The Fallacy of ‘Managed Trade’ : Japan: The problem has little to do with whether their markets are closed, and much to do with our desire to buy their products.

Is it really true that America needs a crowbar to improve its trade balance with Japan? Or do the Japanese respond to the same economic incentives--price and quality--as our other trading partners? Be wary of those who argue that the United States needs one policy for Japan and another for the rest of the world.

Advocates of so-called managed trade argue that when it comes to importing foreign products, the Japanese are different and so need to be treated differently. One camp proposes that Washington tell Japan that it must increase imports of American manufactured goods by some percentage that we will specify each year. Another camp goes even further and wants Washington to negotiate specific increases for individual products.

Undoubtedly there is some popular support for this approach. But the managed-trade proponents haven’t explained how they would force the Japanese to comply. Nor have they suggested what the United States should do if the Japanese refuse. Are they ready to give up, on behalf of the American consumer, Japanese products like the cameras, cars and electronic gadgets that we all enjoy? Would American businesses be prepared to carry out a threat to give up Japanese machine tools and computers?

The claim that we need managed trade because Japanese imports do not respond to the value of the dollar is based on an erroneous interpretation of the facts of U.S.-Japan trade. Proponents of managed trade point out that our trade deficit with Japan remained undiminished after the dollar’s sharp fall from 1985 to 1987. And so, the argument goes, America can’t rely on exchange-rate adjustment to remedy the trade deficit with Japan.

The fact is that between 1986 and 1988, Japanese merchandise imports from the United States rose by 43%. For all other countries, the increase in merchandise imports from the United States was 44%, almost identical to the Japanese figure. And so far in 1989, U.S. exports to Japan have increased by a further 19%, while total exports to all other countries have increased by only 14%.

Although the U.S. trade deficit with Japan remained essentially undiminished between 1986 and 1988, the reason for the lack of improvement is to be found in the United States, not in Japan. Americans continue to be attracted by the high quality of Japanese products like cars and consumer electronics, even at higher prices than before. The Japanese now have the reputation for reliability that American products once had, and they can enjoy brand loyalty even at higher prices.

However, it is not to be overlooked that the price of Japanese products didn’t rise as much as the yen did between 1985 and 1987. The Japanese tend to price their exports in dollars rather than yen, while the European companies generally price in terms of their own currencies. That becomes significant when there is a change in the exchange rate. If the dollar falls relative to the German mark, a product priced in marks becomes more expensive. If it had been priced in dollars instead, the German seller would see his profits squeezed.

The continued rise of Japanese exports to the United States has nothing to do with whether Japanese markets are closed to American products. The two key facts are that imports to Japan rose rapidly when the dollar fell, and that the trade deficit persists because of Americans’ desire to buy Japanese products. Attempts to force Japan to increase imports from the United States would do nothing to deal with the real source of the persistent trade deficit.

Unfortunately, trade statistics are likely to worsen in coming months as the recent rise in the dollar finally shows up in declining exports and more rapidly increasing imports. This will inevitably lead to more calls for a tougher approach to Japan. We hope that the Bush Administration continues to adhere to its free trade instincts as Congress looks for easy solutions.