Who Won the Trade War?

By Zoellick, Robert B. | The National Interest, Fall 1995 | Go to article overview

Who Won the Trade War?


Zoellick, Robert B., The National Interest


NOW THAT THERE is an armistice in die latest phase of the trade war with Japan, it is instructive to evaluate President Clinton's settlement, the costs of achieving it, and the implications for U.S. foreign policy in Asia. I believe the United States received too little and paid more than necessary. Even more troubling, this incident affirms that the administration still does not appreciate how and when to wield power. Worst of all, the Clinton team seems chronically incapable of integrating its ad hoc trade and foreign policies. While Clinton's Asian security specialists publish grand strategies, his economic and political advisors proceed case-by-case with Japan and China, applying contradictory and uncoordinated tactics.

The surest predictor of the administration's position on any foreign policy question remains its calculation of domestic political effect. Ironically, Clinton's bad foreign policy habits are fueling the isolationist sentiments he solemnly decries.

The Trade Hawks Lay an Egg

AFTER DISPLAYING front-page photos of Mr. Kantor playfully threatening Mr. Hashimoto with a bamboo sword, newspapers buried in their business sections the first clue that the administration's Japan hawks had laid a modest egg. It turns out that the Japanese auto-manufacturers have purchased almost twenty billion dollars of American-made auto parts in recent years, slightly exceeding the voluntary goal Japan presented to President Bush. Although candidate Clinton criticized Bush's efforts, President Clinton has settled for smaller numbers that now have only the standing of U.S. "estimates" because Japan refused to extend the 1991-92 goals.

The use of these voluntary goals involves a dangerous balance both for Americans promoting open markets and the Japanese economic bureaucrats. On the one hand, frustrated U.S. exporters want voluntary goals to help overcome hidden barriers and prejudices against imports in Japan. The theory is that once japanese business and consumers are forced to examine foreign goods, they will recognize them as satisfactory and the regular forces of market competition can operate more freely. But voluntary goals can slip into quotas, which make it harder to achieve free competition; they can become ceilings (not floors) on exports, and may lead to a counterproductive attitude of disdain toward the export products that Japanese companies are required to buy. Quotas lead to managed trade, which creates an incentive for exporters to concentrate on getting their governments to bargain for market share, instead of focusing their businesses on developing competitive products and market strategies. The Japanese government's efforts to persuade its industries to establish goals also undermines the cause of deregulation.

The Bush administration decided that the closed nature of some Japanese sectors and business practices warranted pressing Japanese firms to establish voluntary goals, if the goals were complemented by American companies' adjustments to match Japanese opportunities. In early 1993, Japan's Ministry of International Trade and Industry (MITI) probably would have continued to experiment with these arrangements, because the process tended to strengthen MITI's influence within the economy and give it an important role in managing the relationship with the United States.

Unfortunately, the new Clinton administration was oblivious to these subtleties, risks, and tradeoffs. As a result of a failure to analyze Japan's range of flexibility and constraints on trade policy, compounded by poor tactics, Clinton's result fell short of that achieved by Bush.

The administration overplayed its hand from the start by insisting on specific numerical targets in agreements that the United States would enforce with trade law remedies. Given the uncertainties of market conditions, MITI would not accept legal quotas. So MITI retreated from even the idea of voluntary goals and seized the high ground of defending free market principles. …

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