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U.S.-JAPAN RELATIONS: GOOD TERRIBLE? EdwardJ. Lincoln Ec economic ties between the United States and Japan are strong, healthy, and continuing to grow. How can such a statement bejustified? The past two years have been a nadir in postwar bilateral economic relations. Complaints, insults, threats, and moves toward protectionism have been hurled back and forth across the Pacific. How can we have good terrible relations? This oxymoron is a valid characterization, I believe, on the grounds that economic activity and economic relations are rather separate and that developments in one do not necessarily affect the other. People tend to be very careless or loose in defining economic relations. The purpose here is to point out that items often grouped together under the rubric of economic relations are not necessarily closely related. Economic activity consists of the actual bilateral commercial transactions: merchandise trade, services trade (e.g., shipping, travel, banking, consulting, and receipt of income from investment and licensing activity), direct investment activity, technology transfer agreements, other licensing agreements, portfolio investment, and foreign exchange market activity. Economic relations include the creation of an institutional framework by the government within which commercial activity occurs; commercial crossnational cooperation and conflict within this«framework; commercial and government efforts to alter this framework (of their own country or of other countries) through negotiation and Edward J. Lincoln is executive vice-president of the Japan Economic Institute in Washington, D.C, where he directs the institute's economic research activities and writes extensively on various aspects of U.S.-Japan economic relations. Dr. Lincoln is a professorial lecturer at the School of Advanced International Studies. 31 32 SAIS REVIEW pressure; press coverage of all three of these areas and general public reactions. This dichotomy—economic activity/economic relations—is rarely made. Yet I believe the distinction is important and useful because it focuses attention on (1) the extent to which one area affects the other, and (2) the mechanisms by which the effects are transmitted. Economists are trained to deal primarily with the theory and analysis of economic activity, but sometimes they miss the significance of problems in economic relations. Political scientists are trained to analyze economic relations, yet they have little training on how the economic system works. Each field has been venturing outside its traditional area of expertise in attempts to deal with the problems of bilateral relations, but not always with great success. This dichotomy raises a number of questions about the bilateral relationship. How does healthy bilateral economic activity become transformed into unhealthy and tense economic relations? Should we worry about the shouting if the fundamental economic foundation is as sound as claimed here? Can anything be done to improve the tone of relations? These are serious questions, and many close observers of U.S.-Japan relations in Washington have expressed deep concern over the future. My own conclusion is that a certain amount of tension is unavoidable given the differences in societies and institutions, plus corporations' penchant to use national boundaries as a convenient excuse to alter the conditions for competition. The best we can do is to understand the economic developments and, on that basis, keep the tension in perspective ; in contrast to popular Japanese belief, elimination of "misunderstanding " will not make the problems go away. Japan and the United States have legitimate complaints about each other, but it would be foolish to permit these problems to jeopardize our basically healthy economic ties. Economics offers certain standards for evaluating commercial activity . Starting from a set of rather simple assumptions, economic models portray conditions leading to efficient allocations of productive resources (in the sense of maximizing production given societal demands). Economics also provides a simple, but very useful, accounting framework for arranging the multiplicity of international transactions that result from commercial activity. Economic models are certainly imperfect and even crude abstractions of the world, but they do provide a basis for evaluating the efficiency of bilateral activity. The one controversial area at the moment is the dynamics of exchange-rate movements, which leaves room U.S.-JAPAN RELATIONS 33 for some reasonable doubts about the efficiency of current exchangemarket mechanisms. One ofthe few propositions on which virtually all economists agree...


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