Gareth Morgan, Director of Gareth Morgan Investments
With the US economic recovery hitting air pockets, arch protectionist Ross Perot on the march again, and the US senate throwing marbles under Mr Clinton’s programme of fiscal stimulus, it’s not surprising the US administration has become somewhat belligerent with the Japanese measures to revive their own economy. And this in spite of Japanese stimulus measures totalling US$180 bn. Uncle Sam is at his favourite whipping boy once more.
On the surface Presidential pressure on Japan is aimed at reducing the bilateral trade surplus which continues to grow in spite of a 60% depreciation of the $US against the Yen over the last 8 years. Measured in Yen rather than $US the bilateral imbalance isn’t so daunting. That further depreciation of the $US will stop Japan’s surpluse mounting is most doubtful. The last bout of rapid Yen depreciation in the late 1980’s didn’t produce rapid price rises by the Japanese in the US market. Rather the response was for the Japanese to shift more of their own production offshore to the cheaper sources of mainland Asia. For intermediate goods in particular, Japan remains the largest market for many other Asian exporters.
In large part Japan still remains the conduit through which trade with the US is channelled. Two mechanisms thrive: One is the direct export of goods which has had a major part of their construction done in cheaper Asia, but finished off in Japan; and the second is by direct export from Japanese-owned factories in the rest of Asia. Receipts from the sale of these goods flow to Japan in the first case, profits go in the second.
A higher Yen will simply accelerate the outsourcing of Japanese-owned production. A higher Yen will also raise the global purchasing power of the Yen, enabling further purchase by them of offshore production facilities. Whether a higher Yen alone will address the bilateral imbalance of payments between Japan and the US is doubtful. But for America’s Japan bashers, it sure feels good doing it.
Clinton’s real enemy here is the American people’s preference for goods originating from Japanese-owned factories. The pressure he and his predecessors have brought to bear on Japan has done little but encourage that American preference, as Japanese industry has internationalised in response to the dearer Yen. That internationalisation has lowered costs substantially and the American consumer has chortled. Japan is the modern epitome of a internationalised industrialised state. The NAFTA proposal – especially if extended to include other countries in Latin America – has the potential for America to do the same with US-owned firms. Perot though doesn’t want US jobs going to Mexicans. Nor does he want them going to Indonesians in Japanese-owned factories. His response is an increasingly introverted US trade policy.
An escalation of Americas s resentment to Western Pacific goods will do our region no good. The ongoing fall in the $US makes mounting resentment a certainty. Internationalisation is like free trade – best if everyone’s doing it, a source of economic and financial market instability if only pursued by some.