Bending Japan's Barriers

Behind trade barriers as imposing as Mount Fuji, Japanese businessmen long held the flow of foreign consumer goods into their country to a trickle, while pumping ever more of their own products into world markets--particularly the U.S. Lately, because of American prodding and threats, Japan has been working to lower its more egregious barriers and increase its imports. The latest U.S. effort to speed that process was mounted last week by President Nixon himself. In Hawaii he met Japan's new Prime Minister, Kakuei Tanaka, for two days of summit talks, and a key subject was what to do about the gigantic and growing $2.2 billion deficit that the U.S. is now running in trade with Japan.

Nevertheless, the prospect for any quick surge of U.S. exports to Japan remains dim. The Japanese eagerly buy American industrial raw materials--coal, steel scrap and lumber--but the obstacles they put in the way of foreign manufactured and consumer goods are still high. The average Japanese tariffs on finished consumer goods have been lowered from a prohibitive 28% in 1961 to 12% now--still far above the average of 7.7% maintained by most other industrial nations. In the past eight years, Tokyo has cut from 155 to 33 the number of quotas that it maintains on imports, but it still tightly limits the inflow of such items as tobacco, rice, wheat and computers.

Outsize Japanese taxes, based on a product's cost, fall most heavily on the more expensive foreign goods, helping to boost their prices. Thus a set of golf clubs that sells for $200 in the U.S. can go for as high as $500 in Japan; a pair of shoes that can be bought in America for $48 costs Japanese consumers $110.

Some of these hurdles can, and no doubt will, be lowered or removed as a result of further trade talks; the Japanese seem to realize that they must liberalize their import practices if they are to avoid more protectionist retaliation against their own goods abroad. But even an immediate removal of all formal barriers would not necessarily open Japan wide to U.S. marketing men. The most formidable of the obstacles cannot be lowered by diplomatic negotiation. It is Japan's archaic and labyrinthine distribution system.

At the top of the system sit the large trading companies such as Mitsui, Mitsubishi and Sumitomo Shoji. They bring in most of Japan's imports, which are then funneled to the consumer--along with Japanese goods--through some 280,000 wholesalers, one for every five retailers in the nation. As the goods pass down through area, city, town, village and even neighborhood wholesalers, each adds a distribution fee to the price of the product. The practice raises prices on both Japanese and foreign products, but the effect is worse on foreign goods, since they start out at relatively high prices.

Personal Service. Although this system seems unwieldy to foreigners, it makes sense to the Japanese. The nation's retail business consists mostly of tiny, stall-like shops that carry minuscule inventories and must reorder constantly. The streets of many Japanese cities and towns are too narrow and crowded for the big delivery trucks employed by manufacturers and large wholesalers; only the smaller vehicles used by the sub-wholesalers can reach the little Japanese retail shops with dispatch.

Most shopkeepers are absolutely dependent on their wholesalers for goods, credit and sometimes even their display cases. The wholesalers must rely in turn on the trading houses for credit as well as merchandise, for only the trading houses have easy access to bank loans. As for the shopkeepers, few make enough money to expand; they stay in business by offering personal services like goyo-kiki--morning visits from the shop's delivery boy to inquire about customers' needs. Under these circumstances, any foreign firm that tries to hold prices down by bypassing the layers of trading houses and wholesalers and selling directly to retailers is almost certain to be rebuffed quickly. Few in the system dare take a chance on alienating their supplier-moneylender.

American companies consequently must hand over to Japanese wholesalers the responsibility for selling and pricing their consumer goods, and the wholesalers are generally more interested in immediate profit than in building a mass market for foreign products. Despite yen revaluation, which was supposed to make U.S. goods cheaper in Japan, wholesalers continue to sell many American items at pre-revaluation prices, thereby fattening their profits but inhibiting volume sales. The wholesalers continually manage to get high prices because even ordinary products with English-language labels have a special cachet in Japan.

Like the Japanese, the Soviets are tapping the rich U.S. market--but in a somewhat different fashion. Kaiser Aluminum & Chemical Corp. and Reynolds Metals, two of the largest U.S. aluminum producers, have recently signed agreements to purchase technological information and licenses from the Soviet Union. The agreements, which will run for approximately twelve years, allow the aluminum makers to use a Russian casting process that reduces the need to trim aluminum ingots before they are rolled into sheets.

The transactions call attention to a little-noticed element in East-West trade potential: although the biggest deals undoubtedly will consist of exchange of U.S. equipment, processes and technical know-how for Soviet raw materials, the Soviets have some advanced technology to sell too. Two smaller U.S. firms have bought Soviet licenses to use systems for extracting magnesium and for cooling iron-making blast furnaces. Other areas of Soviet expertise include the building of hydroelectric power plants, and gas turbines, and the manufacture of hydrofoil boats like the one Leonid Brezhnev recently gave as a present to President Nixon.

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