CFR Study Calls for ’Open Marketplace’ with Japan Backed by Assertive Trade Policy

July 24, 2000

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July 28, 2000 --- The next American president should challenge his Japanese counterpart to launch a joint initiative to create a U.S.-Japan "open marketplace"— free of tariffs, with minimal regulatory impediments and an increasing freedom to do business— by the year 2010, argues Bruce Stokes in A New Beginning: Recasting the U.S.-Japan Economic Relationship, to be published by the Council on Foreign Relations July 28. The study is the product of a Council project co-chaired by Sen. John D. Rockefeller IV, D-W.Va. and Rep. Amo Houghton, R-N.Y. involving a bipartisan group of U.S. business leaders and American experts on Japan.

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"The time is ripe for a bold new initiative to recast the U.S.-Japan economic partnership for the 21st century," says Stokes. A new American administration will be working with a new U.S. Congress. A new Japanese government is in place. At the same time, a new Japanese economy is struggling to emerge from its decade-long economic doldrums. And the American and Japanese economies are slowly integrating through as bilateral foreign investment and trade grow.

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Washington and Tokyo must seize this moment, Stokes contends. U.S. willingness to resolve mutual problems in a creative fashion is dependent on America’s continued economic good fortune and could turn sour in an economic downturn. Already, the U.S. trade deficit with Japan has never been higher. And the recent surge in U.S. investment in Japan is likely to result in a host of new bilateral problems as U.S. firms try to operate "inside the castle" of the Japanese economy. Moreover, Japan’s commitment to economic liberalization is tenuous at best. A more vibrant, Japanese economy has a limited time to take root before the crushing weight of Japan’s mounting public debt and the burden of its aging and shrinking population foreclose its options.

A new, proactive U.S. policy toward Japan is needed to maximize the potential of the U.S.-Japan economic relationship and to cope with the inevitable problems in day-to-day ties between the two largest economies in the world. The cornerstone of this new American economic posture toward Japan is creation of:

· A U.S.-Japan Open Marketplace by 2010

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Washington and Tokyo should commit themselves to reduce tariffs, minimize regulatory impediments and increase the freedom to do business in their economies by the end of the decade. Such an initiative would encompass further Japanese deregulation, the enforcement of competition laws, facilitation of foreign investment and greater importation of manufactured products. It would be reciprocal, requiring changes in U.S. restrictions on government procurement and foreign investment. This initiative would be backed by the launching of a U.S.-Japan business dialogue, an annual U.S.-Japan summit between the American president and the Japanese prime minister, a formal dialogue between the Congress and the Diet and regular cabinet and sub-cabinet meetings.

To further that goal the next U.S. administration should press the Japanese government to:

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· Restore Economic Growth and Accelerate Restructuring

Priming the economic pump remains indispensable to avoid a recurrence of Japan’s decade-long economic stagnation. Such spending should focus on urban and information infrastructure and be accompanied by tax cuts. But fiscal stimulus is a fool’s errand if it is merely a substitute for structural reform. By any measure—the reduction in excess capacity, unemployment, mergers and acquisition— Japan has yet to experience the restructuring other industrial nations have gone through in the past. It must become easier for average Japanese to create new enterprises and to shift from job-to-job.

· Expedite Deregulation

Deregulation in telecommunications, transportation and energy would do more to spur Japan’s economic recovery and to open the Japanese economy to foreign competition than any other single initiative.

· Strengthen Competition Policy

Exclusionary Japanese business practices aggravate U.S.-Japan trade problems, facilitating the dumping of steel, for example, and deny American firms the full benefits of their recent investments in Japan. To leverage Tokyo’s enforcement of its own antitrust laws, Washington should pursue antitrust cases against practices that exclude American firms from the Japanese market.

· Reform Corporate Governance

Corporate governance reform—including outside boards of directors and global best practice accounting methods— will force Japanese firms to focus on return on equity, undermining import-restricting exclusionary business practices, making it easier for foreigners to acquire local firms, while inhibiting Japanese predatory export pricing.

To support a renewed Japan-focus in Washington, the new administration should:

· Pursue a Proactive Trade Policy

Years of trade jousting with Japan has taught valuable lessons: success requires leverage, it pays to have specific objectives, short time frames lead to truncated results and fragmentation within the U.S. government has frequently been Japan’s most powerful ally. The new administration in Washington should be willing to use all its available trade tools in dealing with Japan: new structural and sectoral initiatives, occasional unilateral trade action and multilateral pressure through cases brought to the World Trade Organization. The next U.S. government must invest added resources to create a Japan team capable of supporting a new Japan policy. And Congress should reassert its constitutional role in trade policy, to prod both the new administration and Japan toward more rapid change.

"In a feel-good era, at a time when the American economy is enjoying unprecedented success, when Americans are captivated with China and tired with Japan, the status quo is the path of least resistance in America’s posture toward Japan," says Stokes. "Such passivity in the face of the staggering economic problems facing the world’s second largest economy and America’s principal ally in Asia would be a profound mistake. But charting a new course for the U.S.-Japan economic relationship will require American assertiveness and a bold vision for a better future. It would be a fitting legacy for the new U.S. administration, a new Congress and a new Japanese government if they have the courage to begin to create that future."

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