Japanese numbers game may end in trader tears

OVER the next six months Japan's soaring global surplus is likely to be one of the most contentious issues dividing members of the United States Congress. Activists led by Richard Gephardt, the House majority leader, are considering new legislation designed to produce specific, quantifiable results in opening Japan's closed markets.

Moderates and passionate free- traders are fighting these efforts, claiming that such ground-breaking US legislation will ignite a global 'managed trade' movement. Nations will bombard each other with bilateral quotas, import and export restraints and restrictive tariffs, all in the name of market opening. What began in the US-Japan context could quickly spread to Europe, other nations in Asia and the Third World.

President Clinton made it quite clear during the recent tense negotiations in Tokyo that he is impatient for market-opening results. In going over the heads of officials to speak directly to the Japanese people he also signalled that such results would be expected from whoever is elected, the business-as-usual Liberal Democratic Party or a new generation of reformers.

The deal he negotiated with the Japanese Prime Minister, Kiichi Miyazawa, which has since been recast and repudiated by bureaucrats in both governments, gives US negotiators wide latitude to achieve these aims. European officials also have targeted reduction of Japan's surplus as a policy priority. The trick will be in the doing.

That Japan's global current account surplus, projected at dollars 150bn ( pounds 100bn) for 1993, is a growing problem is not in question. The grim prospect of other nations being denied economic prosperity because of Japan's strength will not long be tolerated.

Such a surplus in a world of slow economic growth in effect exports unemployment to other countries, particularly when it results in large part, as is now the case, from the stagnation of domestic demand in Japan. In short, Japan's export juggernaut continues while imports have plummeted in response to weak consumer and business purchases.

It is easy to understand why other nations are losing patience in their trade negotiations with Japan. Each year the contrast grows sharper between Japan's extraordinary success in other markets and the inability of foreign producers to penetrate its markets. There is a very good case to be made that Japan is indeed 'different' - an exclusionary, highly interventionist economy that does not welcome outsiders.

However, this image obscures the fact that Japan has been changing rapidly and is likely to continue to move in the direction of the more traditional, market-based economies. It could be counterproductive now to target bilateral trade imbalances with Japan, or for governments to gang up against specific Japanese sectors by imposing restrictive quotas and other trade restraints, a model for which are the restraints on Japanese car imports in the US and Europe.

It would be far better to work at the macro-economic level to reduce the huge imbalances and to continue the current multilateral efforts to persuade Japan itself to do the right things. There should be continued international pressure on Japan to open its markets and to adopt expansionary fiscal measures at home that will reduce the surplus. Results are coming through, albeit slowly.

However, the US and other governments are moving in another philosophical direction. By stepping up what is in effect the management of trade, through demanding extra market share for their exports, they are claiming to avoid the more restrictive and traditional protectionist policies. Thus the pursuit of voluntary import expansion targets (VIEs), or outright quotas for foreign penetration, is on the rise. The semiconductor agreement between the US and Japan, which negotiated a 20 per cent market share for US firms, is a case in point. Many cite it as a successful blueprint that should be followed in other agreements.

But last week, one of its chief architects disagreed. Carla Hills, the US trade representative under George Bush, said in testimony to Congress that the numerical target actually tied her hands in seeking even greater market penetration. Why only 20 per cent when US producers might have been able to garner 30 per cent or more?

The point that Ms Hills was making is that market-opening measures are fine but that numerical targets are not, as they have the effect of actually restricting potential market share. She thus argued firmly against more semiconductor-like agreements.

History tells us that governments have a poor record of managing and targeting industries and market share. The practical problems are immense; bureaucrats tend to shoot either too high or too low in their targeting, with little ability to control either success or failure.

Political capture of such measures by powerful special interests is another big problem. For Congress to legislate such quantifiable measures is to step out on new and dangerous terrain. The administration has enough authority to achieve its goals. A strengthened yen has reduced and will reduce trade surpluses, suggesting that Plaza-like exchange rate accords are among the very best ways of tackling the Japanese problem.