Us Trade Relationschina&Japan Essay, Research Paper

U.S. Trade Relations with China and Japan

(Post World War II)

Seminar on U.S. and Asia Pacific

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.

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). 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.

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).

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).

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).

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 o