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August 10, 1979
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Trade War Avoided- At What Cost?
"Unless you [Prime Minister Ohira] are prepared to take American citrus and unless
you are prepared to take American grain,
unless you are prepared to take American
goods and services, you have to tell your
people they'd better be prepared to sit on the
docks of Yokohama in their Toyotas, watchi ng thei r Sonys, eati ng thei r Kobe beef at $18
a pound."John B. Connally (G. O. P. presidential hopeful).
. "[My generation] is indebted to the u.s. If it
hadn't been for its generosity, we would not
have recovered as we did. But our time is
ending. We were almost yes men for the
U.S. If the heat was on, we succu mbed. That
isn't going to hold with the new generation.
They demand equality. They demand fair·ness. They say, 'We've been productive. If
. the u. S. can't compete, it's their fault."' Toshio Shimanouchi, senior Keidanren
[Japanese Chamber of Commerce] official.
Geneva and Tokyo Agreements
An economist with Japanological interests,
th is writer has been crying wolf for a decade
about the danger of Japanese-American
economic warfare. Following the Geneva
and Tokyo economic summits this spring
and summer, and assuming ratifications of
their results, he is pleased to report that conflict has been at least postponed. (Or if it had
already begun, an early armistice has been
arranged.)
This is good news, but the cloud is not all
silver lining. The remaining problem, as I see
it, is that the settlements leave the consuming public of each country at the not-sotender mercies of that country's organized
business, organized agriculture, and organized labor.
/
Eight Bones of Contention
Over the past quarter-century, economic
disagreements have developed between the
U.S.
Japan under eight main heads,
some of which no longer represent live
. issues.
1. U.S. protectionism. This was the first difficulty to arise. Rather than raising tariffs or
imposing import quotas, the u. S. induced
the Japanese to impose "voluntary" export
quotas on numerous Japanese products, originally cotton textiles, but expanding over
the years, chiefly to other textiles and to .
various forms of steel and steel products.
(The Japanese side has later come to use
these quotas as vehicles to develop exporters' cartels, giving most of the profits of
higher prices to Japanese producers rather
than u.s. importers.)
2. Japanese protectionism. This has been
primarily non-tariff protection (NTP) in recent years. Among Japan's most irritating
forms of N TP have been quotas, elaborate
inspection procedures, and "administrative
guidance" by Japanese governmental agen-cies to firms under their supervision to buy
Japanese goods.
3. Japanese "dumping." This term is limited traditionally to sale abroad of surplus
products at prices below the domestic prices'
of identical products (plus transportation). In
accusing Japanese competitors of dumping
in the U.S., American special-interest
groups have attempted (without noticeable
success) to expand the term to include sales
at prices which "disrupt" the American
market, interfere with "orderly marketing"
of American goods, or are made below
"cost" as estimated by the Americans.
4. Japanese "tax breaks" and cheap credits
for certain key industries. These industries
usually turn out to be export industries or
competitors with imports, and the subsidies
are sometimes called dumping. And under
this same head, we might include Japanese
financial arrangements which are "easier"
on exporters than on importers.
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Opinions expressed in this newsletter do not
necessarilv renect fhe views of the rnanagernenl
of the Federal
Bank of San Francisco!
nor of the Board of Covernors of the Federal
Reserve Systenl.
lar prices of Japanese goods in the U.S., as
the yen rose relative to the dollar.)
5. Japanese capital controls (on purchases
of yen by non-Japanese). These controls are
directed primarily at foreign direct investment in Japan. They aim at minimizing or
postponing foreign firms' expansion of their
competitive facilities within the Japanese
market, especially in such key lines as computers, unless they embark on joint ventures
with Japanese firms.
Compromises of 1 979
The agreements of this year have in general
kept existing protectionist restrictions in
place, in the name of "orderly marketing."
At most, they propose "all deliberate speed"
in reducing them. The two governments
have, however, agreed to oppose additional
restrictions. The scrapping of Japan's "voluntary" export quotas would have helped
American consumers, and the influx of
American goods and American competitors
into the Japanese home market would have
helped Japanese consumers. Taken together, such moves would have gone a long
way toward countering the OPEC oil price
rises for both groups of consumers, and possibly even reduced both American andJapanese inflation rates.
6. Japanese "cornering." The great Japanese trading companies (sagoshasha),with
great financial resources and superior forecasting abilities, are accused of cornering
futures markets for delivery of raw materials
where price rises are anticipated, and causi ng spot shortages in those cou ntries themselves. In the U.S., shoshahave been
accused, singly and in combination, of buying up supplies of lumber and ofsoybeaHsat
critical times.
7. American embargoes or boycotts. As inflation-control devices, and also to
counteract cornering (#6, above), the U.S.
has reduced exports of lumber and halted
exports of soybeans to Japan. The "soybean
shock" of 1 973, although short, was especially resented as "starving Japanese babies
to feed American livestock."
Let us go into slightly more detail on each of
our eight sources of conflict and controversy:
1. As for U.S. protectionism, proposals for
special levies against Japanese exports have
been shelved. Some future easing of American tariffs and quotas may also have been
achieved, but the principal gain remains
roadblocks against things becoming worse
than they are.
8. The yen-dollar rate. Cheap yen make
Japanese goods cheap in the U.S. and American goods dear in Japan. "Strong yen"
make Japanese goods expensive in the U.S.
and American goods cheap in Japan. (The
shosha stand accused of interfering with this
easy generalization by increasing their trading margins on American exports ratherthan
lowering yen prices of American goods in
Japan, and also cutting their trading margins
on Japanese exports rather than raising dol-
2. As for Japanese protectionism, Tokyo has
promised to reduce restrictions, but (as
always) demanded inordinate amounts of
time, primarily to assuage Japanese farmers
and retain 'their allegiance to the ruling
(Liberal-Democratic) party. Time is also required to bring the middle-level Japanese
bureaucracy around to their seniors' newfound internationalism, or perhaps I should
call it new-found adaptation to Japan's positive balances of trade and payments. At the
same time, U.S. exports to Japan through
May of this year have increased 47 percent
over the year-ago figure, to $6.8 billion lowering the
bilateral trade deficit to
$3.4 billion, or only about half of last year's
amount.
u.s.
2
--------_.
_. _--crisis ends short of war with an agreement,
the question is usually pertinent: who won
and who lost?
3. On dumping, nothing new. An American
"trigger price" system for steel products, in
particular, remains in effect, and may be a
basis for future extension to other imports.
The U.S. continues to consider consolidation of responsibility for enforcing antidumping and similar "fair trade" legislation
under the Department of Commerce, the
most protectionist and least consumeroriented of the agencies now sharing this
responsibility.
As between the U.S. and japan, the "bottom
line" seems to be the bilateral trade balances between the two countries, despite all
economics-textbook assurancesabout the
unimportance of bilateral balances. In the
U.S.-Japanesecase, the positive balance has
not only swung since 1965 from the U.S. to
Japan, but it has become the largest such
balance in the entire history of international
economic relations. It is afready falling;
these agreements will lower it further.
Insofar as this reduction was sought most
deliberately and vociferously in the U.s., the
American side may be said to have won. It
does not, however, follow that the Japanese
side has lost. What-doth it profita nation,
after all, to pile up "international reserves"
indefinitely for the contemplation of God
and the jealousy of its trading partners?
4. On Japanesetax and financing policies,
no change.
5. On Japanese capital-control practices,
direct-investment rules have been liberalized. StiII, the terms of joint-venture agreements between japanese and American
companiesremain subject to ex post facto
renegotiations under "administrative guidance" from the japanese Government.
6. Again, no formal change in the activities
of the Japanese shosha. They may well have
promised informally to mend their ways, at
least in America.
As.between producer and consumer interests in each country, however, the case is
clear. Producers have retained their past
gains and consumers have failed to dislodge
them. Protectionist restrictions, even such
recent additions as the u.s. trigger-price
system, remain in place. Each country is
kept safe for its own oligopolies, cartels,
labor aristocracies, and farm blocs. Consumers may take what comfort they can in
possibly delaying the advance of new agreements at their expense.
7. It seems clear that the U.S. wi II not restrict exports to Japan arbitrarily, so long as
the shosha behave themselves. The japanese were, however, unable to change U.S.
policy on Alaskan oil and natural gas, which
(at least until now) may not be exported.
8. Neither the U.S. nor Japan is now using
the exchange rate as a weapon of trade war.
The exchange rate has been depoliticized,
and essentially is determined by private
markets. The exchange rate is not used as a
protection ist device, except in a modest way
when the shosha offset rate changes by
shifting trading margins. Today's "proper"
rates, incidentally, would have given the
Japanese apoplexy ten years ago. At this
writing, the dollar is fluctuating in the
15¥220 range; ten years ago it was fixed at a
¥360 rate which had held for 20 years.
Martin Bronfenbrenner
(The author, Professor of Economics at Duke
University, is Visiting Scholar at the Federal
Reserve Bank of San Francisco this semester.)
Who Won and Who Lost?
Whan a war ends with an armistice, or a
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollaramountsin millions)
Selected
AssetsandLiabilities
LargeCommercialBanks
• ppPAaN • o4 PPI
PUOZ!J\! • P>jsPIV
Amount
Outstanding
7/25/79
Change
from
7/18/79
Changefrom
yearago@
Dollar
Percent
+ 16,933
+ 15.10
+ 15,891
+ 17.53
+ 4,237
+ 15.63
+ 8,189
+ 26.62
NA
NA
NA
NA
Loans(gross,adjusted)
andinvestments*
129,036
185
Loans(gross,adjusted)
- total#
106,523
146
Commercialandindustrial
31,340
67
Realestate
38,949
95
Loansto individuals
21,821
115
Securities
loans
,1,707
49
U.s.Treasury
securities*
7,506
87
400
5.06
Othersecurities*
15,007
126
+ 1,442
+ 10.63
Demanddeposits- total#
41,830
- 1,624
+ 1,950
+ 4.89
Demanddeposits- adjusted
30,750
684
+ 1,073
+ 3.62
Savings
deposits- total
30,577
1
106
+
+ 0.35
Timedeposits- total#
50,743
834
+ 5,650
+ 12.53
Individuals,part.& corp.
42,106
635
+ 17.25
+ 6,196
(Largenegotiable
CD's)
17,921
771
742
+
+ 4.32
WeeklyAverages
Weekended
Weekended
Comparable
of Daily Figures
7/25/79
year-ago
period
7/18/79
MemberBankReserve
Position
Excess
Reserves
(+ )/Deficiency(- )
27
15
10
Borrowings
232
84
74
Netfreereserves
(+ )/Netborrowed
(-)
- 205
69
84
FederalFunds- Sevenlarge Banks
Netinterbanktransactions
+ 1,341
+ 1,634
3
+
[Purchases
(+ )/Sales
(-)]
Net,U.s.Securities
dealertransactions
587
113
+ 718
[Loans(+ )/Borrowings
(-)]
* Excludes
tradingaccountsecurities.
# Includesitemsnotshownseparately.
@ Historicaldataarenot strictlycomparable
dueto changes
in the reportingpanel;however,adjustments
havebeenappliedto 1978datato removeasmuchaspossibletheeffectsof thechanges
in coverage.
In
addition,for someitems,historicaldataarenotavailabledueto definitionalchanges.
Editorialcommentsmaybe addressed
to the editor(WilliamBurke)or to the author..•. Freecopiesof this
andotherFederalReserve
publicatiOns
canbeobtainedbycallingor writingthe PublicInformationSection,
FederalReserveBankof SanFrancisco,
P.O.Box7702,SanFrancisco
94120.Phone(415)544-2184
..
@FedFRASER