Fighting The Trade Tilt

By Stephen Koepp

The formal smiles are fading fast. Until now the trade relationship between the U.S. and Japan has been handled with relative congeniality, especially considering the rising tensions on each side. Practically every potential crisis has been forestalled with cool-headed talks and bilateral agreements. But what seemed at worst a spirited competition between two trade giants last week escalated into a confrontation that could, if not handled carefully, develop into an old-fashioned trade war. In an extraordinary change of tone on the controversial issue of trade with Japan, the Reagan Administration announced plans to impose drastic 100% duties on several Japanese products, ranging from television sets to X-ray film. The Administration's goal, at - least initially, is to block some $300 million worth of Japanese merchandise in retaliation for Tokyo's failure to honor fully an eight-month-old agreement on trade in semiconductors.

The punitive measures, scheduled to go into effect in mid-April, do not amount to much in comparison with the totality of U.S.-Japan trade, which reached $112 billion last year. But they are the harshest trade sanctions that the U.S. has slapped on Japan since the end of World War II, and their imposition could well herald further bitter actions on both sides. "We do this more in sorrow than in anger," said Commerce Secretary Malcolm Baldrige. Despite the obvious risks of such an abrupt change in the rules of engagement, the Administration's toughness earned bipartisan applause. Said Democratic Senator John D. Rockefeller of West Virginia: "It's about time we took some real action." Added Republican Senator Pete Domenici of New Mexico: "There is no question the President did the right thing."

Reagan's strong stand on semiconductors reflects a rising impatience in the White House and Congress with the U.S. trade deficit in general and with Japan in particular. "The point is we are already at war with Japan. The problem is that we have not been fighting back," declared Republican Senator Pete Wilson of California. In a broader offensive, three House committees approved new trade legislation that would mandate tougher ways of dealing with uncooperative trading partners like Japan.

The heavy imbalance in U.S.-Japan commerce is the biggest single contributor to the overall U.S. trade deficit, which hit a record $169.8 billion last year. Japan's exports to the U.S. reached an estimated $85.4 billion worth of goods last year, while American exports to Japan amounted to just $26.8 billion. Semiconductors represent only a fraction of that trade, but they have become a focal point because of their importance in both military and industrial applications. As the brains in products that range from talking bears to smart bombs, chips are a crucial ingredient in an estimated $250 billion worth of U.S. merchandise annually.

While Reagan intended last week's sanctions to be harsh, the Administration carefully aimed them at the offending Japanese companies rather than U.S. consumers. Most of the products -- among them computer disk drives, refrigerators and electric motors -- are manufactured by the same giant corporations that the U.S. accuses of violating the semiconductor agreement: NEC, Fujitsu, Hitachi and others. Because the proposed 100% duties would effectively double the U.S. prices of those items, the Administration avoided choosing products in which Japan has a near monopoly, as in the case of videocassette recorders. The sanctioned products are manufactured by enough companies in the U.S. and other nations that consumers could turn to non- Japanese brands to avoid any huge price hikes.

The Administration hopes the sanctions will be only a temporary measure, assuming Tokyo demonstrates a renewed willingness to live up to the July agreement. The U.S. acknowledges that the pact has been effective in stopping Japanese semiconductor makers from dumping their chips in the U.S. market at below-cost prices. But the Administration charges Tokyo with failing to honor two other parts of the agreement, in which Japan promised to prevent the dumping of chips in other places, notably Hong Kong and Singapore, and to open up the Japanese market to U.S. chips.

Japan claims it has taken strenuous action to live up to the agreement. Even before the U.S. announcement, the country's Ministry of International Trade and Industry earlier last week had ordered its semiconductor industry to reduce the output of some types of chips by 10% in the second quarter, which comes on top of a 10% cut in the previous period. Part of Japan's difficulty in preventing rampant discounting of its chips is a severe glut in the $31 billion worldwide market for semiconductors. Several Japanese trading companies buy surplus chips from manufacturers inside the country and then sell them at huge discounts in other Far Eastern countries, a practice that Tokyo claims it is trying to control. Said Hajime Tamura, head of MITI: "((Reagan's action)) ignores all the efforts taken by Japan in faithfully adhering to the clauses of the agreement."

The Japanese government could respond to the sanctions in kind with counter-retaliatory steps that would close its markets even more to U.S. goods and services. But most Japanese manufacturers, while indignant about the U.S. offensive, hope the two governments will come to a negotiated settlement before hostilities escalate. Said a Sony spokesman: "We don't expect that they will let things go to an outrageous extent."

The sanctions come during a time of relative economic hardship for Japan and political difficulties for its Prime Minister, Yasuhiro Nakasone. Under heavy pressure from the U.S., Japan has allowed its yen to appreciate 43% against the dollar during the past two years, which has pinched the country's economic growth and pushed unemployment to 3% for the first time in decades. The new sanctions would go into effect only two weeks before a planned visit to Washington by Nakasone, who was hoping for a show of friendliness with Reagan that might boost his support at home.

The Government's new toughness is at least partly a response to what Washington perceives as a hardening of Tokyo's attitude. Congress was particularly galled last week by the contents of a classified State Department report that revealed a statement by the vice chief of MITI, Makoto Kuroda, to the effect that U.S. supercomputer makers would only be wasting their time trying to sell the advanced machines to Japanese government agencies or universities. His remarks, which he reportedly made in January at a lunch for visiting U.S. trade officials, seemed to betray a lack of sincerity in Japan's repeated promises to open up its markets to foreign business. Kuroda has denied his statement, even saying that the State Department's report "could be an American trick."

Beleaguered American semiconductor manufacturers largely welcomed the sanctions. Chipmakers in the U.S. claim to have lost $135 million in sales since late last year because of the dumping of Japanese chips in foreign markets. As evidence, U.S. manufacturers have displayed receipts for Hong Kong purchases of such semiconductors as the 256K dynamic RAM (random access memory) chip, which sells there for $1.89 apiece, even though Japan has agreed to a minimum price of $2.50. As a result of such global discounting, U.S. makers say, their share in 1986 of the world chip market, at 43%, fell behind the Japanese portion, 44%, for the first time ever.

Though the Commerce Department has investigated the costs and prices of the Japanese companies and concluded that they are dumping, it is not at all certain that they need to resort to such tactics to outsell American competitors. Says Tokyo Economist Kinji Yajima: "No matter what the U.S. Government might do, American semiconductor makers just simply cannot lick their Japanese rivals." Japanese manufacturing costs are known to be very low, particularly for the mass-produced memory chips that make up about 18% of the market, since the Japanese have invested billions of dollars in building modern plants to turn them out in huge quantities. The American chipmakers acknowledge that they cannot make some types of chips as cheaply as Japanese companies can, but U.S. buyers of chips, as well as Pentagon officials, think it would be unwise to allow U.S. manufacturers to abandon making any important types of semiconductors. Moreover, U.S. chipmakers claim they can still profitably manufacture specialized semiconductors like microprocessors.

The sanctions served as a kind of exclamation mark at the end of a week in which Congress stepped up its efforts to produce a trade package. By a vote of 34 to 2, the House Ways and Means Committee passed a bill that would require the President to take mandatory retaliatory steps in some cases of unfair trade practices and would provide financial benefits and training for U.S. workers who lose their jobs because of foreign competition. Meanwhile, the House Energy and Commerce Committee approved a measure giving the President authority to restrict certain acquisitions by foreigners, while the Banking Committee passed a bill aimed at opening up foreign securities markets to U.S. firms.

Underscoring the urgency of the trade problem was a dramatic plunge in the U.S. dollar last week to a new postwar low of 147 yen, despite efforts by central bankers to stabilize the currency. Global money traders sent the dollar reeling because they expected that the currency might have to fall further if the U.S. is to slash its trade deficit. But sentiment is rising in Washington that protectionism is preferable to watching the dollar sink ever lower. Though the U.S. and Japan may not yet be engaged in a full-scale trade war, what used to be a heated rivalry between friends has now moved on to a new and potentially perilous phase.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: U.S. exports to Japan in billions

Japanese exports to the U.S. in billions

DESCRIPTION: Two bar charts, 1980-1986. Color illustration: Ship sinking under weight of Japanese exports to U.S.

With reporting by Gisela Bolte/Washington and Neil Gross/Tokyo