade barriers of the past, such as high tariffs and quotas.

Yet the GATT, and now the WTO, has found it almost impossible to deal with these invisible measures. In a dispute several years ago on photographic film, the United States took on some of Japan's long-standing and pervasive discriminatory, collusive, and non-transparent practices. The history of Japanese government protection was clear, yet our government lost the case. I suspect this experience has made U.S. negotiators gun-shy in taking on the Japanese system at the WTO.

That is a serious mistake, and we cannot allow it to continue. In the film case, the U.S. industry estimated that its losses because of the barriers approached $6 billion. If similar estimates of lost trade were made by other industries, the total damage to the United States (and to other countries that faced the same problems in their effort to export to Japan) would be staggering. Japan must play by the same rules as everyone else. The WTO must deal with Japan's barriers to trade.

In agriculture, Japan maintains an intricate system of protection. In the Uruguay Round, Japan skillfully protected its domestic agriculture interests. Change in the rice market was supposed to be the Uruguay Round's signal victory in Japan. What has happened? Last year, Japan imported 724,000 tons of rice under the minimum access system created in the Uruguay Round. Japan also implemented a tariffication system that was designed to make import restrictions transparent. Total rice imports under this new system amounted to 225 tons in 1998, its first year. That is equivalent to one 40,000th of Japan's annual domestic demand. This tariffication system was one of the few meaningful concessions Japan made in the Uruguay Round. Yet it is not working.

In currency markets, Japanese foreign exchange reserves have increased markedly over the past year. There appears to be continuing intervention by the Japanese government to maintain a weak yen. With little economic reform and no recovery in domestic demand, they are depending on growth in the export sector to keep them out of recession. This is just one more band-aid, and Japan postpones the day of domestic reform, restructuring, and trade liberalization. Unfortunately, our own government has turned a blind eye to this.

Then there is the telecommunications sector, a key driver for the New Economy and Old Economy as well. NTT is Japan's largest telecommunications provider. Even after the most recent offering of shares in October, the government still owns 46 percent of the company. (By law, the government must own at least one-third of NTT's shares.) In 2000, Congress strongly supported the Clinton administration's negotiations to lower the fees NTT charges for interconnection in Japan, so that NTT's virtual monopoly power could not prevent Internet providers from offering competitive services. Agreement was reached on changes in the charges, but it is still too little and too slow.

Last year, I cosponsored a bill that would prohibit a telecommunications company owned by a foreign government from receiving an FCC license to operate. That prohibition would apply to several companies, including NTT. America has the world's most competitive telecommunications market. W should not allow a company owned and controlled by a foreign government-a company that is not fully subject to competitive forces at home and that may be subtly assisted in its overseas operations-to operate freely in the United States.

There is no question that many of NTT's monopoly practices continue in Japan. Recently, the chairman of NTT called for its complete privatization. We should applaud that. However, full privatization of NTT is not sufficient for Japan's telecommunications market to become truly competitive. Two other changes are required. One is the creation of an independent regulator. Today, the Ministry of Posts and Telecommunications is the regulator. It sets industrial promotion policies for the telecommunications sector, and, like any government ministry, is subject to all the political pressures in Japanese society. It cannot serve as an independent regulator.

The other requirement is strong anti-trust enforcement. Japan's record at this is poor. The anti-trust authority, the Japan Fair Trade Commission, has been under the thumb of the Ministry of International Trade and Industry (MITI) and the Ministry of Finance since its inception. The jury is out on whether the upcoming reorganization of the Japanese government will result in a Fair Trade Commission that can demonstrate independence from the political and bureaucratic leadership of Japan. But without solid enforcement of anti-trust laws, a competitive telecommunications market is unlikely.

Japan matters. It will be at the center of our economic and security interests in Asia for the foreseeable future. We need to work together with Japan where we can, and there are many such areas-security, economic, environment, and health. But we also must proceed boldly when the United States has significant differences with Japan that affect our national economic interest.

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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