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Off-Center: Where Does Japan Fit in Current U.S. Economic Policy and Politics?

By Russell L. Smith, Willkie Farr & Gallagher

Nine years ago this month, the newly installed Clinton Administration launched an all-out offensive to "open" the allegedly "closed" Japanese auto and auto parts markets. For the next two years, Japan was a key focus of an aggressive and confrontational Clinton trade policy. This did not end with the signing of the 1995 U.S.-Japan Auto Agreement. On its heels, the U.S. took up Eastman Kodak’s claims about restricted market access in Japan. While the tone and content might have been new, the basic approach and political importance of these disputes was not. For the better part of two decades, the U.S.-Japan trade and economic relationship had been at the center of U.S. international economic policy, and therefore inevitably at the center of U.S. trade politics.

As Japan enters its second decade of economic difficulty, the view of many long-time analysts of the bilateral relationship is that the situation has changed, and possibly dramatically. This change has taken place gradually, but the results are both clear and potentially very meaningful. At its core, this view concludes that while Japan remains a major global economic actor, it represents neither a rival nor an economic "anchor" for the United States. The fact is that U.S.-Japan trade rivalries no longer dominate U.S. trade activity. Moreover, U.S. economic policymakers, while concerned about Japan’s economic situation, have also all but conceded they have little ability to change it. In short, there seems to be dwindling confidence in the effectiveness of gaiatsu, and therefore little interest in exerting strong external pressure for substantial changes in the Japanese economy.

From a political perspective, the diminished trade and economic focus on Japan has been a mixed blessing. Despite the tensions in the relationship, during the long period of Japanese economic growth at home and abroad, Japan commanded increasing respect in Washington political circles. Though politicians complained about Japanese market access, they also held up Japan’s industrial policies, manufacturing systems, government-industry cooperation, savings rate, productivity, and stability as traits to be emulated in the United States. Now both the complaints and the praise are faint.

These shifts in U.S. focus on Japan have complicated origins. In the U.S., Japan is perceived as suffering from a continuing, debilitating, and systemic economic weakness caused by a combination of over-regulation and lax financial oversight. Commentators offer the opinion that Japan’s post-war model of close government-industry cooperation, lifetime employment, equity cross-ownership, and industrial policy no longer works. They cite globalization, market opening, the Asian financial crisis, and, of course, over-borrowing and speculation grounded in an unrealistic real estate-led "bubble" as factors that rendered that model obsolete.

That condition has resulted in the current prolonged recession. However, the key to the current U.S. political perception of Japan is neither the recession itself nor the causes of it. Japan is no longer seen as a rival, a model, or a threat in many Washington circles because it has been unable to emerge from this condition. Thus, while there is always an underlying concern about economic "meltdown" in Japan, that concern is offset by an implicit consensus (at least in Washington) that the United States and other major economic powers will not allow Japan’s financial markets to collapse. Beyond that question, U.S. opinion leaders and decisionmakers see Japan as mired in its long-term problems--problems which only Japan can address.

If these key U.S. groups believe there is little or nothing that outside forces can do to change the situation, they will move on to other areas of concern. In the international economic and trade area, many have already done so. The key U.S. trade focus is now on disputes and opportunities in Europe and Latin America, and more particularly in China. Both the media and U.S. officials are devoting increasing attention to all aspects of the U.S.-China relationship. They are concerned about U.S.-China trade issues, China’s economic leadership, and potential dominance, in Asia, and the many ramifications of China’s membership in the World Trade Organization. China, they believe, presents problems and opportunities that can be strongly influenced by U.S. policy and political initiatives.

Is Washington entering a true era of "Japan passing?" Some would say this has already happened, and that it will be many years before either the positive or negative attention and deference Japan received in the past returns. Others would say the future prominence of Japan in U.S. economic and political policy has not been decided--that Japan’s strategic importance, the presence of major, "world-class" corporations, an emerging entrepreneurial class, and growing internal pressures for change all belie the notion of that Japan is not responding to its challenges. If, hopefully, the latter view better matches reality in Japan, the current shift in U.S. focus will be both momentary and immaterial.