Both sides must now go back to the drawing-board, and the re-make could be explosive. Prior to the fall of Kiichi Miyazawa's government, the Clinton administration had a definite plan of attack, which was designed to win big political points at home. Japan, as the image-conscious host of the G7 summit, was seen as vulnerable to foreign pressure. This the US hoped to exploit to gain concessions on the stalled Uruguay Round of Gatt talks, and to negotiate the toughest bilateral trade demands in decades.
The Clinton administration was pushing for comprehensive, sector-specific market-opening measures, designed to show real progress in reducing the huge dollars 40bn to dollars 50bn trade deficit with Japan. Mr Miyazawa was familiar with this form of US pressure and had been likely to use it as an excuse to make big concessions. Mr Kantor would have helped the process along by preparing tough trade sanctions with the aim of opening specific sectors, the first being Japan's closed construction market. This was the US plan. But how could it shoot at a lame duck?
Roger Altman, the deputy Treasury Secretary, was the first to admit publicly that the relationship had been dramatically altered. He said last week that it was now doubtful that the US would be able to negotiate a good trade deal with Japan. The betting in Washington is that the new government will be a compromise and thus fairly weak. This could work to the US disadvantage, especially if the Japanese press and public continue to object to what are seen as US bullying techniques.
US negotiators indicate that they have now scaled back their bilateral demands and are pinning their hopes on previously approved plans by the ruling Liberal Democratic Party to open parts of Japan's closed financial services market, including management of pension funds, where the US has a considerable advantage.
What is slowly dawning on both governments is that their predictable and close post-Second World War relationship must be rewritten as these two economic superpowers move towards the 21st century. Each pursued fundamentally different goals after the war, with the US intent on creating the greatest consumer society and Japan on building a production machine that would restore its economic security. Not quite 50 years later, they find themselves on a collision course.
The response of the Clinton administration has been to use mainly a big-stick approach as it seeks clear commitments and quantitative targets to measure Japan's progress in opening its markets. Japanese officials have denounced this approach as the worst form of managed trade, which could result in the carving up of market share by two huge economic powers. The sector-specific approach, however, is gaining ground in Europe and other Asian countries as well. Japanese car exports are a favourite target.
On the other side, US negotiators contend that their Semiconductor Trade Agreement with Japan resulted in a near-doubling of US exports and of sales in Japan by US-based firms. The agreement was for an overall 20 per cent US share of the Japanese semiconductor market. Now, there is growing pressure in the US for the Clinton administration to do more, in mainframe computers, fibre optics, beef, cigarettes, and other specific markets. These demands have grown in response to a plethora of new studies, which estimate that Japan's market access barriers are limiting US exports by dollars 10bn to dollars 20bn annually.
The problem with sector-specific measures aimed at reducing bilateral trade imbalances is that they do amount to the carving up of markets at the expense of others. In response to these concerns, influential US officials want to revive the 1989-90 Structural Impediments Initiative (SII) talks with Japan. These were designed to resolve bilateral problems that arose from basic differences in the two systems. The new emphasis would not be on eliminating differences but on working toward convergence in the areas of antitrust policy, higher education, national saving, worker empowerment, market access, foreign direct investment and export promotion. The problem with these more grandiose schemes is that they can result in years of talk with little to show for it. In addition, key issues such as market access should be negotiated in a multilateral framework.
Japan's recent political upheaval has brought several issues into focus. First and foremost, it sends a strong message to the US to shelve its Big Brother stance on tactics, which assumes that Japan will always be willing to go along. This is not likely to be the case in future on economic and security issues. The US must develop a more comprehensive policy. Secondly, it becomes clear that Japan must take strong steps to reduce its global trade surplus in the interest of the world economy. Finally, if one of the key issues of the 1990s is resolving how competing forms of market economy can live together, then the US and Europe must work with Asian countries to develop better models.Reuse content