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Confronting Japan in the Post-Postwar Era


Scenes from a troubled relationship:

Scene I: The U.S. government said the other week that it will bar Japanese companies from bidding on federally financed construction projects to retaliate for Japan's refusal to open its markets. The Japanese government shot back that the Americans were breaking faith and that Japan would withdraw its special consideration for U.S. construction firms.

Scene II: General Electric recently learned a hard lesson about Japan's market after working for five years to increase sales of its world-leading magnetic resonance imaging (MRI) and CAT scanning equipment. GE provided superior service, met price competition and entertained customers lavishly in the Japanese manner. And it succeeded. Its subsidiary, Yokogawa Medical, now leads the market in MRI and is a strong No. 2 in CAT scanning to Toshiba, which has complained about the harsh competition.

But then something happened. The Japanese police raided Yokogawa and accused it of bribing medical school professors because the company had paid their air fares to medical conferences. Such payment is standard practice in Japan, but GE was singled out for action. Its real crime, say many people, including Japanese doctors and analysts, was upsetting a market-sharing system, and especially discomfiting Toshiba, a member of the powerful Mitsui keiretsu, or alliance group. In such alliances, companies are bound by cross share-ownership and purchasing arrangements to give priority to group members. Antitrust laws largely ended such arrangements among U.S. companies 80 years ago, but Japanese law and custom are very different.

Scene III: Masaru Yoshitomi, director of the Japanese government's Economic Research Center, suggested in a recent presentation at RAND Corp. in Santa Monica that American business practices often don't measure up. "Your large companies bring diseconomies of scale," said Yoshitomi, while Japan's keiretsu allow flexibility and long-range investment. And, he added, you Americans should not be closed to Japanese ideas or you risk fading competitively, as the Europeans faded before American prowess early in this century.

Clearly, more than a trade dispute is dividing Japan and the United States these days. The long postwar period in which America led and Japan followed is ending. And for the way ahead, the United States will have to rethink its policies.

It's a complex situation, not to be understood by criticizing Japan or praising it. Japanese companies don't use mirrors to continually turn out new and better products. They invest in technology and efficiency and so have trounced U.S. companies in older industries and are challenging them in the most advanced technologies.

But there's another side to it. Working from a home market restricted from imports and investment, Japan runs a trade surplus with every major trading bloc or nation. Yes, the U.S.-Japan trade deficit fell last year, to about $40 billion, but that was mostly because the U.S. economy was in recession. Significantly, auto parts imports increased because Japanese car makers continue supplying their U.S. plants from their keiretsu partners.

Japan practices something new in the world, called adversarial trade, writes Peter F. Drucker, in his book "The New Realities." Drucker, a longtime friend of Japan, explains that in adversarial trade, "It can no longer be assumed that competition is entirely beneficial. When the attacking country is still closed to imports--or at least severely restricts them--then the competitor under attack cannot effectively counterattack. It cannot win; it will at best not lose everything."

So what can be done? Face reality, advises a rising chorus of scholars and experts. Recognize that Japan is not going to become an open market and, in the short term, demand simple reciprocity: Import from Japan only as much as it buys from the United States.

But more important, come up with a policy to back U.S. technology. The Bush Administration recently responded to demands from U.S. business and trade experts by naming 22 technologies that it considers critical to economic prosperity and national security--a first step to increasing government funding. The list ranges from computing and electronics to biology, transportation, energy and pollution control.

But the Administration's commitment is suspect. Michael Boskin, the chief economic adviser, infuriated a meeting of business leaders last year by asking if it makes any difference "whether the United States makes semiconductor chips or potato chips?" Boskin's wisecrack reflected free-market thinking that distrusts government help for industry.

However, world markets aren't so free, and a nation's policies make a difference in opportunities for its people and wealth for its society. Potato chips don't lead anywhere beyond sour cream and onions, while semiconductor chips lead to supercomputers and spacecraft.

An earlier Republican administration, that of Abraham Lincoln, understood industrial policy. In 1862, Lincoln's Administration passed the Homestead Act, the Land Grant College Act and legislation for a transcontinental railroad, all of which helped build the U.S. economy and benefit its people. The nation could use such vision again.

The objective is not merely winning a contest, but for the United States to hold its own in a healthy competition with Japan. The U.S. and Japanese economies are now so large that they constitute 40% of the world's total annual output of goods and services. After four decades of an arms race with the Soviet Union, competition with Japan to advance technology could be a boon to human betterment. There are good reasons to get past the current troubles in the relationship.

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