Correspondence

CORRESPONDENCE A. Sabry El-Zawahry, editor U.S.-Japan Relations: A Fundamental Imbalance? To the Editor: Edward Lincoln's article on "U.S.-Japan Relations: Good Terrible?" (SAIS Review 4, Winter—Spring 1984) is a thoughtful and thought-provoking assessment of relations between the world's two leading economic powers. However, I believe he overstates the strength of bilateral economic activity and hence underestimates the potential for serious confrontation in bilateral economic relations. Mr. Lincoln asserts the United States and Japan have developed increasing economic links, making any breakdown in economic relations unthinkable. He cites the increasing flow of royalties from the U.S. to Japan ; growing capital outflows from Japan to the United States; and rising volumes of yen transactions. But do these changes really deepen the ties between the two countries in a manner that will prevent serious confrontations? From an American perspective, that is at best a questionable proposition. The increasing flow of technology fromJapan undermines a traditionally very favorable element of the U.S. balance with Japan. The increasing flow of capital includes a substantial volume of short-term investments that can quickly move in the other direction. And the increase in yen transactions is being overwhelmed by a yen/dollar exchange rate that is seriously eroding the competitiveness of U.S. industries. The massive and growing imbalance in bilateral merchandise trade is appropriately not mentioned as a source of deepening economic ties—yet it is a much more significant determinant of our economic relations than all of the other factors Mr. Lincoln identifies. It is not sufficient to explain from our economist's standpoint that the bilateral imbalance is meaningless or to try to rationalize whyJapan is entitled to have such a large merchandise trade surplus with the United States. Like it or not, that imbalance is a major determinant of economic relations and of domestic political perceptions that shape U.S. attitudes toward Japan. What Mr. Lincoln fails to address in his article is the fundamental imbalance in U.S. economic ties with Japan and what that means for the relationship. The U.S. pattern of trade with Japan does not create a strong political constituency for improving relations. As Bruce Scott of Harvard has pointed out in a recent analysis of U.S. competitiveness problems, trade is unique in the world in that Japan does not import goods that are major exports. Thus, the broad range of interests in the U.S. that are adversely affected by those exports have little or no stake in a reverse flow to Japan. The major U.S. exports to Japan tend to be products that are not labor intensive and benefit a relatively narrow range of U.S. interests such as agriculture. Even U.S. industries that are extremely competitive internationally , like nonconsumer electronics, have been unable to gain significant benefits 259 260 SAIS REVIEW from participation in the Japanese market and thus the view ofJapan as an exceptional problem. Viewed from this perspective, Mr. Lincoln 's assessment of economic activities is more threatening than reassuring. He basically projects that Japan will continue to run large merchandise trade surpluses. In my view that does more than ensure that relations with Japan will be rockier than with Canada or Europe. It is likely to mean that the U.S. political constituency in favor of the current state of economic relations with Japan will erode further and those who support basic changes in the way those relations are managed will multiply. The key question then is whether an improved framework for managing relations can be developed or whether the chaotic, ad hoc, incrementalist, and highly politicized process that exists today will simply worsen. The implied prescription of the article is that we should simply let our economic ties continue to increase and deepen and hope that "cooler heads will prevail" when problems arise. I fear that will not be enough. As Lincoln correctly suggests, "the vast differences between Japan and the United States. . .imply that problems and tensions are unavoidable." Coupled with a growing trade imbalance, the future of bilateral economic relations is uncertain at best. There are some signs that an improved framework can be devised. Recent...