Level Trade With Japan Is Difficult : Imbalances: Increasing dependence on Japanese machinery in the U.S. complicates improvement efforts, officials say.

TOKYO —  With its Asian, American and European partners clamoring for action, it is time again for Japan to work on its perennial balancing act--finding a way to offset its lopsided trade with the rest of the world. But with the nation’s trade surpluses expected to hit new highs next year, the task will be tougher than ever.

“We’ve tried our best, but unfortunately the U.S.-Japan trade imbalance hasn’t improved much,” Kiichi Miyazawa, Japan’s new prime minister, told the Los Angeles Times before he took office. Improvement has become difficult, he said, because of the American economy’s increasing dependence on Japanese machinery and components. “After all this effort, there aren’t many more ideas left for reducing the trade imbalance.”

This year, Japan will export about $307 billion in products while only importing $208 billion worth, giving Japan a trade surplus of $100 billion, near its all-time high in 1985. The surplus could continue to expand, reaching as high as $113 billion, predicts Robert Feldman, an economist at Salomon Bros.’ Tokyo office.

“After investing $3 trillion in their domestic economy over the past five years,” says Deutsche Bank economist Kenneth Courtis, “Japan is back on the attack and ready to export aggressively.” Meanwhile, he says, Japan’s growing competitiveness is making it increasingly difficult to crack the Japanese market in spite of government market-opening measures.

Japan’s rising trade surplus is raising red flags in Washington and elsewhere in the world. European executives are complaining of the explosion of imports from Japan. Korea’s leaders talk of an “invisible barrier” to their products in Japan. This month American trade officials, including U.S. Trade Representative Carla Hills, will descend on Tokyo to push Japan to buy more American auto parts, get tougher on antitrust and to speed up liberalization of such regulation-bound sectors as finance and distribution.

Such trade talks have become a common part of U.S.-Japan relations. But their impact on trade, whether because of the lack of enthusiasm of American businessmen for selling into the Japanese market or to reluctant bureaucrats, have been far less effective.

From the late 1960s to the early 1980s, American trade officials badgered Japan into first removing tariffs, then lowering non-tariff barriers. When Japan’s trade surplus hit a high in 1985 and showed no signs of abating, economists insisted that the real cause was the high value of the dollar.

In 1985, the theory was put to the test as Japan, in coordination with the world’s leading industrialized nations, revalued upward the yen by more than 40%. Although the move initially led to a flood of imports, Japan soon adjusted by cutting costs and moving low-value production to southeast Asia. Japanese exports only temporarily slowed as corporations sacrificed profits to maintain market share. Much of Japan’s imports were related to the boom in land and stock prices and consisted of luxury cars, helicopters, gold and diamonds. When asset prices fell, so did imports.

The most recent theory was that trade imbalances simply reflected macro-economic problems: too little consumption in Japan and too much consumption in America. Last year, that theory was also tested. The U.S. economy was in recession while the Japanese economy boomed. Even then, however, America’s trade deficit with Japan remained at a hefty $40 billion.

If in the best of circumstances Japan’s trade surplus is that large, imagine what can happen when macro-economic forces aren’t in balance. That is precisely what is now happening. Japan’s economy is slowing down sharply, cutting its capacity to import products just as the American economy is gradually beginning to pick up, enabling it to suck in more products from Japan.

To be sure, Japan’s trade balancing efforts have not been totally without effect. A recent report by the Congressional Research Service points out that U.S. exports to Japan rose 119% from 1985 to 1990, and that a growing share of those exports consist of manufactured products. Toshio Itoh, chief economist at Sumitomo Bank, notes that Japan’s surplus as a percentage of its total gross national product has actually shrunk to 2% this year from 4% in 1985.

And Itoh argues that much of the recent increases in Japan’s surplus are the result of temporary factors, such as a decline in the price of oil and a rise in the yen’s value. Officials at the Ministry of International Trade and Industry are preparing a new list of measures to boost imports, in part, by helping foreign companies finance the building of factories in Japan.

Japan is also responding to American pressure by appearing to get more serious about such “structural” changes as enforcing its antitrust laws. Last Wednesday, the Fair Trade Commission filed criminal charges against several makers of plastic food wrap for conspiring to jointly raise prices on some of their products by 40%. It was the first time in 17 years that the commission filed such charges.

But such efforts are a long way from changing corporate behavior. It is unlikely executives will be jailed for the offense, and the fines are so small that few expect them to act as a deterrent.

And just as peeling the layers of an onion reveals just another layer, American companies have often found themselves cracking one barrier only to come up against another. While Japanese manufacturers went along with Toys R Us as far as freezing out the wholesaler, they refused to sell their products at wholesale prices for fear of alienating their traditional wholesalers. Inability to get products at wholesale prices will make it difficult for Toys R Us to follow its successful U.S. strategy of selling toys at a discount.

When the company’s first store was being built, Japanese television carried negative reports from local merchants about how the new stores would cause terrible business failures.

One merchant suggested that “there might even be suicides.” And when the U.S.-based company proposed to skip wholesale channels and work directly with manufacturers such as Nintendo, as it does in the U.S., Japanese retailers and wholesalers complained.

According to newspaper reports, Nintendo resolved the problem by getting Toys R Us to agree not to underprice other retailers. The result will be higher profits for the U.S. retailer but fewer overall sales.

Many economists believe that, barring revolutionary changes in Japan’s business environment, the government’s various market-opening measures are unlikely to dramatically boost imports.

“Japan’s economy is still on a wartime footing,” says Akio Mikuni, who runs his own credit rating agency. “There is still a conscious effort to foster industry.” Although Japan has begun to re-examine its financial and antitrust regulations with the idea of giving market forces more free rein, Mikuni says, “the process is just beginning.”

Prime Minister Miyazawa suggests, however, that if radical changes need to be made, it is the United States that must make them. The United States must decide, he said, what imports it requires for its industry and what it can do without. “Where it isn’t essential, we (in Japan) can stop exporting those products,” Miyazawa suggests. In other instances, he adds, “America may decide to manufacture those products by itself.”

Few on either side of the Pacific seem to be ready yet for such “managed trade.” A U.S.-Japan semiconductor agreement that established targets for foreign market share in Japan has netted some results for U.S. companies, but both sides insist that is not “managed trade.”

And many Japanese still see the nation’s surplus as being far from unhealthy. “As Japan becomes an aging society, our savings will fall and our surpluses will decline,” says Yoshiyuki Noguchi, senior economist at Nomura Research Institute. That, he says, is when Japan will need to draw income from the foreign assets it is now accumulating with cash from exports.

But for America, the future pain from its current deficits could require a search for a more drastic solution. “A country like America that runs a massive trade deficit has to borrow from abroad,” says Courtis of Deutsche Bank. “Key decisions about technology, innovation and production will be made overseas. That matters if you want to be a world superpower--if you want to be No. 1.”

Where U.S. & Japan Win on Trade The 1990 trade surplus figures for nations show broad Japanese strength in goods that are value-added, where Japan provides expertise, while the United States has an edge in airplanes and raw materials.

Japan’s strengths:

Autos, including parts and engines: $30 billion

Capital goods (machinery, etc)*: $20 billion

Consumer goods: $6 billion

U.S. strengths:

Food, feed and beverages: $8.2 billion

Industrial supplies and materials (cotton, plastic, aluminum, etc.): $7 billion Aircraft, including parts and engines: $2.6 billion Source: U.S. Commerce Department