The trade relationship between the world's two largest
and most interdependent economies continues to be troublesome.
In 1993 the two sides agreed to start settling their differences
under the umbrella of the Framework Talks, which included trade
negotiations on automobiles, auto parts, flat glass, and insurance.
To that lot were recently added semiconductors, airplane landing
rights, and film. The basic US argument in all of these cases
is that Japan's markets are virtually closed to foreign products
due to government regulations, and non-tariff barriers such as
the keiretsu system. Japan's contention is that its market are
not closed and that the US industry's failure to penetrate them
is due to its inability to make or modify products to satisfy
the local consumer.
While Japan cannot deny that its industrial culture
is based on traditional values such as loyalty and consensus building,
the US, on the other hand, has a hard time adapting its products
to the ways of the world. An example of this are the discussions
on the automotive industry, which for three decades has been the
biggest bone of contention between the two partners. Following
the bitter discussions during the 1980s that culminated in "voluntary
export restraints"(VERs), Japan and the US finally agreed
on terminating the numerical restraints on the Japanese car makers
on August 23, 1995. In return, Japan is supposed to further open
its markets to American vehicles and increase the purchase of
American-made auto parts for its transplants and home plants.
The US is particularly sensitive to the sizable deficit
in auto trade with Japan. In 1995, the US had a $19.9 billion
deficit in vehicles and a $13 billion deficit in auto parts. Combined,
these figures make up more than 55 percent of the total US trade
deficit with Japan. It is not, then, too surprising that the US
tried to first limit Japanese imports of both cars and parts and
then increase its own share of the Japanese market. Voluntary
export restraints were a way to achieve the first objective. However,
the Japanese car makers quickly circumvented that problem by opening
plants in the US and achieving the same sale results. This trend
continues today. Since 1992, direct imports from Japan fell 21
percent while production of Japanese vehicles in the US grew by
36 percent.
The next US complaint concerned auto parts. The Big
Three auto makers claimed that most Japanese transplants were
following the supplier-OEM scheme from home, obtaining their parts
from their long-established suppliers in Japan. In that sense,
Americans claimed, the Japanese never abandoned their keiretsu
system of closely co-related industries based on loyalty and closed
doors to the outsiders. In response, the Japanese claimed that
American auto parts were never up to par with Japanese parts and
were for that sole reason uncompetitive in the Japanese market.
The same went, Japan claimed, for American automobiles.
The most popular vehicles in Japan are in the "small"
vehicle category with engine capacity between 661-2,000 cc. In
addition, all vehicles are right-hand drive. Most American-made
cars are above the 2,000 cc category and hence desired by very
few who can afford them. Moreover, save for Chrysler's Jeep Cherokee,
Ford Mondeo, and Probe and GM's Cavalier, there are no American
vehicles with right-hand drive. Most of the American models going
to Japan will have a right hand drive beginning this year. Compared
to that, Europeans have over 100 car models already with right
hand drive on the Japanese market. The Big Three have no models
under 2,000 cc and only nine vehicles in the 2,000-3,000 cc category.
In comparison, the Europeans have 127 models in the 2,000 cc range,
and 120 vehicles in the 2,000 - 3,000 cc.
In 1995 the Japanese import market for automobiles
was 10.2 percent of the total car market, compared to 8.1 percent
the year before. While the European car makers controlled 5.4
percent of that share, the Big Three ware barely above 1 percent.
However, that picture is changing for the better. Since the signing
of the Auto Agreement in August 1995, the Big Three's sales in
Japan have grown 33 percent. General Motors had a 43.3 percent
increase in sales between July of this and last year. BMW, Volkswagen,
and Daimler-Benz followed with 30.4, 22.4, and 6.6 percent, respectively.
Among the European manufacturers, Volkswagen's total share of
the market is the largest, due mainly to its propensity to make
smaller vehicles that are priced right for the Japanese.
Another major thorn in the American side is the limited
access to the Japanese dealer network. Although the Japanese government
claims that 67 percent of dealers that are members of the Japanese
Dealers Association already sell foreign cars, European newcomers
to the market have found it more effective to open and operate
their own network of dealerships. According to the analysts of
the Japan Automobile Importers Association, lower prices, stylish
compact cars, and better loan rates from foreign dealerships is
what made foreign cars more attractive to Japanese consumers this
year.
However, since the dealership network still favors
domestic vehicles, the Ministry of International Trade and Industry
(MITI) had to issue a statement to 2,000 dealerships last year
encouraging them to sell foreign cars. Clearly, the closely tied
keiretsu network between manufacturers and suppliers will continue
to hamper US access to the market. On the other hand, the US will
have to continue adapting its products and opening its own dealerships
in Japan if it wants to further explore the little window of opportunity
that has presented itself since last August.
One area where both partners will be making progress
is in auto parts bought by Japanese transplants. As more Japanese
companies locate in the Midwestern and South-eastern regions of
the US, their suppliers will tend to become local American companies.
Currently, Japanese vehicle manufacturers procure up to 70 percent
of auto parts externally. True, many of these parts come from
long-established suppliers in Japan over whom the manufacturers
have some kind of control. However, this picture is likely to
change in the future as only those Japanese parts suppliers large
enough will be able to follow their transplanted OEMs to the US.
According to MITI, direct imports of American-made auto parts
into Japan increased from $400 million in 1986 to $3.4 billion
in 1994
Two most recent trade issues that have caused a row
between the US and Japan are insurance and semiconductors. Back
on July 31,1986 the two partners signed the Semiconductor Agreement
stating that the foreign share of the Japanese microchip market
would be 20 percent. Since that time, the foreign share (mostly
American) rose well above that mark, reaching 30.2 percent in
1995. The US alone sold $8 billion worth of chips in Japan last
year. Nevertheless, the Clinton administration insisted earlier
this year that the agreement be renewed with its original terms.
Having done away with most numerical targets through the Framework
Talks, Japan refused to continue the agreement and won in the
end. Many analysts on both sides of the Pacific agreed that continuing
the 20 percent requirement was unnecessary as the American share
was well established and only poised to grow from there. The US
semiconductor industry is one of the most competitive, high-tech,
profitable industries in the US and world alike, and protecting
it seems like a waste of taxpayers' money. The only obvious reason
for this, according to the Investor's Business Daily, is
that President Clinton needs California electoral votes and Silicon
Valley's campaign cash this year. In other words, it seems that
the expiration of the Semiconductor Agreement hurt only the Clinton
administration. Another setback has been the agreement to let
the private sector, namely the US Semiconductor Industry Association
and Electronics Industry Association of Japan, jointly monitor
the market developments, including market size, growth, and share.
In time, this bilateral body, named the Semiconductor Council,
will become a multilateral body for all countries that agree to
slash tariffs on semiconductors.
Unlike the chip industry where the US market share
is ascertained, insurance remains an uphill battle. The potentially
huge Japanese market is currently only open to a small niche of
products such as accident and health products that make up less
than 4 percent of the total market (the so-called third sector
market). The Office of the US Trade Representative (USTR), led
by Charlene Barshefsky and Ira Shapiro is negotiating for the
opening of the primary/casualty markets. At the time of this writing,
no results have been reported as the self-imposed settlement deadline
has passed by. In the meantime, Japanese regulators have decided
to liberalize the third sector market to allow domestic firms
to compete in it, further jeopardizing the foreign share. The
insurance industry access and related issues are supposed to be
settled in September this year.
And finally, the issue that has the same potential
for being explosive as the automobiles is the Kodak-Fuji fight
over access to the Japanese retail chain. Last year Eastman Kodak
lodged a complaint with the USTR against Fuji and distribution
practices of its photographic film. In turn, USTR is bringing
the issue up with the World Trade Organization (WTO), requesting
an independent investigation of the Japanese retail sector and
an overhaul of the 1970 Japan retail law that limited expansion
of large retail chains. In addition, the US government is asking
the Japan Fair Trade Commission to investigate Fuji Film's close
financial relationship with Japan's four largest distributors.
The heart of Kodak's complaint revolved around a claim that Fuji
controls the 280,000 retail stores in Japan through the four large
wholesalers (tokuyakuten). The only location where Kodak, Agfa,
and other film makers compete with Fuji is in Tokyo.
The Journal of Commerce recently conducted
a survey of Japanese retailers to determine the facts about the
Japanese retail system. The publication interviewed retail outfits
in rail and subway stations and towns well outside Tokyo. According
to the findings, the reason for Kodak's failure to sell products
is twofold. One, several retailers have remarked that there is
no demand for Kodak products. Some of them carried Kodak products
for a while in the past, but the demand was insignificant. The
second reason has to do with Kodak's sales service. Some retailers
have mentioned that Kodak sales representatives never came to
visit.
Determining the truth and Fuji's alleged indirect
control over the retail distribution chain in Japan will be difficult,
especially when one considers that it will be done by the WTO,
a world-wide body. Even if Fuji is found guilty, is Japan going
to change its laws to suit the world? How far is Japan willing
to go to change its system that is based on loyalty and consensus
building? Is the price eventually going to force Japanese consumers
to abandon brand loyalty, as evidenced in the US? In order to
answer these questions, the Japanese consumer will have to presented
with much more choice, both in terms of quality and price, it
seems.
As for the US and Japan, the gradual transformation of the World Trade Organization from a weak giant into a streamlined authority wielding body, will hopefully be a way to settle their disputes in a more civilized manner than threatening sanctions on each other.