A Message for Tokyo

Tom Foley was not the only politician negotiating with George Bush last week when the President made his dramatic turnabout. Bush was also engaged in last- minute telephone talks with Japanese Prime Minister Toshiki Kaifu on a long-range program to shrink America’s $50 billion annual trade gap with Japan. Bush’s statement on “increased tax revenues” produced a timely bonus: it met the principal Japanese demand that the U.S. bring down the federal deficit.

Two days later, negotiators in Tokyo announced agreement on the awkwardly named Structural Impediments Initiative, which commits Japan to boost spending while the U.S. cuts debt. The agreement will permit Bush and Kaifu to enter next week’s seven-nation economic summit in Houston having made progress not just on specific trade issues but also on ways to improve the basic economies of the two countries.

Bush’s announcement helped break an impasse in Tokyo, where the Japanese were understandably skeptical whether Washington’s budget summiteers would do anything more than paper over the deficit. U.S. negotiators said Bush’s statement signaled that the Administration was serious about SII. “We are telling our Japanese colleagues it takes more political courage to raise revenues than to raise public spending,” said an American. “It would be a very strange set of circumstances if the timing was purely coincidental.”

Under SII, Japan agreed to:

— Increase spending on housing, sewers, parks and airports by about $2.8 trillion over the next ten years. Better housing and public facilities should spur the Japanese to reduce savings and spend more. This should increase demand for American imports, including construction services.

— Make it easier for large department stores and supermarkets to open. At present, small shops have considerable protection against such competition. Larger stores are more likely to buy and sell more goods from abroad.

— Crack down on such illegal, but largely tolerated, anti-competition tactics as bid rigging and price fixing. With more competition in Japan, U.S. companies will presumably have a better chance to break into Japanese markets.

The U.S. agreed to:

— Encourage personal savings by Americans, which would reduce their purchases of foreign products.

— Relax antitrust laws that prevent U.S. companies from collaborating on ventures abroad, which would make them more competitive.

— Ease a ban on the export of California’s heavy crude oil. Japan would like to buy it.

— Increase federal spending next year by 12% on civilian scientific and commercial research, 22% on nonmilitary space research and 14% on the National Science Foundation. The changes called for in SII are long term, and will require politically difficult legislative decisions, so the effect of the agreement remains in doubt. America’s trade gap with Japan is already narrowing; the real impetus of SII could be political. A theory in Tokyo is that the U.S. acts as the opposition party in Japan, pushing the government toward market reforms that benefit Japanese consumers. Last week the process may have worked in reverse: as the Democrats in Congress were pushing George Bush toward taxes, perhaps Toshiki Kaifu gave a nudge of his own.

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