U.S.-JAPAN SCORECARD

LAST FRIDAY, A FEW DAYS BEFORE HE LEFT FOR A STATE visit to Tokyo, President Clinton walked outside the White House for a photo op he was clearly looking forward to. Accompanied by Mickey Kantor, the tough-talking Trade Representative who later that day would be nominated to succeed Ron Brown as Secretary of Commerce, Clinton viewed a new Chrysler Neon, Ford Taurus and GM Cavalier–all equipped with right-hand steering wheels for sale in Japan. “Just four years ago,” said Clinton, “if you had told me that I would see it, I’m not sure I would have believed it–right-hand-drive American models made by American workers bound for Japan.”

The event was staged so that Clinton could crow about his accomplishments in an area that obsesses Americans: economic competition with Japan. He and his aides rattled off a raft of figures intended to show how well the U.S. was doing in the rivalry. But where does it really stand right now, and are things as rosy as Clinton’s boasting would imply?

Certainly, some numbers look better for the U.S. Its trade deficit fell from $65.6 billion in 1994 to $59.2 billion in 1995, a decline of almost 10%. Since the beginning of the Clinton Administration, U.S. exports to Japan have increased 34%. The trade deficit with Japan remains enormous, but these numbers seem to indicate a trend favorable to the U.S.

Probably the most important reason for this is the strength of the yen, which has made American products cheaper in Japan. Beyond that, the U.S. has become more competitive in such industries as semiconductors and automobiles. A “framework agreement,” which concerns such broad issues as the loosening of Japanese regulatory restrictions and government procurement policies, is also credited with lowering the U.S. trade deficit and raising exports.

It is tempting to assume Japan’s domestic troubles have given the U.S. an edge, but those difficulties do not reflect the performance of many Japanese companies that manufacture overseas; they remain strong. And while Japan is doing poorly in some areas, such as financial services and software, it is doing well in others–for example, cars and electronic hardware. It is best to see the competition between the U.S. and Japan in terms of relative attributes, not absolute victory or defeat. Several recent studies suggest the U.S. outperforms Japan when the pace of product development is fast but the Japanese are better off when change is slow. Recently the level of activity has favored the U.S., but that may be changing.

Trade is only one side of the U.S.-Japan economic relationship; the other side is finance. The Japanese, seeking an outlet for the billions of dollars they earn from their exports, buy heavily in U.S. Treasury bills. By virtue of the trade deficit, Japan’s holdings of U.S. Treasuries are huge. If Japan ever started selling those bonds, U.S. interest rates would rise and the stock market would plummet. As a Japanese official put it, “Japan can pull the trigger on U.S. financial markets.” But Japan would hurt itself in the process. The rise in rates and the drop of the U.S. dollar would make it more difficult for the U.S. to pay its debts, and for its consumers to buy Japanese products.

Their level of trade and financial interdependence fatefully lash the U.S. and Japan together. So far, Japan’s problems have not hurt the U.S, but in time they could. The U.S. would be making a big mistake to presume Japan’s woes mean the trade game is won. It would be another mistake to believe that if those problems got worse, the U.S. would be better off.

–Reported by Edward W. Desmond/Tokyo, Thomas McCarroll/New York and Adam Zagorin/Washington