The current economic imbalance between Japan and the US has created a crises of confidence in what has been one of the most successful alliances since the Second World War. The magnitude of the Japanese trade surplus and the American
friction has led to increased pressure in the US for trade protection which could have long term effects and costs on the world economic system.
The FSX issue became a rallying point for economic nationalism and in the process obscurred several vital economic points. Sector-specific debates with a microeconomic angle have subordinated more important macroeconomic issues like the trade distorting problems of the federal budget deficit and the national rate of savings. Bergsten and Cline say of the economic debate that:
There [is] a failure to distinguish between the trade imbalances, which result primarily from exchange rate misalignment and underlying macroeconomic phenomena, and the trade policy problem, which focuses on as tariffs and import quouats.
Congressional failure to confront the underlying causes of the trade imbalance appears to be an unwillingness to
70C. Fred Bergsten and William R. Cline, The United States-Japan Economic Problem. Policy Analysis in International Economics, no. 13. (Washington, D.C.: Institute for International Economics, January 1987), p. ix.
trade deficit are unprecedented in history. Continued
confront the more difficult economic problems when there are highly visible short-term issues that may give immediate, but temporary, positive results. The FSX for some politicians was an effective partisan tool to create the appearance of sustained political action to reduce the trade imbalance, make a statement regarding the issue of burden sharing, and
to confront US economic impotence.
During the course of the FSX negotiations and review a chorus of politicians, union leaders, and numerous scholars adopted the FSX as their trade "cause". With an "off-the- shelf" purchase of a US aircraft their preferred option, they continuously attempted to make the linkage between the purchase and a Japan truly concerned with ending the enormous trade imbalance. They tended to ignore or discount valid arguments against an "off-the-shelf" purchase.
Among academicians, Clyde Prestowitz, senior associate at the Carnegie Endowment for International Peace was the most outspoken. As a former counselor for Japan Affairs to the Secretary of Commerce and the author of a best selling book, Trading Places: How We Allowed Japan to Take the Lead, his
voice held weight in some sectors. In his testimony he said: We have a $55 billion trade deficit with this nation,
for which we bear the primary defense responsibility....Airplanes, fighter aircraft, are something that we unquestionably have a comparative advantage in. We make the best and the cheapest. If Japan is not prepared to buy an airplane from the United States, essentially it is saying that it is not prepared to buy a product in which the United States has a comparative advantage. But that, buying products in which you have a comparative advantage is the basis of free trade. So, this agreement had nothing to do with free trade. In fact, it is the opposite of that.71
In Congress a considerable group of influential politicians were using the trade balance as one of their arguments to derail the project. Every Congressman speaking out against the FSX, almost without exception, linked the FSX and the trade deficit. An example can be seen in a letter sent to Senate colleagues by Senator Richard Bryan and Senator Alan Dixon. They state:
This issue has broad implications for our economic future — our future competitiveness in the aerospace industry and the course of our future trade deficit with Japan could both be determined by the actions we take on this issue.
We believe that it is time that the nation should take charge of its future economic destiny. We have lost market share in many industries — automobiles, consumer electronics, semiconductors — due to aggressive tactics by our economic competitors.72
Such rhetoric was very typical of what was coming out of the Congress during the debate of the issue. Many similar statements can be found recorded in the Congressional Record.
71U.S. Congress, Senate Hearings. Implications of the FSX. pp. 30-31.
72Senator Richard Bryan and Senator Alan Dixon, U.S. Senate, Letter to Senate colleagues, (May 10, 1989).
It is difficult to deny that if Japan were to have purchased a pre-assembled aircraft directly from the US it would have been more beneficial for the US trade deficit. An “off-the-shelf" purchase of 130 aircraft would have been worth approximately $3 billion to the US as compared to $2.5 billion that is expected in the current agreement for codevelopment and coproduction. But, this fact should not be used to conclude that the Japanese are unwilling to work towards reducing the trade imbalance. It is ill-advised to use one sector-specific issue, like the FSX, as such a large determinent in setting the economic course to reduce the trade imbalance, because it allows neglect of the macroeconomic factors causing the deficit.
Bergsten and Cline comment that the deterioration of the US bilateral trade deficit with Japan is not a common pattern from which all major trading countries are suffering. The extreme deterioration of the US position in the last decade is actually an exception to the rule.73 These findings suggest a problem in the US-Japan relationship that is not one of increased Japanese trade barriers, but reduced American economic viability.
Statistics disclose that, between 1980 to 1984, more major trading countries improved their trade balances with Japan than there were that had worsened trade balances. Fifteen out out twenty-three improved their situation and only Canada
showed a proportionate increase in the size of its deficit similar to the US.74 (see Table 3 in Appendix, p. 85) Why- have a majority of the major trading countries improved there relative position in their bilateral trading relationship with Japan when the US-Japan trade relationship has dramatically worsened over the same period? These facts weaken the commonly held feeling in the US that the Japanese have become more protectionist in their ways.
In fact, World Bank evidence and analysis by Bergsten and Cline have shown some surprising results about levels of protectionism in Japan and the US. Their results suggest that the amounts of protectionism in both economies are very similar. The simple average for tariffs over thousands of categories of products, when using the GATT definition of manufactures, has the US with an average tariff of 6.3 percent and Japan with an average tariff of 6.0 percent.75 The estimates of overt Non-Tariff Bariers (NTBs) also come to the similar conclusion that Japan is not out of line with the US. Estimates of 1983 suggested that Japan protected 16.9 percent of its nonfuel imports, while the US protected 17.3
74Ibid.
percent.
[Bergsten and Cline] did find Japan more protective in agriculture, with 42.9 percent of agricultural imports covered by NTBs in contrast to 24.2 percent for the US. However, much higher NTB coverage by the US than by Japan in several key industrial sectors brought the measure of protection in total manufacturing to a significantly higher level for the US (17.1 percent NTB coverage) than for Japan (7.7 percent), causing the total nonfuel measure to be marginally higher for the US as well.76
With similar levels of protection in each country it is difficult to use increased Japanese protectionism as the reason for the US-Japan bilateral trade imbalance.
Import and export growth rates for the industrialized nations also don't reflect well on the United States. Between 1973 to 1985 Japan had the highest annual export growth rate of 8.4 percent, Italy had 5.3 percent, Western Europe on the whole grew at a rate between 3.7 to 4.5 percent and the US came in with the lowest annual export growth rate of 1.9 percent. Annual import growth rates told a different story with the US having the highest annual increase rate of 4.7 percent, Western Europe between 3.7 to 2.1 percent, Italy at 2.1 percent and Japan with the lowest annual rate of increase at 1.5 percent.77 When breaking down these export and import growth statistics by countries we see that most countries have improved their bilateral trading situation with the US and have increased their exports and limited their imports from the US. Japan does have the largest trade
76Ibid., p. 61.
surplus with the US, but Canada and Taiwan also have large surpluses, respectively $20 billion and $11 billion in 1984.
However, when the change in bilateral trade balance is stated relative to each country's bilateral trade turnover with the United States in 1980-81 and in 1984, 17 of the 24 countries examined have had larger relative increases than Japan. (see Table 4 in Appendix, pp. 86-88)78
The dramatic differences between the statistics for the US and those of other industrialized nations sends a signal that misaligned exchange rates are more at fault than increased protectionism. The US stands alone in its incredible erosion in international trade.
The rise of the dollar and not protectionist actions of the Japanese has been the primary reason for the deteriorating trade imbalance. The link between the US budget deficit, low savings rate, and the rise of the trade deficit is as follows. The large fiscal deficits and relatively tight monetary policy created high interest rates that attracted foreign funds to fill in the financial shortfall. These actions kept domestic capital at home and created capital inflows from abroad as well, with the effect of bidding up the price of the dollar. This drastically increased dollar — 70 percent between 1980 to 1985 — caused a growing trade account deficit because of the uncompetitive prices of US goods.79 Destler estimates that by 1985 the
78Bergsten and Cline, p. 24.
79Martin Feldstein, "Correcting The Trade Deficit," Foreign Affairs. (Srping 1987), p. 796.
dollar was roughly 40 percent above the level needed to balance the US international current account.80 Other estimates suggest that:
Each rise of one percentage point in the real (inflation-adjusted) effective (trade-weighted) exchange rate of the dollar produces a deterioration of $2 billion to $3 billion in the global US trade balance, and each rise of one percentage point in the dollar-yen rate produces a deterioration of about $830 million vis-a-vis Japan.81
Macroeconomic issues should be the substance of the Congressional debate on the US-Japan economic problem, not the FSX. Congressional leaders should spare no effort to reduce and eliminate the federal budget deficit, increase the US savings rate to provide a larger capital pool, and seek structural adjustments that will improve US competitiveness. Congressional efforts at reducing the trade imbalance have been misplaced.
80I. M. Destler, American Trade Politics: System Under Stress. (Washington, D.C., Institute for International Economics, 1986), p. 157.
Chapter Ills Technology Transfer
Technology transfer has probably been the most significant issue in the FSX debate. With reports of the decline of the US industrial base and the loss of the edge in numerous state of the art technologies in their heads, adversaries of the FSX attacked the provisions for the flow of technology to Japan and even questioned the usefulness of the reverse-flow of technology from Japan to the US. Admittedly, coproduction and codevelopment will transfer aircraft knowledge to the developing Japanese aircraft industry, but the potential benefits that the US will gain from the FSX far exceed the costs. The greatest potential gain for the US is the precedent-setting arrangement to allow the flow of Japanese technology to the US and the greatest concern should be shown for locking the Japanese into primary aircraft production agreements with US companies rather than companies from other countries.
Past studies by the National Academy of Engineering and the US General Accounting Office (GAO) do confirm that military coproduction agreements transfer aircraft technology to the coproducing country.82 Despite the lack of direct
82See National Academy of Engineering, The Competitive Status of the U.S. Civil Aviation Manufacturing Industry. (Washington, D.C.: National Academy Press, 1985); U.S. Congress, House, Report by the Comptroller General to the Chairman, Subcommittee on Trade of the Committee on Ways and Means, U.S. Military Coproduction Programs Assist Japan in Developing its Civil Aircraft Industry. (Washington, D.C.: GAO, 1982); and Frank Conahan, Assistant
applicability of much fighter aircraft technology to civil aircraft, coproduction agreements do expand "production capacity, technology base, and aircraft production labor
Q O
force." A 1982 GAO assessment of Japanese coproduction of the F-15 states:
MITI recognizes that the F-15 and P-3C programs, as well as commercial joint ventures, provide the industry new technology and necessary demand to maintain and expand tha labor force in aircraft production. Moreover, MITI has stated that technological developments of both civil and military aircraft mutually supplement and complement each other, because "development and manufacturing techniques of both are closely related, and technological spin-offs can be mutually anticipated.1,84
With the acceptance of the fact of technology transfer through coproduction and codevelopment, we also must remember that once released this knowledge can never be recalled. Despite limitations that have been imposed in technology transfer much of the basic US aircraft technology has already been diseminated to US allies. The old adage about closing the barn door after the horse got out may be relevant.
The National Academy of Engineering study, The Competitive Status of the U.S. Civil Aviation Manufacturing Industry, suggests some valid questions that should be asked about each
Comptroller General, GAO, Statement before the Subcommittee on Investigations, Committee on Armed Services, U.S.-Japan FS-X Codevelopment Program. (Washington, D.C.: GAO, May 16, 1989).
83Frank Conahan. U.S.-Japan FS-X Codevelopment Program, p. 3.
^U.S. Congress, GAO Report, U.S. Military Coproduction Programs Assist Japan, p. 15.
technology transfer control issue. They include the following:
* How effective will given restraints be? And for how long?
* What alternatives are available to the foreign country or firm?
* What avenues for retaliation or compensatory action by foreign competitors or customers are available for both near and long term?
* What near-term and long-term commercial damage will U.S. firms suffer?
* What damage will the U.S. economy suffer?85
All are valid questions that can be examined through the eyes of the FSX project.
The first and second question are becoming much easier to answer these days because of the growing technological parity among aircraft producers worldwide. If one country is unwilling to negotiate a technology transfer it is possible to turn to another supplier. In the case of the FSX that has also been a possibility. As the Soviet threat declines, the willingness of Japan and other allies to retain
interoperability with the US will decline. The writing of the rebel Japanese parliamentarian Shintaro Ishihara suggests that when the costs of maintaining the US link becomes too expensive in terms of money, national sovereignty, or just plain hassles, Japan should seek other partners for joint ventures and alliances. While Ishihara believes that the
time is now, a majority at this point would not agree with him. His comments should not be discounted, though, because they are representative of an ever growing minority in Japan. With Japan's increasing prosperity, more options open for the country in terms of valuable joint ventures and alliances. Ishihara is bold enough to even suggest the Soviet Union as a possible ally.86
Admittedly the F-16 is regarded as the most sophisticated fighter aircraft in the world, but that does not discount the fact that there are several other very good fighters that could have just as easily served as the base for the FSX. A sale of the Swedish Gripen JAS-39, the Panavia Tornado, the Israeli Lavi plans or a French aircraft were all viable options in this case. Today, the U.S. aircraft industry is not in as dominant a position as it once was. Quality civil and military aircraft technology is available from several European, Scandinavian, and Japanese firms; even the developing countries of Brazil and Indonesia have something to offer. The Brazilians have even been successful in marketing a military trainer to Great Britain.87
86U.S. Congress, House, Congressman Levin’s inclusion of The Japan That Can Say "No" -- The New United States-Japan Relations Card, by Akio Morita and Shintaro Ishihara in the Congressional Record. 101st Cong., 1st sess., (November 14, 1989). Note: This is a translated copy of the Japanese version of the book that was submitted to the Congressional Record. At the time there were several illegal translations being distributed around the US. An English version of the book without Akio Morita’s portion is now being readied for US distribution. 87David Mowery, Alliance Politics and Economics: Multinational Joint Ventures in
When answering the first two questions relative to the FSX case, it is possible to show that restraints on technology would not be effective for long because the alternatives to US cooperation are many. A combination of Japanese success in industrial technology, especially electronics, Japanese finance capabilities and the experience of European and Scandinavian firms in aircraft development provides a viable alternative for future aircraft joint ventures.
The ability to engage in joint ventures with other qualified non-American firms is the most effective answer to the third question about avenues for retaliation or compensatory action by foreign customers. After the strain of the FSX deal and the problems with the Boeing 7J7 joint venture, Mitsubishi has taken some action to send clear signals to the U.S. that it can find other partners. On March 3rd and 4th of 1990, West Germany's Daimler-Benz and Mitsubishi met in Singapore to conduct negotiations on working out a program of intensive cooperation between the two. Cooperation could entail technology transfers and joint ventures with particular emphasis on three fields: aerospace, electronics, and services.88
The possibility of this relationship sends a powerful message to the US because the combination of these particular companies could create an eventual unequaled rival to the US aerospace industry. Daimler-Benz, with sales of more than
$43 billion, has built itself into a company with considerable aerospace expertise by the purchase of aircraft- makers Dornier and Messerschmitt-Bolkow-Blohm (MBB),
aircraft-engine maker MTU, and the electricals group AEG. Mitsubishi, with estimated sales of $200 billion, has through
its subsidiary Mitsubishi Heavy Industries had a considerable history in aerospace. A relationship between the two opens