by Brink Lindsey

Brink Lindsey is director of the Cato Institute's Center for Trade Policy Studies.

January 11, 2001

The great U.S.-Japan trade wars of the 1980s and 1990s now seem like a distant memory. Remember when people were actually claiming Japan would replace the United States as the world's leading economic power? Those prophets of doom warned that unless Americans aped Japanese industrial policy and switched from free trade to "managed trade," the U.S. economic decline would soon be irreversible.

Oops -- never mind. Asia's ailing giant has just limped through a lost decade of economic stagnation and the prospects for the coming years don't look much brighter. Meanwhile, the U.S. has reeled off one of the greatest economic expansions in its history. Even if the boom is beginning to fade, the notion that America might be eclipsed by Japan now looks just plain silly. No wonder the days of Hollywood cautionary tales "Gung Ho" and "Rising Sun" feel like ancient history today.

One relic of the old hysteria was just recently laid to rest. On Dec. 31, with no fanfare and little attention, the 1995 U.S.-Japan Automotive Agreement officially expired. To which the appropriate response is: good riddance.

The pact marked the nadir of the Clinton administration's fascination with "results-oriented" trade agreements. The idea was to "open" Japan's auto and auto-parts markets by setting enforceable sales quotas - -an attempt to rig commercial outcomes that was the very antithesis of free trade. The Japanese, to their credit, balked; the U.S. responded by threatening to slap 100% punitive tariffs on nearly $6 billion worth of Japanese luxury cars.

In June 1995, on the eve of the trade sanctions' going into effect, the two sides compromised. The Japanese agreed to recognize sales figures and the number of dealerships for foreign cars as "objective criteria" for judging the openness of their market. The U.S., however, dropped its demands that Japan accept any specific numerical targets. Nevertheless, then U.S. Trade Representative Mickey Kantor did proclaim his own unilateral targets in the joint statements announcing the deal -- a $6.75 billion increase in U.S. parts purchases by 1998 and 1,000 new dealerships for U.S. cars by 2000.

Ironically, after all the tense drama of the negotiations, the ink was barely dry on the deal before it was basically forgotten. Having been foiled in its efforts to impose outright quotas, and recognizing belatedly that Japan's bubble economy had burst years before, the Clinton administration opted to move on.

The Big Three U.S. automakers decided they needed to consolidate rather than expand their dealership networks in Japan, thus rendering moot the target of 1,000 new dealerships. And on the parts side, continued localization by Japanese automakers' U.S. "transplants" ensured that purchases of U.S.-made parts grew steadily and smartly.

Meanwhile, Japan's prolonged economic distress created new and unexpected opportunities for U.S. expansion in the Japanese market. Specifically, American auto and parts companies began to invest aggressively in their weakened Japanese competitors. Although complaints about Japanese market barriers continued, they grew increasingly ritualistic and perfunctory.

During the past few months, though, the Clinton trade team rediscovered its long neglected handiwork. In November, U.S. negotiators presented their Japanese counterparts with an unofficial "non-paper" that outlined a five-year extension of the auto agreement -- with additional new requirements and "objective criteria." The non-paper was a non-starter. The Japanese didn't object to the idea of regular consultations on auto trade issues, but they rejected out of hand any continuation -- much less expansion -- of the 1995 accord.

One has to ask what lies behind the Clinton administration's thinking? The auto deal was bad policy five years ago, but under present circumstances it doesn't even make sense. In recent years the forces of globalization have utterly transformed the Japanese auto and auto-parts industries -- to the point that it's now difficult to say which of them should still be considered Japanese.

Seven of Japan's 11 automakers have sold large equity stakes to foreign car producers since the 1995 agreement. General Motors owns 49% of Isuzu, 21% of Subaru and 20% of Suzuki. Ford owns 33.4% of Mazda. DaimlerChrysler owns 34% of Mitsubishi; and Renault owns 36.8% of Nissan.

Nissan's president, Carlos Ghosn, is a Brazilian-born former Renault executive. The president of Mazda is an American, Mark Fields. DaimlerChrysler's Rolf Eckrodt is about to take over as chief operating officer of Mitsubishi.

Similar cross-border tie-ups are occurring in the parts industry. Visteon, formerly Ford's components division, acquired 100% of Naldec, a maker of electronic components. Johnson Controls likewise assumed complete ownership of Ikeda Bussan, Japan's second-largest maker of car seats. Tower Automotive purchased a 17% interest in stampings specialist Yorozu. Goodyear took a 10% stake in Sumitomo Rubber. And German firm Robert Bosch, the world's third-largest partsmaker, acquired majority ownership of Zexel, which specializes in diesel engine parts.

In such an environment, who is "us" and who is "them"? What would it mean if Ford were to complain about market access in Japan -- that it can't sell Mazdas there? If Chryslers aren't selling well in Japan, what standing does the U.S. government have to advance the interests of a German auto producer? And if parts makers have a beef with Nissan, what is the Japanese government supposed to do about a French-controlled company?

In the fall, U.S. negotiators reportedly sought to add trade deficits to the list of "objective criteria" in a new agreement. But such figures are meaningless in a globalizing industry. Take the U.S. deficit in auto parts -- measured at $11.4 billion in 1999. That figure is swamped by the $28.1 billion in American-made parts bought by Japanese automakers in the United States -- purchases that never make it to the trade statistics.

Furthermore, those statistics don't capture U.S. parts makers' exports to Japan from overseas facilities. Delphi, for example, supplies Japan with sensors from Mexico, spark plugs from China, batteries from Korea, and engine-control units from Singapore.

There will doubtless be political pressure on the incoming administration of President-elect George W. Bush to "do something" about auto trade. Some partmakers are loath to give up the political club with which they've been beating their Japanese customers for years. And labor unions, meanwhile, can always be counted upon to find a foreign scapegoat for their troubles.

But the Bush team needs to rise above such special pleading. If it wants to reestablish regular bilateral consultations to discuss developments in this vitally important industry, that's fine. But the market-rigging approach of the 1995 agreement should be unequivocally rejected. Let managed trade expire with the administration that concocted it.

This article appeared in The Asian Wall Street Journal on January 11, 2001.