U.S. Trade Relations with China and Japan
(Post World War II)
Political Science 421
Seminar on U.S. and Asia Pacific
Dr. Margaret Karns
April 11, 2000
The United States trades with countries all over the world, creating deficits or surpluses with these countries. The highest deficit that the US has currently is that with Japan, followed by China. With China and Japan s economies among the world s largest, the United States trade relations with the two are important. The path to determine these relations was not easy to establish; even today it is still being worked on. Since WWII, Japan and the US have had trade interactions which mutually benefited their economies but took many steps and hardships to get to the dominating level where they are now. With the ending of economic isolationism after the Cultural Revolution, China and the US have taken careful steps to open their markets to each other and normalize trade relations. During the past decades while developing trade relations, the US has formed large deficits, leaving some with much cause for concern and discussion. But what is a deficit, and is it even a bad thing for the US to have?
A bilateral deficit is when a country buys more dollars in products than it sells. Politicians often label the US deficit as detrimental to the US economy because it takes jobs away from the American worker. Bob Dole and Ross Perot has sought to make America s increasing deficit a campaign issue, saying that ballooning deficits mean the loss of millions of American jobs. Contrary to the common spin, trade deficits are not necessarily bad news. A trade deficit can even be good news for an economy, reflecting flush consumers and an attractive climate for investment, according to Daniel Griswold, associate director of the Center for Trade Policy Studies at the Cato Institute.
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Regardless of whether a deficit is a good or bad thing, the United States still has increasing deficits. How were trade relationships formed with Japan and China? Were there always deficits, and if not, what caused them? What are the current issues in trading with Japan and China, and where does the US go from here? We will attempt to answer these questions and issues throughout the discussion of Japan and China.
The Japan and United States Trade Imbalances
Since World War II, Japan has experienced a miracle of economic success. The trading of raw and manufactured goods with the United States was key in lifting Japan back on their feet after the war. The integration of Japanese businesses into the United States gave Japan opportunities to expand their markets and economy globally. The Japanese economic miracle can be explained by examining the different segments of the Japanese economy and the imbalances of trading with the United States. One question we have about Japan s economic recovery is, Was it the Japanese who rebuilt themselves, or did the United States open market and rebuilding efforts trigger Japan s economic burst? By researching the history of the bilateral trade relations between Japan and the United States, we will explain the possibilities the future holds for these countries.
Japan and the United States have had strong trade flows in both their imports and exports. The most outstanding imports the United States were receiving were textiles, steel, color TVs, and automobiles. Japanese firms, especially those in the manufacturing sector, were portrayed in the United States as efficient organizations producing high-quality products and sometimes the glory of high economic growth and strong exports was extended to the Japanese society in general, (Ito, page 365).
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The main issue at hand is, how do Japan and the United States maintain an equal balance of trade. Whereas nearly all nations have sought trade expansion, they have generally tried to avoid an excess of imports over exports, which is known as a deficit in the balance of trade (Moon, P.5).
For Japan the United States is the most important trading partner, both in exports and in imports. Over a third of Japan s exports go to the United States. This is more than double the share of Japan s exports going to all the European Community countries combined (Ito, page 342).
The bilateral trade also benefited the United States greatly by exporting American products to Japan. The United States started selling products to Japan in 1955. The main items sold initially to Japan were industrial machinery, telecommunication and computer equipment, grain, and chemical products. During the early post war period the trade imbalances were mostly favored to the United States in a higher export percentage. As the Japanese started building up their economy at an incredible rate each year, in return, the export advantage the United States had over Japan has diminished.
The Japanese economy had a long path to go until it could begin to match up with the United States level of power. In the early 1950 s the United States accounted for about 45 percent of total global production (including 80 percent of the world s cars), held 43 percent of international reserves, and furnished about 20 percent of global exports (Moon, P. 96).
Japan first surpassed the United States in per-capita GNP in 1986, after a long period of rapid growth. The real GNP growth rate of Japan averaged more than 10% per year between 1955 and 1973; it slowed down to an average of 5% per year from 1973 to 1988. As a result, the Japanese economy in 1988 was 9 times its 1955 size (in real GNP).
During the same 33 years, the United States economy grew to 2.67 times its 1955 size, (Ito, page 3).
The United States was bigger and stronger to begin with in 1955, which made it harder for the U.S. to double their size. A factor to keep in mind about these facts, the Japanese economy in 1955 was very weak which made the economy easier to increase its total size.
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Japan joined the World Trade Organization (WTO) in 1995. The WTO helps settle disputes, promote economic development, and aid trade flow. The WTO was formed from the GATT agreements. The GATT is an international agreement setting out the rules for conducting international trade (World Trade Organization).
Japan has taken full advantage of the WTO free trade agreements by exporting an incredibly high number of goods to foreign countries. The WTO agreements require equal trade for all countries in the organization. No countries are allowed favoritism or special exceptions. The goal of the WTO is to incorporate a modern free market theory, in which goods must be free to trade in all countries. The WTO has come a long way to help the United States and Japan balance out their trade. The trade tariffs on imports to the United States from Japan used to be as high as 200% in the early 1960 s. Now in the year 2000, the trade tariffs are around 4-6%. This allows for much easier trade for Japan and the United States.
The United States is Japan s largest export market for consumer goods. Japan, in turn, has become the largest foreign consumer of American debt. Such developments are pulling these two countries economies into increasing interdependence, yet injecting serious political tensions into their relations. Dissatisfaction is no longer limited to local producer groups such as Flint, Michigan, autoworkers or Japanese rice farmers that are threatened by the other country s participation in their domestic market. Rather, in both countries their bilateral relations are quickly becoming a thorny political issue (Kernell, P.1).
The bilateral trade relations will always be a debated political topic and there isn t a correct or incorrect way to deal with these issues. The United States, with exports constituting only a little over 10 percent of its gross national product (GNP), is less reliant on trade than virtually any other country in the world. Even Japan, with its reputation as a great trading nation, is much less dependent on trade than any European nation. Despite its shortage of natural resources, the sheer size of Japan s economy, second only to that of the United States, enables it to meet most of its own needs and to consumer most of its own production (Moon, P.3).
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The signs of trade-induced strain between the United States and Japan are evident in both formal diplomatic relations and in public opinion, with so called Japan-bashing often heard in street corners and in Congress. U.S. complaints center on the bilateral trade deficit with Japan, which has hovered around $50 billion annually since 1985 and which exceeded $65 billion in 1994 (Moon, P. 93).
Japan denies fault for the United States deficit in trade. A 1993 poll revealed that 85 percent of Japanese felt that America unfairly blames Japan. Furthermore, Japan complains that American efforts to reduce the trade deficit violate principles that are both imbedded in international law and regularly professed by American trade officials. Diplomatic relations reached a low point in summer of 1995 with parties exchanging threats of trade sanctions amid heated bilateral negotiations that did more to aggravate tensions than to resolve issues (Moon, P. 93).
There is a constant cycle where Japan sends its biggest chunk of exports to the United States. The United States sends Japan American products but not at an equal balance. The American economy gets upset because American workers are losing their jobs because the American companies not able to compete with Japanese companies. For example, the high levels of unemployment in Detroit have been ascribed partially to annual sales of nearly 2 million Japanese cars in the United States (Moon, P.5).
This would be of little concern if these imports were balanced by exports that produce employment and profits from American products sold abroad, but during a trade deficit they are not. Then Japan connects this circle back to the beginning of the cycle by investing billions of dollars into the American economy. The Japanese want the American economy to do well, so the Japanese investors will get a good return in their investment in American businesses. Japan depends on U.S. Markets to accept 30 percent of its exports and on American products, which constitute 25 percent of its imports. The trade dispute could greatly effect the economic relationship as a whole. The United States relies on Japanese capital to supply needed investment funds Japanese investors hold more than $100 billion in foreign direct investment in the united States and a similar amount in U.S. Treasury bonds and Japanese investors depend upon the health of the American economy to generate returns on that investment, (Moon, P. 94).
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A trade relationship was also built between the US and another Asian country, China. Throughout the past twenty years, many issues and obstacles have also been overcome in expanding trade with China.
Expanding US trade with China: Issues, Obstacles, Consequences and Imbalances
Since the “open door” policy in the late 1970s, successful trade and investment with China has been a common goal among American businesses. Along the way, there have been many issues and obstacles to overcome as a business relationship with China has been formed. In light of consideration for China’s membership in the WTO, there are still issues to be dealt with and examined. Through the development of an economic relationship with China, we will attempt to examine the causes and impact of trade imbalances with China, as well as implications of the imbalances and plans for dealing with them in the future.
It is important to introduce the guiding principles behind China s foreign trade policies and ways of doing business. These five principles promote mutual respect and sovereignty and territorial integrity:
1. Mutual nonaggression
2. Noninterference in each others international affairs
3. Equality and mutual benefit
4. Peaceful coexistence
5. Independence and self-reliance
According to Hua Guofend in the first session of the fifth National People s Congress (Tung 22), the goal is to supply each other s needs and promote production and economic prosperity among the world s nations. Following principle 4 of peaceful coexistence, the Chinese like to arrive at agreements through a consensus in negotiations or mutual discussions, rather than voting. Mr. John Eaton of E-S Pacific Corporation notes that even though a lot of firms may have been skeptical and think that China is trying to sugar-coat the issue by using terms such as equality and mutual benefit, the Chinese really mean it when they say that a joint venture should be operated according to the third principle (Tung, 32).
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The explanation of an imbalance on imports is that countries should only supply something when there is a need, never forcing something upon them. Therefore, if a country can make it rather than import it, they should do so to build up their own economy, according to the Chinese methodology. Principle 5 of independence and self-reliance used to mean economic isolationism during the Cultural Revolution. After 1979, it means that foreign assistance should be accepted as long as it does not impinge on China s national sovereignty. In other words, China is learning by example from other s experience that they should increase knowledge and decrease the time it takes to get this knowledge. Keeping these general principles in mind, one will note that early on in trade relations with China, the US did not heed these guidelines.
In the 1970s, US trade was not very extensive with China, yet many entrepreneurs were anticipating “exclusive deals” in the region. They would travel to Beijing with big hopes, only to find they had to deal with China completely on China’s terms. Importers had more success, as “The China Trade was simple at that time, being primarily the import and export of goods that were packaged in boxes and bales,” (Lubman, page 2).
By the end of the 1970s, most American exporters were critical and weary of trade with China, while the importers had had better success. In 1979 with the adoption of the “open door” policy, foreign investors were welcomed into the region, as they anticipated access to billions of untouched customers. The Open Door policy, in general terms, meant trade liberalization. Yet China did not let an unfettered flow of goods and services enter its market. Rather, it insists that anything that can be made within the boarders will be made at home.
With great expectations and aspirations of penetrating a new market, American businessmen and investors plunged into the market. Most American businessmen did not view China as simply a new market to exploit, rather “in the softer vocabulary that the Chinese themselves offered, of friendship and assistance to the country’s modernization,” (Lubman, page 3).
Americans were more lenient with deals and transaction terms because they hoped their consideration would yield enormous profits. Another reason special rules applied in dealing with the Chinese was to make sure the relationship was not built with America’s competitors instead. They wanted to make sure that a relationship and loyalty was forged with them instead of their European or Japanese counterparts.
Yet frustration surmounted in part because Americans were used to doing business based on legal agreements, signed contracts and careful attention to financial analysis. However, Chinese businessmen were less apt to sign documents or use lawyers. Another mistake on the American’s side was the lack of research or preparation on companies, culture and the country itself. They believed that the information they were collecting was unique and groundbreaking. Americans did not bother to look beyond what they were doing and learn from others mistakes and research from the past. The fact was, since the 1970s information was available about how to train people, do marketing research and work out the kinks of doing business in China. The problem was no one knew about previous research or bothered to ask the proper questions about it. Such information could have been used to their advantage, but was overlooked or ignored as businesses virtually learned the hard way how Chinese negotiate and do business.
The feeling in the late 1980s was that working with the Chinese was next to impossible. In light of the political turmoil in June 1989, many American investors gave up because they had “overestimated business and technology’s effect on China and underestimated difficulties working in the Communist system,” (Lubman, page 4).
With the Tiananmen Square incident, a “pall” was cast over foreign direct investment (FDI) even as China tried to bounce back and raise FDI. China did this with efforts directed towards promoting investment through policy pursuit, and developing legal institutions while the economy grew.
Yet questions about the strength of central government have been raised as local departures from central policy increase. Since the opening policy began, investment has been regulated as laws have been made and then later changed. Inconsistencies between national and local legislation have also been found so much so that Beijing has had to forbid certain tax incentives. Because of the problems with FDI, the strength and role of the Chinese government and pending membership into the WTO, there are many issues to be sorted out in the trade relationship between the US and China.
In reference to the chart in attachment 1, since 1985 there has been an increasing deficit between the US and China. According to the information illustrated, the trade between the two countries declined substantially between 1975 and 1977 because of political unrest in China. This means that economies that are centrally planned, where foreign trade policies are controlled and directed by the central government, the national policies pursued by the country have a tremendous impact on the functioning and performance of foreign trade, (Tung, 3).
Success story: E-S Pacific Corporation
Not all business relations with China were unsuccessful. One example of a success story is the E-S Pacific Corporation, a company that scored major accomplishments in securing joint-venture arrangements with China to construct large hotels in key cities, specifically Beijing and Shanghai. This joint venture illustrates experience with negotiating, the terms of the agreement, and the factors responsible for their mutual success.
Because of the lack of hotels and other facilities, China had to reject 75% of tourist s applications in 1980; in 1979, only 960,000 tourists visited. The China International Travel Service s (CITS) goal was to receive two million tourists by 1985. In order to do so, the country needed ways to accommodate the influx of visitors. E-S Pacific Corporation, a subsidiary of the Cyrus Eaton Group of Companies was not a large hotel chain, yet had large successes in securing joint-venture arrangements with China. The E-S Pacific Corporation engaged in joint-venture hotels by keeping in mind the five principles, because it is non-resource depleting, non-polluting, creates jobs, has low energy requirements, and most importantly, there was a positive hard currency cash flow immediately upon opening. It also gives the Chinese the important perspective of foreign knowledge and expertise and brings in foreign capital.
In the construction of the 1000 room luxury hotel, the design and construction management was brought in from California, while the actual builders were locally hired from Beijing. The Corporation avoided classic compensation, known as the twin tower approach, which is when a foreign partner comes in and constructs and pays for two towers, one of which is run by China and the other by the foreign investing firm. The difficulty is they are managing the towers separately. In E-S Pacific s joint venture, there is joint managing, constructing and operating of the facility. In effect, they both receive mutual benefits and have the ability to transfer management expertise that one side brings to the other.
Overall, John Eaton, treasurer of E-S Pacific Corporation in August 1980 thought that they were good partners, pragmatic, conscientious, eager to learn and straightforward, yet at times, disappointedly slow by American standards, (Tung, 106).
E-S Pacific signed a letter of intent that was neither binding nor exclusive. The Corporation undertook the responsibility for providing the financing, design, construction management and foreign procurement for the project. The CITS provided the site, all the necessary approvals by China, certain materials and all the labor for construction and operation of the hotel. Also, to protect themselves against unforeseen exploitation, the CITS put a cap on the number of years the venture lasts. At the end of the ten years time, their 49% is handed over to CITS and their role is over.
There are several reasons why E-S Pacific was considered over more well-known national chains like the Hilton. First, the workers were paid the normal wage rate, with an added 30% for tax deductions and 10% extra as a worker s incentive. Second, because of Cyrus Eaton, Senior s pioneering efforts. Even though he never went to China, he was a major proponent of China s admission into the US. His groundwork earned the necessary guanxi, or goodwill and trust. E-S Pacific also had the experience of dealing with socialist countries in Eastern Europe making them aware of issues, concepts, and problems dealing with socialism. Upon printing of the related article in 1982, ground had not been broken for the construction of the hotel, yet optimistic plans were underway to also build other hotels in Shanghai. Because E-S Pacific Corporation was diligent in maintaining the five principles in their negotiations, success was achieved over other major contenders in China.
Such success stories are also evident in the development of an economic relationship with Japan.
The Developments of Economic Relationships with Japan
There are many trade conflicts that have taken formation through out the 1980 s and 1990 s. The United States had successfully demanded that Japan lift import restraint on beef, citrus fruit, lumber products, and other goods. The United States had asked Japan to deregulate its financial markets. The United States had demanded certain changes in the market trade under a threat of retailing regulations on the Japanese products, (Ito, page 6).
Since the nineteenth century, economic liberalism has been the dominant theoretical perspective on international trade. Liberal economic theorists maintain that free markets establish prices that result in the most efficient allocation of factors of production, such as land, labor, and capital. Thus, they have concluded that free trade is the surest path to economic prosperity and growth (Moon, P.2).
Beginning in the late 1975, the U.S. industry began experiencing greatly accelerated competition from imports, particularly from Japanese firms. In the second half of 1975, color television imports rose to over 22 percent of the U.S. market and concluded the year at 19.5 percent. The most dramatic jump in imports occurred in 1976, with 34.6 percent of color televisions sold in the United States originating abroad, (Baranson, page 77).
This incredible acceleration of Japanese investors took away from the market control of the United States and added more competition. From 1970 to 1979 the major U.S. color television manufactures witnessed a decline in market share from 72.8 percent to 55 percent. This decline can be attributed to the increase in Japanese imports at the expense of U.S.-firm market shares and to a less obvious factor: the purchase of Magnavox by N.V. Philips of the Netherlands in 1975 and Quasar/Motorola by Matsushita in 1975 represented the loss of over 12 percent U.S. market shares. (Baranson, page 77).
The growth of Japanese control in the American market was a result of the free market which the Japanese used to their advantage. They capitalized on the United States free market by sending companies over to the United States to expand their big companies in Japan and enter their products into the United States economic market.
In August 1972 Sony became the first Japanese firm to begin production in the United States. This was Japanese first sign of investment in the United States. They constructed a five-line assembly plant in San Diego, California. Between 1972 and 1980, seven Japanese color television manufacturers established production facilities in America, (Baranson, page 81).
This was a huge trend of onshore production by Japanese companies. Mitsubishi Electric Corporation and Toshiba were also investors in the Unites States during the late 1970 s. Mitsubishi and Toshiba would produce the twenty five inch television sets then use the U.S. marketing to help sell their products.
In the 1980 s the biggest debate was concerned with how many vehicles may be exported to the United States. From 1980-1984 the trade policies of the automotive market varied greatly between Japan and the United States. After the second oil crisis of 1979, the American consumers declined in their purchasing of new cars. In June 1980, the United Auto Workers, later joined by Ford, submitted an escape clause petition seeking temporary import relief (Destler, Odell, p. 14).
Presidential candidate Ronald Regan had pledged on the campaign trail to try to convince the Japanese that the deluge of their cars into the United States must be slowed. With strong encouragement from the White House and US Trade Representative, Japan s Ministry of International Trade and Industry announced, on May 1, 1981, that Japanese automakers would limit their sales to the United States for the next two or three years (Destler, Odell, P. 15).
The export restraints the U.S. was pressing against the Japanese were not holding their ground. Japan s exports continued to increase into the U.S. market during the United State s automotive recession. The United AutoWorkers (UAW) attempted to create a legislation that would increase the manufacturing of automobiles in the U.S. The UAW justified their legislation proposal simply by further developing the principle that the Japanese ought to put more production facilities where their market was (Destler, Odell, P.15).
The U.S. unemployment at this time was at its highest level since the 1930 s. By 1984, the legislation was effectively dead, and no bill was created.
More than half of the US imports in the early 1980 s went not to household consumers but to manufacturers and farmers who use imports of materials and machinery in their production processes. If restraints are imposed against imports of steel, copper, or semiconductors, users must either cut profits or raise the prices they charge for their end products, thereby undermining their competitiveness (Destler, Odell, P.27).
Imports of consumer goods affect the interests not only of the final buyers, but also distributors and retailers who compete by offering foreign goods.
There have also been issues and obstacles to overcome while developing an economic relationship with China.
Development of economic relationships with China
In 1996, China was the United States eighth largest export market. $17.5 billion in goods were exported to China, either directly or through Hong Kong. $13.5 billion was invested either directly, through joint ventures or development in China. Despite the United States success in selling to China, it has a growing trade deficit of $10 billion in 1990 to $40 billion in 1996. Yet the Commerce Department’s figures on deficit are misleading, as billions were unaccounted for, overlooked or accounted for incorrectly. $5.5 billion of goods were exported to China via Hong Kong, yet not included in US export figures. Similarly, $7 billion in profits earned by Hong Kong’s firms are added to China’s figures, thus bulking up the amounts of China’s export profit. This results in an understatement of the success of US firms selling to China and the overstatement of the success of Chinese firms selling to the US, (see attachment 2 and 3, Lardy).
If the US exports goods to Hong Kong, who in turn directly export the goods to China, these amounts are not added to the US’s export totals. Conversely, when China exports goods to Hong Kong, who then add about 25% of the value, the total amount is added to US import figures from China. For example, in 1996, the Commerce Data says that US exports are $12 billion. With the sales from Hong Kong added, real US exports are $17.5 billion. Commerce Data indicates that US imports are $51.5 billion, yet when the added value from Hong Kong is removed, real US imports are $44.3 billion. The two factors show that the real US deficit is $26.8 billion, as opposed to Commerce Data’s figure of $39.5. Yet regardless of an overstatement in the deficit or not, since 1985 there has been a turnaround from a surplus with China to a deficit (see Attachment 1).
What needs to be determined is if a deficit even matters, and if it does, what does the US do? These questions will be considered.
In 1996, the deficit with China accounted for one fifth of the total US global trade deficit. One reason for this increasing demand for Chinese produced goods is cost. Americans have an increasing demand for inexpensive clothes, shoes and electronics. Because of the inexpensive, labor intensive production of these goods, China has 39% of the market share of world exports of clothing, toys, sporting goods and footwear, (Lardy 1997, page 4).
However, even as China’s total exports in these industries is rising, it has not overcome the previous export amounts produced by Hong Kong, Singapore, South Korea and Taiwan. Little labor displacement is occurring in the US due to China’s advancement in the manufacturing industry. The reality is, as other countries are improving their technology, they are moving away from manufacturing, in effect, leaving it for China.
Forty four percent of China’s total exports can be attributed to foreign invested firms in China. Another large factor in China’s total exports is its processed exports, in which foreign companies pay the Chinese to assemble and process given components. These two factors together account for 66 to 75% of China’s total exports. Instead of joint ventures or FDI, it could be more advantageous to outsource certain services. Some Americans believe that it is “less than necessary than they formerly thought to invest in overseas manufacturing facilities,” (Lubman, page 10).
As a result American firms could contract certain services out instead of directly controlling production facilities in China. This outsourcing also saves Americans from future trouble of joint ventures.
Many American companies are experiencing problems with Chinese partners. They find themselves relying heavily on local partners to guide them through the investment procedures. Their partners however, want dividend payouts faster than is realistic. American partners have begun to buy out their partners to take control over the enterprise. The companies are finding joint ventures unnecessary and are reverting either to wholly foreign owned enterprises or outsourcing of Chinese manufacturing firms.
When Bill Clinton expanded most favorite nation (MFN) status to China in 1994 and following years, it was important in both the negotiations over intellectual property rights and China’s application to the WTO. More than 150 of the Fortune 500 companies have already approached the vast Chinese market. Legal and accounting firms and banks and securities houses have started to penetrate the market. Yet US-China differences still reside in several important areas, including human rights, nuclear proliferation and the Taiwan issue.
Thanks to China’s economic reform and the “open door” policy, China has welcomed a large amount of foreign investment and strengthened its own capacity for exports. Because of this strength, China has become less dependent on Hong Kong as the middleman. For example, before 1993, Hong Kong intermediated for more than 40% of China’s total exports to the United States. After 1993, that number decreased to 24%. During the same period, American sales of technology and industrial equipment to China had significantly increased. The trade deficit with China will be lowered pending WTO membership that would “require China to open its domestic market and liberalize its trade and foreign exchange practices, as well as its foreign markets,” (Barfield, page 89).
Another problem in the development of an economic relationship with China was in the trust and investment sector. The Guangdong International Trust and Investment Corporation (GITIC) went bankrupt in 1998. This caused serious losses to a number of creditors. Many thought China had betrayed foreign lenders. Such lenders did not get standard letters of guarantee, but rather “comfort letters” assuring them that the GITIC would not “be allowed to default,” and that their investments were safe. Even though some critics blame the profit-hungry bankers who ignored “the normal practice of due diligence,” (Lubman, page 8) the debate still rests on the letters which were perceived as guarantees yet proved to hold no weight.
A final cause for concern in the Chinese market is the lack of laws or enforcement of them to govern trading practices. Special rules seem to apply to China that investors are now growing weary of. These American investors have found that they are losing money or only breaking even in their multi-national corporations’ projects. Companies like Southwestern Bell and the Royal Bank of Canada have withdrawn.
Another issue to consider while addressing China and Japan-US relations is the importance of Japanese imbalances and the concerns with the Security Treaty.
Dealing with Japanese Imbalances and Concerns with the Security Treaty
Some Japanese manufacturers attributed the imbalances of trade to their high-quality products at reasonable prices. The Japanese manufacturers claimed that was the reason for the major growth in Japanese exports. Japan has recorded surpluses in the trade balance and deficits in the service balance. During the 1970 s and the 1980 s, Japan s current-account balance tended to be in surplus except for the years of the two oil price crises, 1973-1975 and 1979-1980 (Ito, page 293).
The two oil crises during the 1970 s were a milestone in Japan s growth. They were averaging about 10 percent GNP growth per year until 1973. Once the 1980 s stabilized the oil prices, Japan reached a plateau by averaging only four percent GNP growth per year. The investment-income surpluses rose because Japan has accumulated a large amount of foreign assets that yield interest and dividends; the travel-account deficits rose partly because more Japanese are traveling abroad and spending more and partly because the definition of the travel account was changed in 1988 (Ito, page 293).
The United States and Japan have maintained a strong security relationship for nearly half a century. On January 19, 1960, the two governments signed the Treaty of Mutual Cooperation and Security, which continues to provide the basis for the close relationship between the two governments and their defense establishments. During the postwar occupation period, the United States required Japan to dismantle its military and agreed to provide in return for that country s defense needs. (Kernell, P. 1) This gave the United States military control of a strategically important section of the world. There are approximately 100,000 U.S. military personnel deployed in the Asia Pacific region, over 40,000 are in Japan, including about 28,000 in Okinawa. Under the terms of the Security Treaty, these troops contribute to the defense of Japan and to the maintenance of international peace and security in the region. In the United States Asian Pacific security alliance, the U.S. military is working on strengthening their alliance with Japan.
The bilateral trade negotiations to balance the trade deficit are in a time of increased urgency in the late 1980 s. The 1988 Trade Bill had established firm deadlines for measuring progress (Armacost page 32).
In this heated competition, the goal for the two countries was to create a balance in their trade. Coordinated macroeconomic policies were the obvious remedy. But diagnosing the problem proved easier than treating it (Armacost page 35).
The alliance remains the cornerstone for the defense of Japan and for U.S. security strategy in East Asia. Japan recently re-stated its own unwavering support for the security relationship in its long-range defense blueprint, the National Defense Program Outline, issued in November 1995. The U.S.-Japan Mutual Defense Treaty commits both sides not only to the defense of Japan but also to regional stability. With the significant reduction of external threats to Japan’s security, the alliance’s focus today must shift from the defense of Japan to the broader regional goal. This will require Japan to increasingly share in the risks and responsibilities, in order to keep the alliances strong.
Recent developments have made dealing with trade imbalances in China a hot topic in the media, in light of its consideration for the WTO.
Dealing with imbalances in China
It is an overstatement to label China as a completely closed economy or engaged in unfair trading practices based on US data. The statistics underestimate China’s imports from the US and overestimate China’s exports to the US. Thus, according to Lardy, “the US deficit with China in 1995 was US $22.2 billion, not the US $33.8 billion dollar figure reported by the US Department of Commerce,” (Lardy 1996, page 2).
The bilateral trade deficit has been overstated by fifty percent. Over the past five years, the US has increased its exports to China by 22% annually. In fact, our exports have grown more rapidly to China than to any other country, making it our ninth largest market for exporting by US firms. These points indicate that the bilateral trade deficit is not as large or consequential as previously indicated.
In addition, the focus on the inaccurate data takes the attention away from the more important fact that US exports to China are increasing. The exports to China over the past five years has increased, as stated above, more than 22% annually. This is more than double the annual growth rate of US exports to any other country. The data indicates that China is a relatively open economy as it has let in more foreign direct investment into its economy in the past five years than Japan has since World War II.
Another factor in dealing with the imbalances is the possibility of the US imposing sanctions on imports from China, such as increasing tariffs on Chinese imports or setting import quotas. However, the US will gain little to nothing by imposing such sanctions. The fact is, China can find other markets for its goods. If its industries are not making any money by exporting to the US, they will take their business elsewhere. If China did not sell to the US, it would not even lose out that much, as the US contributes “no more than 2.5% to the total output of the Chinese economy,” (Lardy 1996, page 3).
Further, if the US pursues imposing sanctions on China, it will cost more to pursue and enforce than will be made from the sanctions. China could potentially stop buying the necessary raw materials from the US for future export back into the US market. As a result, this would hurt the American manufacturers of the parts, components and hides. If the US proves to be a “problem maker,” China could always find more compliant capital goods markets in Europe and Japan.
Since the “open door” policy began in the late 1970s, China has on average incurred more trade deficits than surpluses. If China wanted to increase its imports, it would only be able to finance it through more FDI, increased overseas borrowing or decreased overseas investing. The key to a balance of trade is in China’s membership to the WTO, which in turn would lead to a more forceful central government.
China’s membership to the WTO will be advantageous two ways, for the benefits it can give as well as receive. According to the WTO Director-General Renato Ruggiero during a speech given April 21, 1997, “China increasingly needs the opportunities and security of the WTO system to fulfill its high potential for growth and development.” The WTO also needs China as a member to truly be a universal system. As China moves higher up the “production ladder,” its imports and exports will increase. It will continue to manufacture clothing and shoes, and as technology improves, so too will its ability to export related goods and services. At the same time, China will be dependent upon imports from the US, among other countries, to help fuel such growth and keep up with its own consumer demand.
China’s incorporation into the WTO will make its integration into the global financial system run much more successfully. In order to reach interdependence in the world trading system, China needs to find a more concrete way to manage its international trade policies. By moving away from the “Maze of arbitrary, shifting and unstable bilateral trade deals,” (Ruggiero) China can begin to focus on consistent and binding pre-set rules and policies.
The White House issued a fact sheet on March 1, 2000 outlining how the US-China WTO accession deal negotiated last November will benefit American high technology businesses such as computer manufacturers, telecommunications companies and information technology firms. Further, the milestone agreement will help open China s markets to American firms because it grants American firms the ability to obtain trading and distribution rights for the first time, and provides strong protection for intellectual property rights. It also contains strong measures for fighting unfair or market-distorting Chinese trade, and compels Chinese state-owned and state-invested enterprises to compete on commercial terms, (US Department of State).
There is a point of safeguard worth mentioning, in light of WTO protests in Seattle and Washington that fear for American jobs. The agreement also addresses non-tariff barriers like the lack of trading rights and distribution rights, and ensures that American workers and companies are protected from practices that injure US industries, such as dumping and import surges. The US will gain new leverage to ensure fair trade and to protect the US agricultural and manufacturing base from import surges, unfair pricing, and abusive investment practices.
Economic restructuring will be necessary as China begins to assume WTO import policies. Yet it will also benefit from such obligations as it exports to other WTO nations by receiving duty-free treatment. Another advantage for China is the forum it will have access to in order to solve trade disputes and encourage foreign investment. A third advantage to being a member of the WTO is that China will have the opportunity to be a part of writing the trade rules for the 21st century.
Implications of Japanese and Chinese Imbalances
The Japanese “miracle” didn’t occur overnight. Prior to World War II, Japan was rapidly growing economic trading partner with the U.S. Why couldn’t Japan predict the economy drop in the 1970’s oil crises? Even after the oil crises, Japan continued to have excellent economic success. Was it the Japanese who rebuilt themselves, or did the United States’ open market and rebuilding efforts trigger Japan’s economic burst? In researching the current and past trade imbalances between the U.S. and Japan, it is feasible to conclude that the alliances of trade between the two countries will flourish and remain strong for years to come.
On July 3 of each year, China’s MFN status expires. In order for China to join the WTO, it is contingent to gain permanent normal trade relations from the US, instead of waiting for an annual congressional review. According to GATT, it is required that all WTO members have to have immediate and unconditional NTR/MFN, or permanent MFN. In order for that to be considered, China needs to improve continue to improve human rights and labor standards, and stabilize Taiwan relations, as agreed upon in the US-China bilateral WTO agreement. The next step is getting Congress approval of granting the permanent status. Once these issues are resolved, and China works to sign separate bilateral WTO agreements with other member countries such as the EU, China could be accepted into the WTO, and trade imbalances will begin to diminish.
Bibliography Page
Text References
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Internet Resources
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