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Japan’s Bad Trade

Why won’t anyone talk about Tokyo’s auto protectionism?
Illustration by Michael Hogue

Mitt Romney was in his element a few years ago as the Obama administration struggled to rescue the Detroit auto industry. In an eat-your-spinach tone, he ticked off his recommendations for reform. Top management should go, executive dining rooms should be shut, and factory wages slashed. Then there were the industry’s “legacy costs”: given how drastically Detroit’s market share had shrunk in the face of rampant imports, retiree entitlements had come to account for as much as $2,000 per car. Countless retirees would just have to be thrown overboard.

Whatever the merits and demerits of Romney’s lengthy list, it contained a notable omission. It made no mention of international trade. This despite the fact that for decades Detroit has been undermined by an egregiously unfair world trade system. As if to rub salt in Detroit’s wounds, Romney held up Japanese automakers as a model of quality manufacturing—the same companies which for two generations have been the greatest beneficiaries of rigged markets.

As the Michigan-born son of a top auto executive—and as one of America’s most capable experts on how the global economy really works—Romney certainly knew better. But he is hardly alone in buttoning his lip where trade with Japan is concerned. America’s entire globalist elite has long realized that Tokyo no longer tolerates frank discussions and is often devastatingly effective in evening the score with anyone rash enough to challenge it.

Yet facts are facts. Here are a few which, though they remain hidden from most Americans, are widely known to media commentators, diplomats, Japan scholars, and of course aspiring presidential candidates:

  1. The Japanese government has used a plethora of constantly evolving regulations to keep the combined share of all non-Japanese automakers to just 4 percent of the Japanese market. The share never varies, whether the yen is strong or weak. (The yen is up nearly 50 percent against the dollar in the last five years.)
  2. The Detroit corporations, in common with all major automakers, make many cars in Europe configured for Britain’s drive-on-the-left roads, and by extension for Japan’s. They also make countless components and assemblies that have been shut out of Japan for no other reason than that they are not made there.
  3. Even Volkswagen, which sells broadly as many cars around the world as Toyota, has been allocated—that is the right word—just 1 percent of the Japanese market; by contrast Toyota’s share is close to 40 percent. (Volkswagen is lucky, incidentally: Hyundai’s share is 0.02 percent and Daewoo’s 0.003 percent, and this in a country where close to 1 percent of the people are ethnic Koreans.)

As Pat Choate, a former top executive of TRW Corporation and an expert on the global auto industry, points out, the fact that so little of the truth of the Japanese market has emerged in public in recent years is a message in itself.

The fundamental economic issue here is that by pricing high in the protected home market, Japanese automakers can powerfully subsidize their prices abroad. The policy is underpinned both by traditional Japanese cartel dynamics and by governmental “guidance.” Basically, the Japanese consumer unwittingly foots the bill for much of the Japanese industry’s consistently heavy investment in R&D and ever more efficient new production processes. This leaves cartel members free to price abroad at little more than low variable costs (which means they need aim to recover merely the cost of direct labor and immediate inputs such as components).

The cartel’s profitability is further bolstered by Japan’s so-called sha-ken system of car inspection. This is so rigorous that most Japanese drivers trade in their autos every three years. Choate comments: “Japanese autos, of course, last far longer than three years.  But to keep up revenues, the industry has a market of captive customers that keep buying new. Japan is the land of new cars—virtually all Japanese made.”

Worn down for four decades by such unequal competition, the Detroit companies have been chronically starved of funds to invest in R&D and new production processes. The result is they have gone from leaders to laggards in quality and productivity.

Of course, umpteen times over the years the problem of Japan’s closed market has been declared solved. A particularly impressive-sounding solution was presented by President Bill Clinton in the White House Briefing Room in 1995. With Japanese Trade Minister Ryutaro Hashimoto by his side, Clinton announced that Japan had agreed “to truly open its auto and auto parts markets to American companies.”

He added: “This agreement is specific. It is measurable. It will achieve real, concrete results … we finally have an agreement that will move cars and parts both ways between the United States and Japan. This breakthrough is a major step toward free trade throughout the world.”

Clinton focused on the Japanese distribution system, pointing out that, whereas 80 percent of U.S. car dealers sold foreign brands—often, of course, alongside American ones—only 7 percent of dealers in Japan sold anything other than Japanese cars.

This deal was the most recent attempt by any Washington administration to open the Japanese market and, like all previous such agreements, it was dead on arrival. If the Clinton administration made the slightest attempt to enforce it, we were never told. Even Detroit never revisited it and has only in the last few months begun to agitate again on Japanese protectionism. (Detroit’s return to the issue has been stimulated by the Obama administration’s effort to push through the so-called Trans-Pacific Partnership, a proposed new trade agreement.)

In the seventeen years since Clinton’s breakthrough, the number of actors who have tried to keep the Japan trade story alive has dwindled to almost nothing. Meanwhile, Tokyo no longer makes even a pretense of complying with American ideas of fair trade.

Perhaps the most graphic evidence of Tokyo’s true policy has been the story of the Renault-Nissan alliance. Originally established in 1999 and consolidated in subsequent years, this odd-couple partnership ostensibly gave Paris-based Renault control of Yokohama-based Nissan. In a powerful symbol of Japan’s ostensible acquiescence to American-style globalization, Renault’s Carlos Ghosn was even installed as simultaneous chief executive of both companies.

Given that Renault enjoyed a fundamental advantage in lower French wages and was more than a match for Nissan managerially, many observers expected it to make big inroads in the Japanese market. After all, the Nissan distribution chain—Japan’s second largest—was now ostensibly Ghosn’s to reshape. As reported by the BBC in 2005, the two companies were “expected to go through a process of rapid integration.” In particular they hoped to achieve savings through “jointly owned distribution subsidiaries.”

To the extent that the companies have cooperated on distribution, however, this has been confined entirely to markets beyond Japan. In the Japanese home market, Nissan has kept its distribution system strictly off-limits to Renault. The result is that, far from increasing, Renault’s Japanese market share has dropped from a negligible 0.08 percent in 1999 to a totally insulting 0.04 percent in 2009, the latest year for which figures are available. Indeed, to the extent that the company’s brand is known at all on Japanese roads, it is as a minor brand of Taiwanese-made bicycles!

And this is just the beginning of Renault’s woes. Judged by growth in total global sales, Renault has consistently been a hopeless also-ran, whereas Nissan has been a star performer. (Renault’s global sales are up less than 15 percent since the first full year of the partnership, whereas Nissan’s have zoomed nearly 78 percent. Nissan’s success has been attributable not least to increasing inroads in Renault’s home turf of Western Europe.)

How does Renault feel about all this? Neither Ghosn nor any of his executives in Tokyo or Paris has responded to numerous telephone and email messages. Even Renault’s major French rival, the Peugeot-Citroen group, with a recent share of just 0.1 percent in Japan and similarly known there as a minor Taiwanese bicycle brand, is not commenting.

Perhaps the French government might be more forthcoming, I thought. But when I emailed some questions to the French embassy in Tokyo, diplomats there could hardly have been less gracious had they been stung by bees. In an email response, Jules Irrmann, an official spokesman, gratuitously implied that any discussion of Japanese protectionism amounted to  “Japan-bashing.” As for my questions, he vaguely directed me to the embassy’s website. Given that there appeared to be nothing there of relevance, I followed up with several requests for clarification. They went unanswered, and so did similar messages sent directly to two successive ambassadors and to the deputy head of the French mission in Tokyo.

What is clear is that Renault’s experiences in Japan should be of some significance to Paris. After all, the company is one of France’s most important “national champions” and French officials signed off on its tie-up with Nissan.

French feelings cannot have been soothed by Japan’s remarkably more robust performance in overall trade. Even in the teeth of one of the biggest earthquakes in history, Japan last year logged a current account surplus of $120 billion. France by comparison incurred a deficit of $66 billion—almost as poor a performance on a per-capita basis as the United States.

Japan’s unemployment rate, moreover, was recently one of the lowest in the developed world, while France’s was one of the highest. On an apples-to-apples basis, as adjusted by the U.S. Bureau of Labor Statistics, the French unemployment rate last year was 9.4 percent, more than double Japan’s 4.2 percent (and considerably higher even than America’s 8.9 percent).

Given numbers like these, what explains France’s pusillanimity? It might seem uniquely mysterious—except that when I asked similar questions about Volkswagen’s virtual exclusion from the Japanese market I encountered a similar pattern: Volkswagen did not reply and the German Embassy in Tokyo took two weeks to respond, and then to say that all questions should be referred to the German government in Berlin.

As for the United States, a spokesman for John Roos, the Obama administration’s ambassador to Japan, responded promptly, but only to say the embassy had no comment. For good measure I also tried to contact Mitt Romney’s campaign staff but never received a response.

What do American Japanologists think of all this? Their collective institutional memory is second to none—many of them indeed were already fully credentialed as far back as the early 1970s, when Japanese trade issues first surfaced in Washington. Certainly few of them need reminding that as early as 1982 Japanese foreign minister Yoshio Sakurauchi assured a meeting of the GATT that Japan “is one of the most open markets in the world.” Many of the them are probably aware too that Nobuhiko Ushiba, who served as Japan’s ambassador to Washington in the early 1970s, told reporters: “There is no example in recent history of a nation liberalizing trade policy as fast as Japan.”

To say the least, American Japanologists know the score. Unfortunately, their voices have long been silenced. I have not been able to identify a single American scholar who has published a paper on Japan’s auto-trade barriers in more than a decade. At a more informal level, a useful indicator is the Japan-U.S. Discussion Forum. This is a website moderated by the National Bureau of Asian Research, a think tank associated with the University of Washington. Japanologists across the United States monitor this forum daily, and many of them contribute to it. Though its search facility is dysfunctional and gives inconclusive results, there seems to be no record of the remarkable problems Renault has encountered in Japan ever having been raised there. Rather the reverse: the Renault story has been presented as a French success and an encouraging example of Japanese market-opening. In fact, at least one contributor some years ago went unchallenged in presenting Japan as opening its auto market to foreign competition.

The only American academic observer I know of who continues fearlessly to uphold the Western truth ethic on Japanese trade is Ivan P. Hall, a Harvard-educated Japan historian and a former cultural diplomat to Japan. Author of Bamboozled, an account of how American views of Japan have been shaped by a propagandistic agenda in Tokyo, Hall minces no words in pronouncing the Japanese car market one of the world’s most protected.

Why is he almost alone in calling a spade a spade? Hall’s answer is forthright: “We are living in very cowardly times.”

Perhaps most surprising of all has been the performance of the English-speaking media. Major news organizations have long since swept the Japanese trade story under the carpet. Even Renault’s comeuppance, obvious as it is to every Japan-based foreign correspondent, has not been reported. Meanwhile the Foreign Correspondents Club of Japan has not organized a significant discussion on auto trade problems since the mid-1990s. Indeed, it has done the opposite by organizing several events portraying the Renault-Nissan alliance as evidence of a globalizing Japan.

Why do so many key people duck the issues raised by Japanese mercantilism? As Hall points out, a key factor is the State Department’s anachronistic Cold War mindset. “Diplomats in Tokyo,” he comments, “typically view their overriding function as political rather than economic—presiding over a bromidical ‘broader relationship’ and easily frightened by tough trade questions that might ‘offend’ their Japanese hosts.”

Another factor is that the Japanese are now the world’s dominant suppliers of producers’ goods to the global car industry. This means their erstwhile formidable rivals in the United States and Europe must now humbly stand in line for the latest, most advanced Japanese equipment, components, and materials. Not only are Japanese suppliers organized in solid cartels, but they are led by authoritarian bureaucrats skilled in maintaining industrial corporations’ focus on long-term national goals.

As for the silence of other actors, in virtually every case money has clearly played a role. This is most consequential in the case of candidates for national office. They are beholden to Wall Street investment bankers, which in turn often function as surrogates for foreign industrial interests.

Meanwhile, as Hall has extensively documented, the field of Japan studies at American universities is now heavily dependent on Tokyo-based grant-giving authorities. Other money comes from a few globalist-minded U.S. corporations that have entered into a Faustian bargain with the Tokyo establishment: in return for receiving “affirmative action” in the Japanese market, they undertake to promote Tokyo’s agenda among American scholars. The most important such collaborator, until it flamed out a few years ago, was the disgraced New York-based insurance company AIG. For decades it drew much of its profits from Japan’s highly regulated—and rigged—insurance markets. It returned the favor by funding academics willing to portray the Japanese market as proverbially “one of the world’s most open.” Boeing, Goldman Sachs, and Coca-Cola have also long played a similar role in steering scholarly inquiry into acceptable areas.

Money also goes a long way towards explaining the timidity of the American media. While American editors have an honorable tradition of standing up to American advertisers, the challenge presented by the Japanese is of a different order. In advertising matters, as in so many other aspects of Japanese life, government-led Japanese cartels prevail, and they have increasingly used their financial clout to intimidate American editors. These latter rarely speak frankly, of course, even in private. But one episode that did become public some years ago was an effort by about a dozen Japanese advertisers to muffle the launch of a controversial book on the Nanking massacre. The book, by the late Iris Chang, was due to be serialized by Newsweek. The advertisers made clear their displeasure. For a moment, Newsweek’s editors vacillated, but in the end, to their credit, they went ahead. It is clear that they had little choice: their hand was forced by Chang, a particularly determined writer with a reputation for fearlessness, who went public with the story of the advertisers’ intervention.

A knock-on effect of media silence is that politicians have an alibi. As Matt Blunt, president of the Washington-based American Automotive Policy Council, points out, efforts to push for market-opening action in Japan have long been stymied by the fact that most American politicians know little about the issues. “They simply assume that because they are not reading anything in the press, the access problem has been solved.”

Will the U.S. government ever get serious about Japanese protectionism? I put the question to a prominent Washington-based lawyer who served in the Reagan administration and considers himself a hawk on America’s industrial decline. “The U.S. government has simply given up on opening the Japanese auto market,” he said. “The United States is just not going to close its market to Japan. We need Japan against China.”

This does not quite add up. If Japan deserves to be considered a U.S. ally, why has it worked so assiduously, under clear government leadership, to hollow out one key U.S. industry after another? And why has it, contrary to its claims to have embraced Western values, resorted to such elaborate measures to suppress Western comment on its policies? These seem like reasonable questions. But in money-minded Washington, they are the wrong questions.

Eamonn Fingleton is the author of  In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Dominance.



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