Solution to the Trade Deficit With Japan: Cap It

THE United States has tried without success for more than two decades to close its trade deficit with Japan. The Japanese have not cooperated in the past nor will they in the future unless compelled to do so. Indeed, the Japanese minister of trade, Ryutaro Hashimoto, recently commented that Japan regards its current account surplus as a "precious asset."

It is time Washington tried a new approach. Our proposal involves capping the US merchandise trade deficit with Japan at a decreasing annual amount until an acceptable level is achieved.

In contrast, the Clinton administration is pursuing the same approach that has failed in the past. After the collapse of framework talks on autos and auto parts, Washington declared that it would take Japan to the World Trade Organization and vowed to publish a list of Japanese exports the US will target for sanctions, primarily luxury automobiles and sport-utility vehicles.

Economists concur, however, that opening Japanese auto and auto-parts markets will have only a limited impact on the US trade deficit with Japan. The trade imbalance, therefore, will not significantly improve despite the fact that in 1994 automobiles and auto parts accounted for about 58 percent of the US merchandise trade deficit with Japan.

The accelerating appreciation of the yen versus the dollar also has not offered a solution to the trade imbalance, nor is it likely to do so. Note that in 1994 the dollar was at a historical low, at just over 100 yen to the dollar, but the trade deficit was $66 billion, a historical high. Answers to the US trade deficit with Japan, therefore, will not be found in currency-exchange rates.

If neither solving the automobile and auto-parts problem nor an appreciated yen will solve the US trade-deficit problem with Japan, what will? A solution was proposed by Lester Thurow, an economist at the Massachusetts Institute of Technology, in a paper submitted to the Joint Economic Committee of Congress in 1985. Professor Thurow's proposal was championed by veteran Rep. Pete Stark (D) of California. In an April 1985 speech, Mr. Stark proposed that the US set a limit on Japan's balance-of-trade surplus. The limit he proposed was $15 billion annually.

Unfortunately, when Stark introduced his legislation into the House, it was rejected because it ran counter to Reagan's "free trade" ideology.

Now that the Clinton administration is threatening sanctions against Japan (with the endorsement of an 88 to 8 Senate resolution in favor of sanctions), Stark's proposal should be reconsidered. Had Stark's legislation, immediately capping the deficit at $15 billion, been adopted and implemented, the US would have saved an estimated $300 billion in the cumulative trade deficit from 1987 to 1994.

We believe such a deficit cap is a better approach because it permits more flexibility. It allows Japan to decide how it wants to limit its trade surplus. Japan can increase imports, decrease exports, or create various combinations of trade measures to meet a predetermined US trade-deficit figure. Since the recent framework accords failed to obtain Japanese agreements to impose "voluntary" increases in foreign auto and auto-parts purchases in Japan, it is logical to move toward a system that puts the onus squarely on Japan. By limiting the overall deficit to an agreed-upon figure, we force Japan to take responsibility for its unfair trade practices. But we also allow the Japanese to make the necessary trade adjustments in any manner they choose. This arrangement also avoids a US decision to protect any particular industry. In sum, it addresses the trade-deficit problem with a maximum degree of flexibility for both countries.

It is not assumed that the trade deficit can be solved overnight. Consequently, if legislation such as this is enacted, it should mandate only a modest reduction in the US trade deficit each year. It could be stipulated, for example, that the 1994 figure of $66 billion be reduced in 1996 to no more than $56 billion. In 1997, the deficit cap could be reduced another $10 billion to $46 billion. This process would continue each year until the US trade deficit with Japan reached an agreed upon amount. A reasonable target would be $16 billion annually by the year 2000. In a global market system, the US does not need an absolute trade balance with Japan.

The Clinton administration would need to do two things to implement this arrangement. First, it would need to decide what is an acceptable trade deficit and set a target date to arrive at that figure. Second, it would need to establish procedures to ensure that the deficit does not exceed the stipulated amount.

In his congressional presentation, Thurow suggested a complicated system in which licenses would be sold to Japanese exporters and US importers in each quarter of the year, with the value of the licenses determined by the value of US exports to Japan in the previous quarter. Other approaches could be devised.

Since Tokyo seems unwilling or unable to act to solve the trade problem, Washington must summon the political courage to do so. We believe the alternative suggested here is superior to the unimaginative Clinton administration proposal.