February 9, 1994
"If a Precedent of Market Quotas is Established with Japan, It Will Surely Work Against U.S. Interests - In Other Cases Clinton Forgets About Free Trade"
San Jose Mercury News
By Timothy Taylor
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DESPITE OCCASIONAL hesitations, President Clinton has largely fought the good fight for free trade. But in the current negotiations with Japan, the Clinton administration seems eager to boldly go where protectionists have so often gone before -- to having government order the specific amounts to be exported and imported.

Japan's prime minister, Morihiro Hosokawa, is scheduled for a summit meeting with Bill Clinton on Friday. U.S. trade negotiators have been demanding that Japan guarantee to American producers a specific percentage share of Japan's markets for certain goods like autos and auto parts, telecommunications, financial services and medical equipment.

For a number of reasons, this demand is terribly misguided.

First, it undercuts the U.S. position in all other trade talks. How can America preach the virtues of free trade to Latin America, Europe and Russian reformers, and then turn around and demand a guaranteed market share from Japan?

If a precedent of market quotas is established here, it will surely work against U.S. interests in other cases. For example, what if the European Community says that European nations must have a guaranteed share of their own market, even if this inhibits U.S. exports? What principled response does the United States have if other countries demand a guaranteed share of long- protected U.S. markets, like agriculture or textiles?

Only two months ago, the Clinton administration was touting the virtues of its GATT agreement. If America doesn't like foreign trade practices in Japan or elsewhere, those talks offer mechanisms for complaining and being heard. Having government negotiators slice up the market is not the answer.

A second problem is that numerical market share targets will hinder Hosokawa's recent attempts to break the links between bureaucrats and industry and to open up Japan's political system. America's long-term interest is to nurture popular democracy in Japan.

Instead, required market shares will be defined, negotiated, and enforced by Japan's career government bureaucrats. In effect, they give American approval to the continued meddling of Japan's notoriously intransigent trade officials.

Third, cracking the Japanese market is less important than tackling the rest of Asia. According to International Monetary Fund figures, Japan produces 7.6 percent of the world economy. (By comparison, the U.S. produces 22.5 percent.) However, the developing countries of Asia -- China, Korea, Singapore, Taiwan and the rest -- produce 17.7 percent of the world economy, more than twice the size of Japan.

Moreover, while the Japanese economy has one foot in recession and the other foot on a banana peel, many other parts of Asia are growing explosively. This is the time for American firms to be setting up alliances with the Japanese to sell in the developing nations of Asia, not focusing on a fixed share of Japan's stagnant market.

Fourth, before alienating Japan with ill-considered trade demands, America should remember that Japan is our most powerful friend and ally in the flammable Far East. In North Korea, China, Taiwan, Japan and elsewhere, there are threats of nuclear proliferation and buildup of conventional weapons. Moreover, America wants Japan to help fund U.S. forces in hotspots all around the globe.

Finally, there are sound economic reasons why specific market share targets are unlikely to alter America's $55 billion trade deficit with Japan. The fact is that trade deficits reflect mainly macroeconomic factors, like how much a country consumes and saves, not barriers to trade.

The United States is a high consumption country; it consumes more than it produces, and imports the extra from abroad. Japan is a high savings country; it produces more than it consumes, and exports the surplus abroad. That's why America has a trade deficit, and Japan a surplus.

If the U.S. can reduce consumption by cutting its budget deficits, and Japan can increase consumption with a tax cut and a surge of public spending, then the trade deficit will diminish. But unless the fundamental consumption/ savings balance changes, tinkering with market share quotas will only favor certain industries at the expense of others, without really addressing the trade deficit at all.

It's perfectly sensible for Clinton's trade negotiators to pressure Japan to open up its markets, just as it is sensible to pressure all countries -- including the United States -- to open their markets and keep them open. But it is not sensible for the U.S. to demand that Japan's government guarantee to U.S. producers a certain percentage of Japan's markets.

Arguing for free trade one month and then for guaranteed market shares the next month makes U.S. trade negotiators look frivolous and silly. Demanding a measurable share of the Japanese market may sound tough, but it's the shallow, short-sighted toughness of an unreasoning bully.

A summit without a trade agreement would injure both Hosokawa and Clinton politically, so they will probably cobble something together. Before Clinton's trade negotiators insist too strongly that an agreement must include numerical export quotas, they should listen to some of the speeches their boss gave last fall, during the NAFTA and GATT talks, when he used to support free markets and free trade.

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