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April 8, 1983
U.S.-Japan
Trade
Recently, Prime Minister Yasuhiro
Nakasone of Japan visited the United States
to confer with President Reagan on outstanding issuesdividing the two nations.
Coming within two months of his taking
office, the visit demonstrated the
importance Mr. Nakasone attached to their
resolution. Chief among the issueswas that
of U.S.-Japan trade.
The discussion on this issue has at times
been acrimonious. There is a strong tendency in the United Statesto blame rising
imports, especially those from Japan, for
a good share of the business slump and
unemployment in this country. Reported
difficulties faced by u.s. exporters in
penetrating Japanese import barriers have
reinforced resentments. Legislation now
pending in Congress calls for imposing
restrictions on Japaneseimports unless
Japan agrees to remove its barriers against
U.S. exports. On the Japaneseside, there is
an equally strong sense of outrage directed
againstthe U.S. criticisms. The Japanesefeel
that they are being unfairly castigated for
their superior economic performance in
macroeconomic management, product
quality, production efficiency, marketing
and management expertise.
When emotions run high, issuestend to
become distorted and obscured. There is
danger that amidst charges and countercharges the two sides might talk past each
other and take rash actions to the detriment
of both economies. There·is, therefore, a
need to sort through the issuesand examine
pertinent facts before attempting to assess
the opposing views.
Trade developments
U.s.-Japan trade should be considered inthe
overall context of U.S. irade with the rest
of the world. As shown in the chart, u.s.
foreign trade during the last eighteen years
can be divided into three periods of six years
each. During the first six years, 1965-70, we
had an average overall trade surplus of $3.7
billion per year. In the same period, our
bilateral trade with Japan showed a recurring deficit averaging $0.8 billion a year.
During the second six-year period, 1971 ,76,
our overall trade balance swung between
surpluses and deficits but averaged an
overall deficit of about $0.8 billion a year.
Our bilateral trade deficit with Japan in that
period widened to an annual average of
$3.0 billion. During the most recent six
years, 1 977"82, our overall trade deficit
leaped to an annual averageof $26 billion,
while our bilateral trade deficit with Japan
increased to $12 billion a year.
These observations suggest two characteristics of U.s. foreign trade over the past
18 years. First, over the firsttwo-thirds of the
period, from 1 965 to 1976, there existed a
pattern of triangular trade. That is, our
persistent annual bilateral trade deficits with
Japanwere more than offset, or were largely
offset, by our surpluses with the rest of the
world. As long as this continued, bilateral
trade deficits caused little concern.
Second, the pattern of triangu lar trade
disappeared in the late 1970s and early
1980s. Implicit in the data of the past six
years is that one leg of the tripod-our
surplus with the rest of the world outside
Japan-collapsed. We have thus had trade
deficits with both Japan and the rest of the
world. Indeed, the data also imply that
between the 1 971 -76 and the 1977-82
periods, the deterioration of our trade
balance with the rest of the world ($16
billion a year) greatly overshadowed that
with Japan ($9 billion a year).
§:§
Japaneseviews
The Japaneseclaim that their success is due
to their superior economic performance on
both macr()- and micro-levels. We examine
the facts underlying the claims in three
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Opinions
in this newsletter do no!
necessarily reflect the vie\.\':. (If the manZtgc'n'icnl
of
Federal ReserVl' Bank or San Francisco,
or of the Board of C;overnor i ; of trw "Federal
-20
Reserve Sv:::.tern.
-30
sive" depreciation of the yen against the
dollar has shut many u.s. products out of the
Japanese market and helped the Japanese
products flood the U.S. market. The
Japanese contend that the yen depreciation
was the result of tight monetary policy in the
United States. They blame the policy for
driving U.s. interest rates up in comparison
to Japanese interest rates and, thus, for
causing a capital outflow from Japan. The
yen depreciation, from this view, was
brought about by u.s. economic policy.
areas: unit labor cost, exchange rate, and
macro-demand management.
Unit laborcost. Comparing the changes
between 1 976 and 1981 in wage rates, labor
productivity, and unit labor cost (labor cost
per unit of output) in domestic currencies as
well as U.S. dollars in the two countries
yields several conclusions. Over this fiveyear period, U.s. wage rates rose nearly 60
percent while labor productivity made only
small gains. As a result, U.s. unit labor cost
increased by about 50 percent. In Japan,
because the increase in laborproductivity
kept pace with the rise in wages (both risi ng
about 40 percent), unit labor costs remained
nearlv constant.
However powerful the effects of yen depreciation in the short-run, it accounts for little
of the large shift in the trade balance since
1 975. The U.S. deficit with Japan rose from
$1 .5 billion in the mid-1 970s to about $18
billion in 1 981 -82 (see Chart). During that
time, the yen appreciated by 30 percent. The
long-run deterioration of the U.S. trade
balance with Japan must, therefore, be
explained primarily by factors other than the
exchange rate.
The reldtive changes in unit labor costs in
the two countries probably contributed
significantly to the deterioration in the
U.S.-Japan bilateral trade balance which, in
turn, might accountat least in partforthe 33
percent rise in the dollar value of the
Japanese yen between 1 976 and 1 981 .
However, the yen appreciation in the intervening years was not large enough to offset
the relative change in unit labor costs. In
1 981 , the Japanese industries still had a
considerable cost advantage over their U.s.
counterparts compared to their respective
positions in 1 976.
Aggregate demandmanagement. The Japanese argue that one such factor has been
aggregate demand management in terms of
the rate of spending growth in each country.
During the decade prior to 1 975, the
average annual rate of spending growth
(measured by nominal GN P growth) of 1 6
percent in Japan was double that of 8
percent in the United States, Since then,
specifically from 1 975 to 1 981 , Japan
drastically cut back spending growth to 9
percent a year to restrain inflation. In the
United States, spending growth speeded up
to 11 percent a year. The relative shift in
demand-management policy is, therefore,
claimed as a main cause for the very large
shift in the two countries' reciprocal
demands for each other's products.
Exchangerates.In recent years, the yen has
depreciated sharply against the dollar. From
203 yens per dollar atthe end of 1 980, the
yen depreciated by 27 percent to 277 yens
per dollar at the end of October 1 982. The
sharp yen depreciation gave a substantial
competitive edge to Japanese exports in the
u.s. market because Japanese export prices
rose only 12 percent in the meantime. While
this increase exceeded the U.S. export-price
increase of 4 percent, it still meant a very
large improvement in the price competitiveness of Japanese exports against U.s.
exports.
U.S. views
Except for exchange-rate effects, the U.s.
side of the discussion does not directly
dispute these Japanese views. It rather
concentrates on blaming Japanese non-tariff
trade barriers to U.s. exports.
Based on the recent decline of the yen, U.S.
producers have complained thatthe "exces2
U.S. TRADE BALAN CE
1977-1982
Average Overall Balance
- $26.3 bUlIon
1965·1970
1971-1976
Average Overall Balance
Average Overall Balance
+ $3.7 bUlIon
- SO.8billion
Average Bilateral Balance
Averago Bilateral Balance
-$3.0 billion
- $0.8 bUlian
Japan
II
Overall
0
companies, and distribution is effected
through a tight-knit network of wholesalers
and retailers. U.s. exporters complain that
because of the traditional "buy-Japanese"
sentiment in the group, it has been very
difficu It to penetrate the market even when
U.S. products are better and less expensive.
For example, U.S. tobacco exports to Japan
are hampered by the fact that distribution of
tobacco products in Japan is in the hands of
an official monopoly that prices foreign
cigarettes at least 50% higher than comparable local brands. This limits American
cigarettes to no more than one percent of
Japan's $10 billion market.
Import quotas. Japan maintains import
quotas on 27 items, of which 22 are agricultural products and five industrial products.
Among these, the United States has been
pressing particularly hard for the removal of
the quotas on beef, oranges, and orange and
grapefruit juices, all of which offer substantial sales opportunities in the Japanese
market. However, protracted negotiations
have brought about only some liberalization
of the quotas, nottheir total repeal.
Customs procedures. U.S. exporters claim to
be frustrated by Japanese customs' arbitrary
valuation and examination procedures. For
instance, Japanese customs do not have the
same provisions as U.S. customs for classifying a product on the basis of prior sample
approvals that cover all future shipments
from the same producers. A U.S. exporter
cannot be sure of how a product will be
classified and valued by the Japanese
customs inspector until the shipment arrives
in Japan. Moreover, the inspectors have
wide leeway in determining values and the
extent of physical inspection. Until recently,
there have been few avenues for appealing
the inspectors' decisions.
In response to U.s. political pressures, the
Japanese Government has over the last two
and a half years made a number of policy
changes to mollify U.S. complaints. A Trade
Ombudsman's Office has been set up to
hear cases of alleged unfair practices;
foreign test results for medicine and
cosmetics are now accepted; customs
valuation and inspection procedures have
been simplified and standardized. In March,
legislation was proposed to amend laws on
standards and certification procedures that
discriminate against imports. But although
some strides have been made in reducing
sources of friction, there still exists widespread feel i ng among U.S. exporters and
government officials that much remains to
be done.
Testing standards. In order for a product to
be marketed in Japan, it must first be subject
to Japanese testing to ensure its compliance
to Japanese standards. One difficulty this
presents is that Japanese standards are
written in terms of design criteria rather than
performance criteria. For instance, the standard for plywood specifies how pi ies shou Id
be assembled and bonded rather than how
the plywood should perform in use. U.s.
plywood shipments have been rejected
because knots were too large even though
there was no evidence that knot size affects
strength and durability. On pharmaceutical
products, Japanese authorities until recently
accepted no foreign test results and required
all such products to be clinically tested in
Japan on the grounds that the Japanese are
physically and metabolically different from
foreigners.
Conclusion
The Japanese are correct in stating that the
large trade imbalances between the two
nations are primarily due to basic economic
factors rather than any existing trade
barriers. At the same time, the U.s. is
justified in pointing to the many overt or
informal barriers to imports in Japan.
Bilateral discussions have yielded significant progress in reducing sources of conflict.
Their continuance provides grounds for
hope that actual and threatened trade
barriers will give v-iay to mutually beneficial
expansion of trade between the two nations.
Mary Ellen Burton-Christie
Distribution channels. Imports into Japan
are dominated by large Japanese trading
and Hang-Sheng Cheng
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amountsin millions)
SelectedAssetsand Liabilities
large CommercialBanks
Loans(gross,adjusted)and investments'"
loans (gross,adjusted)- total#
Commercialand industrial
Realestate
Loans to individuals
Securitiesloans
U.S. Treasury securities"
Other securities'"
Demanddeposits- lolal#
Demanddeposits- adjusted
Savingsdeposits- total
Time deposits- lolal#
Individuals, part. & corp.
(Large negotiable CD's)
Weekly Averages
of Oailv Fil!.ures
Amount
Outstanding
3/23/83
162,715
141,660
45,066
57,235
23,403
1,892
8,096
12,958
38,412
27,124
65,086
68,271
60,730
21,549
Weekended
Change
from
3/16/83
-1,074
-1,048
- 443
10
14
_. 696
21
47
-2,402
- 407
84
- 219
20
- 166
-
-
Weekended
3/23/83
3/16/83
107
31
76
47
43
4
Changeirom
year ago
Dollar
Percent
4,639
2.9
4,999
3.7
2,874
6,8
0.6
350
271
1.2
1.7
31
1,798
28,6
- 14.3
2,158
1,056
2.8
705
2.7
34,387
112,0
23,606
- 25.7
21,729
- 26,4
13,384
- 38.3
Comparable
year-ago period
Member Bank Reserve Position
Excess Reserves (+ )/Oeficiency (-)
Borrowings
Net free reserves (+ )/Net borrowed( -)
:I<
69
11
58
Excludes trading account securities.
# Includes items not shown separately.
Editorial comments may be addressedto the editor (Gregory Tong) or to the author . ... Free copies of
this and other Federal Reservepublications can be obtained by calling or writing the Public Information Section, Federal ReserveBank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone
(415) 974-2246.
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