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U.S. Trade Policy With Japan

U.S. TRADE POLICY WITH JAPAN:
ASSESSING THE RECORD

An Update

The Council of Economic Advisers
and
U.S. Treasury Department

April 12, 1996

President Clinton has made opening the Japanese market a key priority.

One month after taking office, President Clinton set forth a simple but powerful mission statement to guide trade policy: "We must compete, not retreat." At the same time, he made clear that his trade policy would not be business as usual. "We will continue to welcome foreign products and services into our markets but insist that our products and services be able to enter theirs on equal terms." Since that time, President Clinton has been unwavering in his commitment to secure tough but fair trade agreements -- and to make sure that those agreements are enforced.

President Clinton has made the economic relationship with Japan a model for his distinctive approach to trade policy. Accordingly, one of his first trade initiatives was to establish a "framework for a new trade relationship with Japan." In the 33 months since the Framework Agreement was signed, the Administration has concluded more trade agreements with Japan than any previous administration. And in keeping with the President's commitment to America's companies, workers and farmers, the Administration has followed through on implementing, reviewing, and enforcing these agreements. The President's consistent application of the principles he laid out in his first months in office is now producing convincing results.

U.S. exports to Japan in targeted sectors are growing rapidly.

The Clinton Administration has negotiated 20 trade agreements with Japan, including Uruguay Round, Framework, and other bilateral agreements. The agreements cover priority areas from general market access and deregulation, to intellectual property rights protection for U.S. goods and services, to important services sectors such as insurance and construction, to specific goods sectors such as automobiles and apples. The trade agreements are "win-win", yielding lower prices and higher quality for Japanese purchasers and consumers and increasing market access for U.S. companies, workers and farmers. Free and fair trade has long been recognized as the basis for increasing living standards for all trading partners.

The Administration's strategy is results-oriented. The agreements include objective criteria for measuring progress and timelines for review of the agreements. The Administration has placed a high priority on enforcing the agreements, which is helping to ensure they deliver real benefits for American companies, workers, and farmers.

The Administration's strategy is showing positive results. In the goods sectors covered by our Uruguay Round, Framework, and other bilateral agreements, U.S. exports to Japan have grown over 85 percent since this Administration took office. Growth in exports to Japan in these sectors is 3 times greater than growth in other U.S. exports to Japan -- which has also been strong. Indeed, growth in all U.S. exports to Japan of 34 percent has been over twice as great as growth in U.S. exports to the European Union. Total U.S. exports to Japan reached a record $64 billion in 1995.

The July 1993 Framework Agreement is the cornerstone of the Administration's trade policy with Japan. The Framework focuses on all three aspects of the economic relationship with Japan-- macroeconomic, structural and sectoral--and it establishes guidelines for review of the agreements to ensure that the desired results are achieved. This strategy is now paying off: in the goods sectors covered by the Framework Agreement alone, U.S. exports to Japan have risen 120 percent since the Agreement was signed -- four times as fast as other U.S. exports to Japan. U.S. businesses and workers are achieving successes in sectors covered by Clinton Administration trade agreements.

Autos and Auto Parts: Since the auto and auto parts agreement was signed in August 1995, U.S. auto and auto parts exports to Japan have risen over 35 percent, totalling $3.8 billion in 1995 -- already exceeding exports to the European Union. In 1995, the Big Three and Japanese transplant producers exported over 140,000 U.S.-made vehicles to Japan, up nearly 40 percent from 1994.

Recognizing that U.S. auto makers could expand their sales if given adequate opportunity to display their products in Japan, the Administration targeted access to dealerships as an important part of the August 1995 auto and auto parts agreement. Since the agreement was signed, the Big Three U.S. automakers have added 30 high-quality, high-volume dealer outlets in Japan, but more progress is required.

Deregulatory actions in Japan are beginning to lead to more sales for competitive U.S. suppliers in the auto parts aftermarket. U.S. parts suppliers will now have the opportunity to sell their products through Japan's major auto parts retailers and service stations. Such access will dramatically increase U.S. auto parts sales to Japan: For example, as result of opportunities created by the agreement, Tenneco Automotive, which has made efforts to break into this market for years, expects to expand its sales of shocks and struts in Japan from the existing level of 70,000 units per year to 105,000 in 1996.

Telecommunications Equipment: Since two agreements on telecommunications procurement were signed on November 1, 1994, U.S. exports of telecommunications equipment to Japan have increased nearly 50 percent, to $1.7 billion in 1995. This is almost twice as fast as the growth of U.S. exports of telecommunications equipment to the European Union, albeit starting from a lower base.

Cellular Telephones: After years of stalled negotiations, the Clinton Administration concluded an agreement in March 1994 with Japan to open the cellular telephone market in the Tokyo-Nagoya area, the largest population center in Japan. Since the agreement was signed and the Japanese Government instituted deregulation measures, subscribers to the North American designed system have grown from 22,000 to 600,000. Motorola, which tried unsuccessfully for years to break into this market, provides the bulk of the equipment to build and maintain this system, with sales values in the hundreds of millions of dollars per year. Greater competition in the region has also benefitted Japanese consumers -- they now not only have greater choice but also enjoy lower prices for cellular phone services. Initiation and monthly service fees are now one-third the previous rates.

Medical Technology: The Clinton Administration concluded a Framework Agreement with Japan covering public sector procurement of medical technology (such as MRI machines and CT scanners) on November 1, 1994. A review of the agreement in July 1995 determined that the Japanese Government has made good progress toward implementing the transparent and open procurement procedures called for in the agreement. Since the agreement was signed, U.S. exports of medical technology to Japan have increased over 35 percent, to nearly $2 billion in 1995.

Rice: The Clinton Administration targeted rice in the Uruguay Round negotiations. Although American medium-grain rice has been highly rated on quality by the Japanese Food Agency, imported rice was virtually banned in Japan for decades. With the successful conclusion of the Uruguay Round, Japan finally opened its market to imported rice and American rice has been well-received by Japanese consumers.

In 1993, a major failure of the rice crop in Japan led to the first taste of American rice for many Japanese consumers. Since that time, U.S. farmers have sold $287 million of rice exports to Japan, more than the previous 25 years combined. And although Japan's rice crop subsequently recovered, U.S. exports of rice to Japan in 1995 totalled $31 million.

Apples: The Clinton Administration targeted apples as one of its first bilateral trade initiatives with Japan, and an agreement was concluded on September 13, 1993. Since that time, the Administration has continued to work with Japanese officials to increase the number of U.S. apple growers and apple varieties certified to supply the Japanese market. These sustained efforts are beginning to pay off: where U.S. apple exports to Japan were once banned, apple exports approached $7 million in 1995. Meanwhile, imports of apples have brought lower prices to Japanese consumers, which will help increase overall apple sales in Japan.

Copper: The Clinton Administration targeted copper in the Uruguay Round negotiations. Since the Uruguay Round Agreement was signed, U.S. exports of copper to Japan have increased by over 80 percent, to $350 million in 1995. The United States sells 1.5 times as much copper to Japan as to the European Union, and U.S. exports of copper to Japan are growing faster than those to the European Union.

Chemicals: The Clinton Administration targeted chemicals in the Uruguay Round negotiations. Since the Uruguay Round Agreement was signed, U.S. exports of chemicals to Japan have grown nearly 25 percent, reaching $2.8 billion in 1995.

Flat Glass: Until the flat glass agreement was signed in January 1995, Japan's $4.5 billion market for flat glass had been dominated by an oligopoly of 3 Japanese producers. U.S. exports of flat glass to Japan doubled in 1995 to nearly 5 million square meters.

Japan's market is also opening up more broadly.

Realizing that progress in individual sectors would depend in part on addressing overall imbalances, the Administration targeted macroeconomic and structural adjustment in Japan as important aspects of the Framework agreement. On these fronts as well, the results have been positive. Japan's imports have been growing rapidly. This strong import growth is especially encouraging given low overall growth in Japan and the recent depreciation of the yen against the dollar. Indeed, recent evidence suggests Japan may be experiencing a structural shift towards greater acceptance of imports.

By the last quarter of 1995, the Japanese current account surplus had fallen below 2 percent as a share of the economy. Moreover, Consensus Economics forecasts continued reduction in Japan's current account surplus from $110 billion in 1995 to $88 billion in 1996 and $69 billion in 1997.

And the bilateral trade deficit with Japan has begun to decline.

Despite slow growth in Japan during 1995, U.S. merchandise exports to Japan grew five times faster than our imports from Japan. Overall, U.S. merchandise exports to Japan grew 20 percent in 1995 alone. As a result, the trade deficit with Japan declined by nearly 10 percent -- the first decline in five years. Trade in autos accounted for half of the improvement in the trade deficit: U.S. auto exports to Japan increased by nearly 40 percent while imports fell for the first time in a decade.

The improvement in the trade deficit in part reflects economic recovery in Japan. While we welcome the improvement in the bilateral deficit, it is important to note that the bilateral deficit is not a scorecard for trade policy. The goal of our trade policy is to improve the economic well-being of Americans by expanding trade.

The recent success of our Japan trade policy parallels improvement in overall U.S. competitiveness.

Our strong export performance in general and to Japan in particular is attributable to a variety of factors, in addition to the numerous market opening agreements concluded during this Administration. The President's overall economic plan, with its emphasis on deficit reduction and investment, has led to strong sustained growth with low inflation. This has encouraged strong growth in U.S. investment and employment, and helped to strengthened U.S. business confidence and the fundamental competitiveness of U.S. industries and workers. The economic results have been impressive by any measure: during the last three years, the American economy has produced 8.5 million new jobs; the federal budget deficit has been cut nearly in half; home ownership is at a 15-year high; the combined rate of inflation and unemployment is the lowest in 27 years; and an all- time high of almost 2 million new businesses have been created. U.S. exports have surged, rising 31 percent since the beginning of the Administration, and the World Economic Forum has ranked the United States number one on competitiveness for two years in a row, up from number 5 in 1992.

For more information, please contact Michele Jolin at 202-395-5084.

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U.S. TRADE POLICY WITH JAPAN: ASSESSING THE RECORD