NEWS ANALYSIS : Both Sides in Dispute Wary of Escalation

WASHINGTON —  When the stakes in poker get too high, most card players move cautiously, fearful of losing all.

And with nothing less than the future of U.S.-Japanese relations at stake in the trade dispute that faces a crucial juncture today, both nations seem wary of taking rash actions that would escalate the case into a full-fledged trade war.

As negotiators scramble to try to resolve the dispute in Geneva before U.S. sanctions on Japanese luxury automobiles are imposed, many trade experts in and out of government believe that the two sides will try to keep the fight from gaining uncontrollable momentum through retaliatory measures.

Japan, some analysts say, always has moved cautiously in the past when faced with the threat of stiff trade sanctions. These experts believe that dire predictions of a new and bitter economic Cold War between the world’s two great industrial superpowers are greatly exaggerated.

“The last thing the Japanese want to do is escalate,” said Alan Stoga, an international analyst with Kissinger Associates, a New York consulting firm. “The Japanese may retaliate, but, if they do, I think it will be in some finely calibrated way.”

Clinton Administration officials also said Tuesday that they do not believe the case will lead the two sides to indulge in eye-for-an-eye bloodletting.

Indeed, Administration officials, concerned that the automobile trade case is gaining such a high political profile in both nations, sought to downplay its potential impact as the deadline loomed.

“Both sides have said repeatedly that we don’t anticipate this dispute will jeopardize the overall strength of the U.S.-Japan relationship, or even the overall trade relationship,” a senior Administration official said Tuesday.

“People really seem to be playing this up as a major [break] from our past policies or that it is somehow jeopardizing our relationship with Japan,” the official added. “But this is really just one more step in a long process of U.S. efforts to open Japanese markets. And neither side wants this to damage our relationship.”

Yet at the same time, President Clinton and his advisers are determined to go through with their threat to impose the sanctions if an agreement cannot be reached, Administration officials said.

And so, other outside analysts argue, the unprecedented scale of the punitive measures--with their special relevance to politically powerful, import-happy California--may be leading trade relations between the two countries into uncharted and dangerous territory.

That could raise new and troubling questions about whether the two nations can keep the lid on a potentially explosive issue.

“I’m not sure past Japanese practice is a good guide to what may happen here,” former U.S. Trade Representative Clayton Yeutter cautioned. “We’re in a new era.”

The imposition of the sanctions could create one of the most serious ruptures in relations between the two nations since the end of World War II.

Critics have complained that the Clinton White House is following a strategy of confrontation--largely ignoring a new international trade dispute settlement process through the World Trade Organization--which could cost the United States credibility on trade issues around the world.

“The Administration is engaging in brinkmanship,” argued Carla Anderson Hills, who was chief U.S. trade negotiator during the George Bush Administration.

All of that could put new pressures on the fragile Japanese economy and on U.S. exports.

What’s more, California--positioned as Pacific Rim middleman--could get caught in the cross-fire.

Indeed, by threatening trade sanctions against Japanese luxury cars to gain access to the Japanese auto market, the Administration is employing a negotiating strategy that ultimately could pit trade-dependent Californians against Midwestern auto workers and labor unions.

While that is certainly not the intent of a President who has wooed California assiduously since taking office, it is true that California has more to lose in an all-out Pacific trade battle than virtually any other state.

Last year, for example, California’s exports to Japan surged by 26% to $13.2 billion--led by rising sales of industrial and computer equipment and electronics and aerospace products.

But overall, the direct economic impact from the dispute in both the United States and Japan is likely to be far less than the political and psychological fallout.

In Japan, analysts said, the uncertainties caused by the dispute could lead to a sharp decline in the nation’s financial markets. That, in turn, could put added pressure on Japan’s ailing banking sector, already reeling from the bursting of the Japanese real estate bubble.

And it could ultimately lead to a shakeout in the Japanese auto industry, where several weaker manufacturers are still hanging on.

By contrast, the U.S. economy--far less dependent on international trade--is likely to ride out the storm more easily.

“Overall, the impact on the U.S. economy will be relatively minor,” predicted Robert Hormats, an international economist at Goldman Sachs.

Hormats said he expects that kind of impact because he does not believe that the Japanese will retaliate broadly against U.S. goods.

While the sanctions cover nearly $6 billion in Japanese exports to the United States, he said that he believes that Japanese retaliation is likely to be limited to other pending trade cases, such as an ongoing dispute over air cargo landing rights.

Carol Brookins, an expert on international agricultural trade at World Perspectives, a Washington consulting firm, added that if the Japanese move to retaliate, they will only do so within the limits allowed under the new World Trade Organization.

Most analysts believe that Japan will have a strong case against the United States because of the Administration’s decision to act on its own without waiting for the global trade regime to resolve the auto trade dispute.

“I think the Japanese will be quite happy to delay any immediate action in order to press their case before the WTO and turn the debate on international trade against the United States for a change,” argued Marcus Noland, a senior fellow at the Institute for International Economics in Washington. “Once they win their case, the debate would go from being one about the closed nature of the Japanese market to one about how the United States is a bully. That would be worth a lot to the Japanese.”

Still, if the sanctions are imposed and retaliation is swift, among the first to feel the pinch in the United States would be Californians.

California-based subsidiaries of Japanese auto makers, dealers and subcontractors that supply parts to Japanese luxury automobiles would get hit almost immediately. But given the backlog of Japanese luxury cars at dealerships, there is little expectation of immediate layoffs or dealers going bankrupt.

California advertising firms could be next in line if the sanctions begin to eat into the Japanese auto maker’s hefty advertising budgets.

But the damage to California’s economy could escalate quickly if Japan responds with counter-sanctions against targets such as agricultural and high-tech exports.

The agriculture industry is particularly vulnerable to Japanese retaliation as Japan is now the United States’ No. 1 export market for agricultural and forestry products--thanks in part to the success of previous rounds of U.S.-Japan trade negotiations.

Risen reported from Washington and Iritani from Los Angeles. Times staff writer David Holley contributed to this report from Tokyo.

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