The Japan Model and Trade Policy

Interview with Clyde Prestowitz
(Clyde Prestowitz is the author of a recently published book "Rogue Nation: American Unilateralism and the Failure of Good Intentions")

Q: Your latest book is on U.S. foreign policy, but you are known as a Japan expert. How do you feel about that categorization?

Prestowitz: I became known as a Japan expert partly because I was once the lead negotiator with Japan. Then I wrote "Trading Places." I lived in Japan in high school, but in the foreign service, I served in Rotterdam, the Hague and Brussels for 6 years. I was in Japan for four years. I have more ties to Europe and have traveled in Mexico, Brazil, Venezuela and Columbia. I feel frustrated when I am tagged as a Japan guy. I speak four European languages.

Q: Did you bypass Japan, as many Japan experts allegedly have done since the mid-90's?

Prestowitz: Japan has diminished in relative importance, but I did not bypass it. I have a report coming out on Japan in October, and did a book a few years back called "Asia After the Miracle" with a major chapter on Japan. I still go there a lot.

Q: Does the U.S. presently have a trade policy toward Japan?

Prestowitz: It is kind of laissez faire. And it depends on how you define it. We still negotiate with Japan on telecom and other issues, but it is less prominent. The Uruguay Round killed section 301. In negotiations before that, we said that if a trade partner did not open up, he got zapped by super 301. Now we are less able to engage in tough sectoral negotiations.

Q: It looks like many in Washington lost interest in trade.

Prestowitz: The U.S. economy started booming. Nobody is losing jobs to imports. The U.S. trade deficit has soared, but it didn't displace workers. Second, the U.S. bought into Rubin's strong dollar policy. That in a way is our trade policy, one that supports subsidized imports. If you acquiesce in market intervention that reduces artificially the value of the yen, won or whatever, then you acquiesce in subsidizing exports into your own market.

Q: How does this apply to China?

Prestowitz: The Chinese are maintaining the renminbi peg at an artificially low rate to stimulate exports. This helps to enhance the trade surplus with the U.S. The difference with Japan is that China is open to investment so products from China are produced by Americans or non-Chinese companies. We are subsidizing those companies.

Q: Is the trade deficit with China an issue in Washington?

Prestowitz: It is starting to get talked about a bit. But I seriously doubt if it will become an issue like with Japan. For one, Japan's exports to the U.S. resulted in job losses - Silicon Valley lost jobs as Japanese D-Rams gobbled up the market. Also, it was virtually impossible to sell or invest in Japan. The lack of reciprocity led to a sense of unfairness. The sense of perceived pain led to the policy response. Chinese exports to the U.S. are displacing the products of others - Mexicans, Canadians, Japanese, Koreans, but not Americans - because we stopped making the stuff. We got knocked out of it early. But China is open to investment.

Q: Do you think that culture is part of the explanation?

Prestowitz: Well, Japan has always been very homogenous, a very tightly organized society that rejects intrusion. They say the nail that sticks up gets hammered down - even the Japanese face that. There is enormous conformity. When Perry sailed into Tokyo Bay, prior to that Japan had been closed for 250 years. Perry showed up with superior technology. The Japanese could not resist frontally, so the whole point of the Meiji restoration was to use Western technology to keep the West out - Japanese spirit, Western technology. They have always had a very allergic reaction to outsiders.

Q: Is Japan more tribal than China?

Prestowitz: I don't agree that China is not tribal. My wife is Chinese-American, and she can get very Chinese (laughs). The Chinese are at a lower level of technological development, so they see investment as a way to raise their skill level quickly. They are more self-confident about their ability to control and absorb "barbarians."

Q: Has the revisionist view of Japan been defeated or become obsolete?

Prestowitz: No. Actually, my view is that revisionism is the conventional wisdom. The big debate in the '80's started with me as trade negotiator. The economic and political community in the U.S. and the Japanese themselves argued that they had a democratic and capitalist market economy. It had Japanese characteristics, but it was the same as the U.S. model and would respond the same way to the same stimuli.

Q: And you disagreed?

Prestowitz: What bugged me was the trade conflicts. If there was no systemic cause, then why were the conflicts so numerous? We said Japan was unfair. They insisted that the U.S. must try harder. It seemed to me that if we were right, there was an awful lot of unfairness in agriculture, auto parts and telecom. Yet I knew that we were working awful hard to enter the market.

Q: So you staked out your own position?

Prestowitz: I lived there, and worked in Japan. I saw that maybe it is a democracy, but not like what we see in Washington. Maybe it is a market economy, but not like ones that I usually dealt with. I saw systemic differences. Capitalism? How is it capitalism when three quarters of firms practise cross share holding to block out foreigners? Japan was playing football fair and square. Americans were swinging for the fences. The Japanese were wearing pads, and the Americans were getting beaten up. I realized that given the premises, we could not succeed - it was like Viet Nam. So you either stick with the failed theory, or you create new ones and policies to reflect the evidence.

Q: You had many supporters, but also many detractors.

Prestowitz: The Japanese rejected my ideas. Japan didn't want to make a big change in its trade policy. Economists didn't want to either. Under my theory, Japan couldn't be successful. That is when they started calling me a Japan basher.

Q: Is Japan's economy a form of crony capitalism?

Prestowitz: It is not crony capitalism, but the Japan model. It emphasizes government intervention and collusion between enterprises that exclude foreigners. Most reasonable foreigners would have to agree that is was not and is not similar to the U.S. system. So I was right on the analysis.

Q: But you predicted continued growth, whereas Japan stalled.

Prestowitz: Where I was wrong was in mistaking the bubble for long term, permanent strength.

Q: Did you support the Clinton-Kantor approach to Japan?

Prestowitz: It is probably not good to ask. I was involved. I have to say I was very disappointed. They adopted my ideas, but executed poorly. If I had been trade rep - my name was on the list - the problem was that we had guys...I am not trying to criticize any one person...If you want to deal with Japan properly, you need an analogous model in the U.S. like ATT. Before '84, it was a regulated monopoly. One scenario was post-'84 deregulation. Anyone could enter the telecom market and compete with ATT, but no one did because ATT could crush anyone. As a matter of industrial policy, we forced ATT to divest and compelled every American to make a choice on his long distance carrier. We didn't give market share like someone gets 6%, but we gave incentives to increase the market share of new entrants. We maintained results and changed the incentives when ATT was not losing share fast enough. We knew that new competition would get crushed if left to themselves.

Q: How does this relate to Japan?

Prestowitz: I thought that we should do the same with Japan by building in incentives for Japanese auto dealers to carry foreign brands. Over three years, we would get to a certain level. It felt that it was a fairly sophisticated approach.

Q: But you think that this was not the U.S.'s policy?

Prestowitz: This got transformed into crude market share targets that were easy to attack. I felt that if I could sit down with Japanese officials and talk open kimono, as they say, they could be persuaded that they have a stake in achieving more foreign participation in their economy. But we took the typical U.S. approach of pounding the table or threatening 301.

Q: Many Japan experts predicted that the Japanese middle class would exert naiatsu, or internal pressure, that would augment the U.S.'s gaiatsu, or external pressure. Why did the middle class fail to rally?

Prestowitz: They define what is good for them in a different way. Most Americans define what is good in a narrow material sense. They see it differently. But I felt somewhat disappointed by some of the Japanese reaction. I spent time there and studied Japanese. My youngest son is an adopted Japanese boy. It was mostly the stuff about me being a Japan basher - that hurt.

Q: After the Japanese backed their government, many Japan experts felt that predictions of Japan converging with the liberal West had failed. Do you agree?

Prestowitz: I have been through it. The older I get, the less I know. The older I get, the less certain I am. They have their reasons. It is very difficult for someone from outside the culture to totally grasp the psychology. It looks like they accept diktat. One answer is that they are sheep, shoganei. But another answer may be that they value harmony in a way that doesn't appear to us.

(Interviewed by Victor Fic. This article was contributed by the interviewer.)