On Living and Trading with Japan, United States Commercial and Macroeconomic Policies

Article excerpt

Japan is becoming Americans' prime nemesis. Trade war is replacing cold war. Free trade has never been U. S. policy. But after World War H we took the lead in subjecting national commercial policies to international rules and in negotiating multilateral commercial disarmament. Like other countries, the U. S. sometimes violated the letter and spirit of the GATT. Now, however, we have made aggressive unilateral threats and retaliations, mainly directed at Japan. "Managed trade" has even gained Sonte rationales in economic theory. But if nations start playing uninhibited strategic games, both trade and the gains from trade are likely to shrink. Our trade deficits were macroeconomic in origin. The remedial policies are fiscal and monetary, not commercial. Let us stop resenting the prosperity of Japan and repair the foundations of our own productivity and living standards.

IT'S A SPECIAL honor to be your Adam Smith Lecturer in 1990, 200 years after the death of the man we revere as the founder of the discipline of economics. In July, I participated in a Symposium in Edinburgh to mark the anniversary, and in a wreath-laying ceremony at his grave. History also will credit this year with the victory of Adam Smith's political economy over Karl Marx's, the triumph of Western capitalism and democracy over Soviet communism and dictatorship. Especially here in America, these dramatic events have been jubilantly bailed as conclusive vindications of our economic and political institutions.

Yet we Americans are much less sure of the strengths of our system and the virtues of our way of life when we turn our eyes to the Orient and observe Japan's economic success. We do not regard it, as we might, as spectacular evidence of the superiority of "our system." We seem to view "Japan Inc." as still another alien economic order, one that succeeds not by following our principles but by violating them, a system with which our businesses and workers cannot be expected to compete on their own.

Largely because of the frustrations we feel in our economic relations with Japan, the United States is deliberately flouting the canons of foreign commerce set forth in The Wealth of Nations. The book is, after all a tract arguing for free trade over mercantilism, and we are going for mercantilism.

A New Yorker cover this summer depicted New York City as a metropolitan Japanese garden. Robert Reich of Harvard reports an informal poll he takes of many American audiences: Which of two scenarios, A or B, do you prefer? In Scenario A, U. S. real GNP is 25 percent higher in the year 2000 than in 1990, while in Japan real GNP is 75 percent higher. In Scenario B the figures are 8.0 percent for the U. S. and 8.3 percent for Japan. All kinds of audiences prefer B, with only one exception: economists.

Like Reich, I am deeply disturbed by the proclivity I detect, among intellectuals as well as plain Americans, to put Japan in the slot of America's prime nemesis now vacated by the Soviet Union. Japan is seen to be as determined to conquer us by economic clout as the Soviet Union was to subdue us by force, and more likely to succeed. Japan's threat is apparently perceived to be to displace us as Number One in the world economic Olympics, to outcompete us in manufacturing industries and technologies we regard as our rightful domain, to take over our real estate, corporate industries, and banks and, evidently, to flood our homes, roads, and shops with machines, gadgets, and toys of high quality and reasonable price, taking in return our paper IOUs denominated in a currency we ourselves print.

I am old enough to remember times when we Americans scorned Japanese products as cheap, low quality imitations of the real things made at home. Some crafty Japanese business men established in Japan a manufacturing center named "Usa" so that they could put "MADE IN USA" labels on their products. Now American consumers pay a premium just for "made in Japan"; the Chevy Nova, now Geo Prizm, produced by the joint General Motors-Toyota venture in Fremont, California, is the same car as the Toyota Corolla and sells for $1,000 less. …