TIME Domestic July 10, 1995 Volume 146, No. 2 ------------------------------------------------------------------------------- Return to Contents page ------------------------------------------------------------------------------- TRADE LOOKS GOOD, BUT WHAT'S UNDER THE HOOD? The last-minute deal between the U.S. and Japan eases a crisis but leaves plenty of anxious doubts BY GEORGE J. CHURCH Some truisms: peace is better than war. Any increase in sales of U.S. goods to foreigners is preferable to none. A door to Japanese markets pushed open a crack beats one slammed shut. So the auto-and-parts agreement concluded by U.S. and Japanese negotiators in Geneva last week, just barely in time to head off a possible transpacific trade war, looks beneficial to both sides. But. Spin doctors in Washington and Tokyo to the contrary, the eleventh-hour deal is more of a truce than a real peace. To be sure, the pact left both sides momentarily ebullient. In Tokyo an official of the Ministry of International Trade and Industry reported after the deal was struck, "They're so happy that they're giddy over there"--over there meaning in the office of Prime Minister Tomiichi Murayama. And by transatlantic telephone Bill Clinton told U.S. Trade Representative Mickey Kantor, "Hey, Mick, congratulations. It sounds like you did great." It may not have been a cigar-on-the-veranda moment for the President, but he was clearly pleased. And, maybe more to the point, relieved. The auto pact kept the peace--for now--largely because, in the grand tradition of U.S.-Japanese trade settlements, it left Washington and Tokyo ample room to quarrel about just what it was they had agreed to. Clinton enthused, "This agreement is specific. It is measurable. It will achieve real, concrete results." In Tokyo, however, Hisashi Hosokawa, a hard-line MITI official, insisted that "this agreement is a rejection of numerical targets" for Japanese purchases of American cars and parts. His boss, MITI Minister Ryutaro Hashimoto, may have strengthened his already bright chances for becoming Japan's next Prime Minister: he was being hailed as a hero precisely for having got Kantor to drop a U.S. demand for such targets. The facts tend to support the Japanese in this argument. The auto deal between the two governments contains no hard numbers. Kantor and Clinton have pointed to a few anyway: 1,000 more Japanese dealers selling American cars in five years; a prospective increase of $9 billion in three years--or roughly 50 percent--in sales of U.S.-made auto parts to Japanese buyers. These are American estimates of what will happen if Japanese carmakers carry out pledges they supposedly made "voluntarily" and which are additionally subject to changing business conditions. But Hashimoto has made it clear that the Tokyo government does not guarantee that these--or any--targets will be reached. The pact provides for regular reviews to see how it is working out, yet prevents the U.S. from applying new sanctions if Japanese companies fall short of their promises. For these reasons, the auto deal falls far short of being the "major step toward free trade throughout the world" that Clinton hailed. This week, even before the pact had been printed, word got out that Kantor's office will begin investigating a potentially explosive complaint by Eastman Kodak. The company charges that Fuji Photo Film and the Tokyo government illegally conspired to prevent Kodak from enlarging its 9 percent share of the market for camera film in Japan. The complaint--involving some of the same Japanese business practices that the U.S. tried but failed to change in the auto deal--is one of several other cases involving Japan pending in Kantor's office. The auto pact doesn't set much of a precedent for resolving these disputes, unless it is the precedent some Japanese fear: that from now on it will take a sanctions deadline for negotiators to make any progress. Such a deadline was little more than half a day away when Hashimoto and Kantor reached their agreement. Had they not done so by midnight Wednesday, the U.S. was poised to impose 100 percent tariffs on 13 makes of Japanese luxury cars, including Lexus and Infiniti, raising their prices enough to make them virtually unmarketable in the U.S. and costing the Japanese automakers nearly $6 billion a year in lost sales. Japan could have retaliated by limiting imports from the U.S., perhaps of aircraft and farm products such as beef. That might have spurred another U.S. retaliation and started a spiral badly damaging economies and shattering financial markets in both countries--the mutually assured destruction theory of trade warfare. Which is why, in Kantor's view, as related by sources in Washington, sanctions lose much of their value after being applied; the threat is the thing. So, poised on the brink of doomsday, Kantor settled for what he took to be Japan's best offer. Which, despite its seeming vaporousness, is hardly insignificant. Increasing the number of showrooms where they can be seen can hardly help raising sales of U.S. cars in Japan, though it is far from certain whether Detroit's Big Three can offer autos pleasing enough to Japanese motorists to achieve mass sales. As for American auto parts, more than half the expected sales increase would occur in the U.S. itself. Japan's Big Five automakers announced plans that add up to building 2.6 million cars a year in America by 1998, vs. 2.1 million now, and to putting more U.S.-made parts into those cars--a move that just happens to make business sense because American parts are often much cheaper than their Japanese counterparts. There could also be a significant increase in sales of U.S. parts in the Japanese repair market if the Japanese government follows through on its agreement to change regulations that now have the effect of making drivers get their cars fixed in designated garages with mostly Japanese-made spare parts. The deal, however, does little to break down the keiretsu system. Keiretsu refers to groupings of Japanese companies, such as automakers and their parts suppliers, that are linked by cross-ownership and deal mainly with one another. At most the trade agreement could conceivably give automakers that want to buy U.S. parts an excuse for telling their keiretsu partners "no sale." But the system itself remains; asked about it in Geneva, Hashimoto replied, "We will have new keiretsu now with the American car and parts manufacturers." Unfortunately, he was joking--or was at least taken to be so by his audience, which erupted in laughter. And speaking of which, did somebody mention political credit? "After two and a half years of negotiations, the final agreement is vague, unenforceable, nonbinding--in short, it is virtually empty," declared presidential candidate Bob Dole from the Senate floor two days after the deal was announced. For now, though, it will probably give Clinton a boost in such key electoral states as Michigan and Ohio, which are heavily dependent on auto and parts manufacturing, though the deal is drawing only a lukewarm response from the trade hawks in the President's own party. "We can and should go even further to [achieve] real trade fairness," said House Democratic leader Richard Gephardt. That sentiment is echoed by labor leaders, an important constituency for Clinton. Stephen Yokich, president of the United Auto Workers, called the agreement "a modest, yet important, step," but added, "clearly much more work remains to be done." Will that work be done? Some would argue that it is in Japan's self-interest to reduce its monstrous trade surplus--a record $66 billion with the U.S. last year. Japan is suffering through its worst postwar slump: production has been stagnant for four years; unemployment has reached a record 3.2 percent; banks are sitting on top of a pile of bad loans estimated at $1 trillion; the Nikkei index of Tokyo stock-market prices is down more than 60 percent from its inflated 1989 peak. The causes are both numerous and complex, but clearly the country's venerable postwar strategy of squeezing domestic consumption to concentrate on exports no longer produces prosperity. The Japanese economy needs a good dose of deregulation and promotion of consumption--including foreign goods and services. Given those troubles, the auto deal looks less like a victory for Japan than a lost opportunity to open its markets further. But old habits die hard, and vested interests, like the keiretsus, are powerful. The auto-and-parts deal has averted a hot war over trade, but it does not preclude a long and hard-fought cold war. Reported by Irene M. Kunii/Tokyo and Adam Zagorin/Washington Copyright 1995 Time Inc. All rights reserved. [Image] Text Only ------------------------------------------------------------------------------- time-webmaster@www.timeinc.com