Saturday, April 05, 2008

When I was in college, one of the things that especially interested me about Japan was the trade issues. At the time, I suffered from what seems to be a frequent affliction of folks studying Japan (or any other country/area) in that I gave more of a benefit of a doubt to the Japanese side than I did to the US position. I remember one thesis I wrote on the US/Japanese trade dispute which would have made Reischauer with its sugar-coating of Japan's trade policies.

A very quick refresher from the Council of Foreign Relations online debates:

We have been down this road before, and know how to deal with such situations. Two decades ago, Japan built an export powerhouse behind an artificially cheap currency and protected home markets. This continued until 1985, when it began to threaten the stability of the world financial system. The problem then, as now, was the U.S. trade deficit.

The Reagan administration, much like the current White House, doggedly ignored the over-valued dollar through its first term while millions of jobs disappeared and thousands of factories closed. Finally, Congress acted and passed a measure (HR 3035) which hit countries like Japan, Brazil, and Korea, that maintained large U.S. trade surpluses, with a 25 percent tariff.

In a complete about-face, Treasury Secretary James Baker then negotiated the Plaza Accord with the G-5 (Japan, Germany, France and the U.K.), on September 22, 1985. The next day, the Federal Reserve and Central banks in Japan and Europe executed coordinated currency interventions that began to drive the dollar down. The dollar continued to fall until the Louvre Accord 16 months later, which stabilized its level again. The dollar fell 29 percent to 46 percent against the G-5 currencies in this period.

The U.S. never imposed a tariff in the Plaza era—HR 3035 never even became law. The mere threat, combined with concerns about a potential financial crisis, were enough to get the deal done. Interesting debate on free trade for the next US administration at CFR here.

Of course, this did not resolve or even slow the escalating trade disputes/trade deficit with Japan at the time. Japan simply changed strategies. Uncle Sam didn't as we practice "free trade" as a religion. Security to us means military security. Japan is not so simple-minded and does not need to be as Uncle Sam provides Japan's military security at discount.

I grew up religious before becoming agnostic (thanks to Professor Blackwell and a course on Buddhism). I was also a member of the Church of Free Trade, until I finally realized that there is no truly free trade between countries on this planet. It is all managed. Some just do it more thoroughly than others.

No comments:

Post a Comment