A Blueprint for Reform

By John Greenwald

Why can't the U.S. be more like Japan? And vice versa? Those were the questions underlying much of the discussion at trade talks between the two nations in Washington last week. In some cases the medicine prescribed was far too bitter to swallow. If Japanese negotiators had their way, for instance, American consumers would curb their use of credit cards, lose the deduction on home mortgages and pay a stiff new gasoline tax. For its part, the U.S. wanted Tokyo to make it easier for large department stores to set up shop in Japanese cities, to boost public spending, to crack down on Japanese price-fixing and bid-rigging practices, and to shorten the workweek of Japanese employees to five days by eliminating half-day Saturday shifts. The ambitious talks were part of the Structural Impediments Initiative launched by President George Bush last May, which seeks to make fundamental economic changes in the two countries in order to reduce the $49 billion U.S. trade deficit with Japan.

The two-day talks stretched to four, and ultimately Japan agreed to far- reaching reforms that would open Japanese markets more widely than ever before to American business. At the same time the U.S. vowed to take steps to improve the competitiveness of American industry. President Bush praised Japan's recently elected Prime Minister Toshiki Kaifu for showing "true leadership," noting that "in one month we have had real success."

Among other concessions, Japan promised to lessen the power of tiny shops to obstruct the opening of new department stores that could stock larger amounts of foreign wares. It presently takes up to ten years for a store opening to be approved; Tokyo said it would shorten the process to about a year. Japan also pledged stiffer antitrust penalties for companies that rig bids to freeze out foreign suppliers. Moreover, Tokyo vowed to increase government spending on public works such as airports, roads and sewers. Besides creating business opportunities for U.S. contractors, such projects would facilitate the flow of imported goods to Japanese retailers.

In return, the Bush Administration largely restated its previous pledges to encourage Americans to save and invest more of their earnings. Washington once again stressed its determination to cut the U.S. budget deficit, to improve American education and to upgrade the work force. Much like the Japanese promises, the vague U.S. statements made little mention of how the goals would be accomplished. Nonetheless, U.S. Trade Representative Carla Hills commended the "progress and hard work on both sides." Hills called the deal "the most ambitious effort we've seen from the Japanese. It constitutes a clear blueprint for reform."

Congressional leaders, who have threatened tough trade sanctions against Japan unless it opens its markets further, greeted the Japanese pledges with practiced caution. Said Texas Democrat Lloyd Bentsen, chairman of the Senate Finance Committee: "Put me down as a skeptic who has seen too many agreements in which the results don't match the rhetoric." Many lawmakers are withholding judgment until they can see signs that the agreement is benefiting U.S. companies. Observed Senator John Danforth of Missouri: "In any commercial agreement with Japan, seeing is believing."

But the ambitious plan is likely to do little to narrow the U.S. trade gap with Japan anytime soon. Most of the proposals, if enacted, are to be phased in over a period of years. And while U.S. exports to Japan nearly doubled from $23 billion to $45 billion between 1985 and 1989, the trade deficit showed little improvement. Reason: the growing demand of American consumers for Japanese products all but canceled out the rise in U.S. exports.

The accord comes at a time when the high-flying Japanese economy has hit a downdraft. Shares traded on the Tokyo Stock Exchange have lost some 25% of their value this year, and the yen has fallen more than 8% against the dollar. Japanese policymakers denied that the financial turbulence had made them any more willing to reach last week's agreement. "We would have done this if the yen were strong and stocks were going up," said one senior Tokyo official.

At a news conference, Prime Minister Kaifu said the accords, though "painful" in the short run, would ultimately "improve the quality of life of the Japanese people, promote consumer benefits and bring our economy into better harmony with the world economy." Among other advantages, the agreements would create lower prices for Japanese shoppers by encouraging increased competition from foreign goods. Moreover, consumers and businesses would gain from proposed changes in property-tax laws that would rein in the cost of real estate (one square meter in Tokyo can now cost $250,000). Far from being bitter, that medicine would be quite palatable.

With reporting by Gisela Bolte/Washington and Barry Hillenbrand/Tokyo