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Bad economics = losing politics

Its job was to identify the industries to bedeveloped, formulate a high-growth strategy for those industries,and supervise competition so as to guarantee economic health andeffectiveness. Revisionists thought that the apparent success of the capitalistdevelopmental state signaled the end of orthodox free-marketeconomics. Japan, not the United States, would serve as the modelfor the rest of the world to follow. By contrast, America'ssupposed attachment to laissez-faire ideology had blinded it to thefact that the rules of international competition had changed: "Ifthe United States were a well-run country," Johnson told Fallows in, "neoclassical economists would be hanging from the Capitoldome.

Johnson continued to praise the capitalist developmental stateuntil at least as recently as Like so many earlier candidates, however, the revisionists'claimed "third way" failed to live up to expectations. Therevisionists recognized correctly that the Japanese system ofpolitical economy differs in important respects from Americanpractice. Among its distinctive features are the close and informalties between industry and government, stable cross-shareholding andheavy reliance on relationship-based bank financing rather thanimpatient capital markets, keiretsu alliances withsuppliers and distributors, and lifetime employment arrangements.

Furthermore, it is true that particular Japanese industries haveachieved some spectacular competitive successes and that untilrecently Japan as a whole was growing much faster than the UnitedStates. Where the revisionists erred, though, was in thinking thatJapan's distinctive political economy accounted for its superioreconomic performance. What was really happening? First, Japanese companies haddeveloped new and superior manufacturing techniques, including suchinnovations as continuous improvement and just-in-time inventory.

These innovations were sufficiently important that theydistinguished a new system of so-called lean production fromtraditional mass production. Second, Japan as a whole was experiencing continuing high growthand rapid advancement because it was playing technological catch-upwith the West. It is much easier to grow and improve productivityquickly by adopting and adapting technologies invented elsewherethan by developing those new technologies internally. And those very same market forces, not interventionist tradepolicies, were ultimately responsible for making the direpredictions of an unstoppable Japanese juggernaut look foolish inretrospect.

With often painful restructuring, U. At the same time, Japan's economicperformance naturally slowed as the country reached thetechnological frontier. And what about the interventionist elements of the Japanesesystem so beloved by the revisionists? It turns out that "Japan,Inc. Even Clyde Prestowitz nowrecognizes this fact:. As a catch-up machine, this model was unparalleled. But onceJapan caught up. While the model wasgood at concentrating resources to hit targets already set by thepattern of Western development, it performed poorly at selectingnew directions.

In particular, the clubby, relationship-based system ofallocating capital--until recently praised by Prestowitz and hiscolleagues for its long-term focus--now looks dreadfully wastefuland inefficient. It is impossible to determine which "newdirections" are worth pursuing in the absence of a financial systemthat directs capital toward its highest return. Ultimately, the blame for Japan's current problems lies with itsfailure to make the transition from capitalist developmental stateto a mature economy at the technological frontier.

Instead ofmaking that transition, Japan first faked prosperity by inflatingthe bubble economy in the late s; then, after the bubble burst,it refused to introduce market accountability into the system. Rather, the Japanese authorities let the bad debt problem festerand worsen.

This rot at the core of things has crippled the wholeeconomy. The recent "Big Bang" reforms suggest a hopeful change ofcourse, but it is too early to tell how far that course will befollowed. To revive its fortunes, Japan needs to move to a system in whichcapital is allocated, not according to established relationships orgovernment policy, but in response to clear and undistorted marketsignals. In sum, Japan needs to abandon the very elements of theold "Japan, Inc.

Some have trudged on bravely, minimizing Japan's currentproblems and continuing to trumpet the superiority of the "Japan,Inc. Fingleton is no crank: he was formerly an editor at Forbes and Financial Times , and his book was named one of Business Week 's top 10 business books of But now,three years later, the book contains howlers that take the breathaway. Most of the Japanese financial disasters the Western pressreported in the early s were merely symbol-economy losses thathad few if any negative implications for the realeconomy.

About the heart of the problem, Japan's inefficient and badlydebt riddled banking system, he had this to say: "In fact, there isprobably no other major Japanese industry that has such anefficiency lead over the Americans as banking! By , it was apparent that Japan was girding itself for a newleap forward with the help of powerful Keynesian economicstimulation via increased public spending.

Keynesianism has, ofcourse, been out of fashion in the West for decades, where its sideeffects such as inflation, increased government borrowing, and arise in imports are deemed intolerable. These side effects havehardly been a concern in Japan, where wage increases are tightlycontained, the national budget is in surplus most years, andvarious natural and artificial barriers to imports ensure that thebenefits of budgetary stimulation do not leak abroad.

In short, while American observers continued to dwell on theillusory gloom of the past few years, the Japanese were focusing ona bright future. Just how bright this future is we will nowsee. Three years and trillions of yen in "powerful Keynesian economicstimulation" later, Fingleton's "bright future" has yet to emerge.

But even as evidence of Japan's problems mounted, Fingletonremained optimistic: "The Japanese economy is like a young cyclistpeddling uphill," he said in a speech in Like Fingleton, James Fallows stuck to his revisionist guns wellinto the s. Indeed, he had high praise for Fingleton's analyis. East Asia's financial crisis, though, seems to have been thestraw that broke the camel's back for Fallows. Writing as thecrisis deepened in November , he admitted that the Asian modelthat once so impressed him has "tragic flaws":.

The case against the Asian model is obvious. The effort todiscourage consumption denies people the full fruits of theirlabor; guidance by bureaucrats invites corruption and seemsham-fisted in a world of instant capital flows and breakneckdevelopment in info-tech. Of course, none of these flaws were "obvious" to Fallows only acouple of years earlier.

And still, Fallows tries his best toaccentuate the positive:. But the soundness of parts of the model remain underappreciatedin the English-speaking world. In major manufacturingcategories, Japanese, Korean, and Chinese manufacturers have heldor expanded world market share even as banks collapse around them.. As economist Paul Krugman commented recently on Fallows'sobservation: "Shouldn't this make him wonder whether tradesurpluses are such a good thing?

Now, however, he is trying tocover his tracks. At a speech delivered before the EconomicStrategy Institute this March, for example, he said: "The disasterof did not refute revisionism but rather confirmed the essenceof the revisionists' message--there are differences amongcapitalist systems that are not trivial and that under the rightcircumstances can blow the system apart.

During the early eighties, when Japan's trade surpluses with theUnited States set new records every month and came close todestroying much of the manufacturing base of the U. And we advocated using the full market power ofthe United States--which was, and still is, the main market for allthe East Asian economies--to force them to make international trademutually beneficial by opening their markets. Our policy answer.

Revisiting U.S. Trade Policy: Decisions in Perspective

We called for atrade war. The intent was to force Japan into a domestic-demand-ledeconomic strategy by selectively weaning it from the Americanmarket. What was wrong with the so-called revisionists'strategy is that the Cold War was still on and there were manyfools in the U. The reformsthat are now promised in Japan were needed c. If forcing Japan into a domestic-demand-led economic strategywas always Johnson's intent, it was easy to miss it.

Recall that hewrote: "A policy of pressuring Japan to alter its economic systemto make it look like the American system is doomed tofail. In order to meet the competition of Japan, other countries mustcopy or match Japan's keiretsu -type company structures,its mercantilist industrial and trade policies, its ability to makecapital available on a preferred basis to strategic industries, andits managerial incentives that impose long-term perspectives oncompany operations.

Neoclassical economic theory is not onlyirrelevant to this challenge, it is downrightmisleading. Of all the revisionists, Clyde Prestowitz has reacted mostdramatically to Japan's current problems. Without explicitlyrenouncing his former views, he has nonetheless turned them ontheir head. They may be necessary to keep thepatient alive, but they won't restore him tohealth. Indeed, according to Prestowitz, the whole Asian model--once thesupposed wave of the future--must be scrapped, and the sooner thebetter: "With much of Asia now on life support, it is time torecognize that the Asian brand of capitalism is dangerous to theworld economy's health and that it must be abandoned, particularlyby Japan.

Prestowitz once wrote that "it is counterproductive to continueto act the missionary toward Japan in the matter of trade andeconomics. To ensure that Japan takes these or other recommendationsseriously, it might be necessary for world leaders to convene anextraordinary session of the World Trade Organization. It was JohnMaynard Keynes who proposed in the s that a world trade bodyshould have emergency measures for handling threats to the worldtrading system arising from chronic surpluses as well as fromexcessive deficits. Perhaps it is time for the WTO to come to gripswith this long-recognized problem in a way that would encourageJapan seriously to consider a thorough opening of its market toboth domestic and foreign enterprises.

While Prestowitz's disillusionment with the Japanese model isbetter late than never, his proposal of a WTO remedy for Japan'stroubles is wrongheaded. Japan's economic woes are not a tradeproblem and should not be treated as such. Thedysfunctional Japanese policies at issue do not fit thatdescription. Punitive tax rates on corporate and personal income donot discriminate against foreigners; neither does the failure toclean up banks' bad debts; neither does the hopeless attempt tofake economic vitality with wasteful public works spending. The argument made by Prestowitz and others is that if Japanreforms its economy and returns to a healthy growth path, it couldimport more and take up the slack for the ailing economies of thePacific Rim.

Perhaps, but how does that distinguish Japan fromother countries around the world? Surely Europe could grow fasterand absorb more imports if it weren't hobbled by chronicdouble-digit unemployment. If every economic underachiever werehauled to the dock, there would be no end of WTO tribunals.

The revisionists claimed to have discovered a new and superiorform of capitalism: the Japanese capitalist developmental state. Today, however, the Japanese model is better known as "cronycapitalism," and its manifest failures are causing economic painand political turmoil up and down the Pacific Rim. The revisionistsargued that the United States was doomed as a leading economicpower unless it adopted Japanese-style practices. It didn't and isnow enjoying spectacular and unrivaled prosperity.

In short, the revisionists' doom-and-gloom prophecies could nothave been more wrong. All their errors trace back to a commonsource: an inability to understand and appreciate the power of freemarkets. Suffering from what Nobel Prize-winning economist F. Hayek termed the "fatal conceit," 87 they believed that ahandful of government planners could outthink millions of privatedecisionmakers--could pick "strategic" industries, allocate capitalin defiance of market signals, and prop up the stock market andreal estate values.

Like so many others before them, they pridedthemselves as sophisticated realists, yet in fact their faith inbureaucratic miracles was hopelessly naive. Only a few short yearswere needed to burst their bubble. This book was orginally published in andreissued in with a new introduction. Stock market percentage decline is based on authors'calculation of Nikkei prices with a historic high of 38, Chalmers Johnson, Japan: Who Governs?

New York:W. Robert L. Industries New York: Free Press, , p. Textavailable from authors by request. For more on the failure of U. That worsens Boeing's competitive position against Airbus, its biggest competitor. Mexico was looking for an anti-corruption clause. He would have to do so 90 days before withdrawal. He did not need congressional approval to do this. It states that the president has the power to unilaterally withdraw from all trade agreements. It's uncharted legal territory. That would raise the costs of imports from Mexico.

By law, he can only raise tariffs by 15 percent for days without congressional approval. Exports from those countries would be assessed standard tariffs. At that point, importers would probably sue the U. It turned toward the Pacific Alliance. In , the alliance created a free trade zone between Mexico, Colombia, Chile, and Peru.

In , 94 percent of all goods traded in the zone were tariff-free. Mexico also improved its trade relationship with the EU. The new agreement might help restore some of the , - , manufacturing jobs lost in California, New York, Michigan, and Texas. On the other hand, it could raise the price of affected imports for American consumers.

Beyond Tariffs: What’s Preventing a U.S.-China Trade Agreement?

Inflation would increase as a result. The new restrictions might reduce some trade. It increased U. That created 5 million new U. That's almost as much as it imports from China. The new agreement won't threaten the flow and price of these imports.

Introduction

They include oil, manufactured products, fruits, vegetables, coffee, and cotton. The only exception is automobile imports. Restrictions on auto exports might damage Mexico's economy. It could force more Mexicans to immigrate to the United States. The Balance uses cookies to provide you with a great user experience. By using The Balance, you accept our.

Dollar Exchange Rates Trade Agreements. By Kimberly Amadeo. Progress had been slow. Article Table of Contents Skip to section Expand. Continue Reading. It is true that Japan, like other countries,has its share of overt protectionist barriers; it is also true thatthe Japanese system of political economy is distinctly differentfrom the U. Nevertheless, in the absence of overtrestrictions, foreign companies can and do achieve competitivesuccess in Japan.

The existence of suchsuccess stories is simply not compatible with the stereotype of aclosed Japan that the revisionists advanced. Fortunately, as with industrial policy, the United States onlyflirted with the revisionists' trade policy recommendations. It didimpose quantitative restrictions on major Japanese imports--theso-called voluntary restraint agreements on automobiles, steel, andmachine tools.

And in the case of semiconductors, it negotiated a"voluntary export expansion" agreement in which Japan agreed to anexplicit 20 percent market share target for foreign suppliers. The Clinton administration sought to apply a "results-based"approach more broadly, under the U. In a final showdown overautomobiles in June , the United States ultimately decided toback down rather than impose sanctions against Japan.

Since thattime, U. Despite a few dalliances, the United States stuck with its basiccommitment to rules-based trade. It allowed the voluntary restraintagreements to expire. Indeed, theprospect of losing its case at the WTO was a major factor behindthe U. Meanwhile, the United States has prospered from its refusal tofollow the revisionists' advice. The revisionists' predictions went so badly astray because theyfundamentally misinterpreted Japan's economic system.

Inparticular, they believed they had discovered in Japan a new andsuperior form of capitalism: the so-called capitalist developmentalstate. According to the revisionists, the capitalist developmentalstate represented a "third way" in which the government sets broadsocietal goals but uses market mechanisms to achieve them. Privateownership of property and free exchange exist, but governmentplanning and resource manipulation are also essential. The Asian-style system deeply mistrusts markets.

It seescompetition as a useful tool for keeping companies on their toesbut not as a way to resolve any of the big questions of life--how asociety should be run, in what direction its economy shouldunfold. Specifically, the government attempts to foster economicdevelopment through market intervention aimed at helping specificcompanies improve their prospects of success.

Intervention includesdirect subsidies, import protection, and directing the flow ofprivate capital toward promising industries. Chalmers Johnson described MITI as the "pilot agency" primarilyresponsible for translating the government's goals into substantiveindustrial policy. Its job was to identify the industries to bedeveloped, formulate a high-growth strategy for those industries,and supervise competition so as to guarantee economic health andeffectiveness. Revisionists thought that the apparent success of the capitalistdevelopmental state signaled the end of orthodox free-marketeconomics.

Japan, not the United States, would serve as the modelfor the rest of the world to follow. By contrast, America'ssupposed attachment to laissez-faire ideology had blinded it to thefact that the rules of international competition had changed: "Ifthe United States were a well-run country," Johnson told Fallows in, "neoclassical economists would be hanging from the Capitoldome. Johnson continued to praise the capitalist developmental stateuntil at least as recently as Like so many earlier candidates, however, the revisionists'claimed "third way" failed to live up to expectations.

Therevisionists recognized correctly that the Japanese system ofpolitical economy differs in important respects from Americanpractice. Among its distinctive features are the close and informalties between industry and government, stable cross-shareholding andheavy reliance on relationship-based bank financing rather thanimpatient capital markets, keiretsu alliances withsuppliers and distributors, and lifetime employment arrangements. Furthermore, it is true that particular Japanese industries haveachieved some spectacular competitive successes and that untilrecently Japan as a whole was growing much faster than the UnitedStates.

Where the revisionists erred, though, was in thinking thatJapan's distinctive political economy accounted for its superioreconomic performance. What was really happening? First, Japanese companies haddeveloped new and superior manufacturing techniques, including suchinnovations as continuous improvement and just-in-time inventory. These innovations were sufficiently important that theydistinguished a new system of so-called lean production fromtraditional mass production. Second, Japan as a whole was experiencing continuing high growthand rapid advancement because it was playing technological catch-upwith the West.

It is much easier to grow and improve productivityquickly by adopting and adapting technologies invented elsewherethan by developing those new technologies internally. And those very same market forces, not interventionist tradepolicies, were ultimately responsible for making the direpredictions of an unstoppable Japanese juggernaut look foolish inretrospect. With often painful restructuring, U.

At the same time, Japan's economicperformance naturally slowed as the country reached thetechnological frontier. And what about the interventionist elements of the Japanesesystem so beloved by the revisionists? It turns out that "Japan,Inc. Even Clyde Prestowitz nowrecognizes this fact:. As a catch-up machine, this model was unparalleled.

But onceJapan caught up. While the model wasgood at concentrating resources to hit targets already set by thepattern of Western development, it performed poorly at selectingnew directions.

Bad economics = losing politics

In particular, the clubby, relationship-based system ofallocating capital--until recently praised by Prestowitz and hiscolleagues for its long-term focus--now looks dreadfully wastefuland inefficient. It is impossible to determine which "newdirections" are worth pursuing in the absence of a financial systemthat directs capital toward its highest return. Ultimately, the blame for Japan's current problems lies with itsfailure to make the transition from capitalist developmental stateto a mature economy at the technological frontier.

Instead ofmaking that transition, Japan first faked prosperity by inflatingthe bubble economy in the late s; then, after the bubble burst,it refused to introduce market accountability into the system. Rather, the Japanese authorities let the bad debt problem festerand worsen. This rot at the core of things has crippled the wholeeconomy. The recent "Big Bang" reforms suggest a hopeful change ofcourse, but it is too early to tell how far that course will befollowed. To revive its fortunes, Japan needs to move to a system in whichcapital is allocated, not according to established relationships orgovernment policy, but in response to clear and undistorted marketsignals.

In sum, Japan needs to abandon the very elements of theold "Japan, Inc. Some have trudged on bravely, minimizing Japan's currentproblems and continuing to trumpet the superiority of the "Japan,Inc. Fingleton is no crank: he was formerly an editor at Forbes and Financial Times , and his book was named one of Business Week 's top 10 business books of But now,three years later, the book contains howlers that take the breathaway.

The Revolution in American Trade Policy

Most of the Japanese financial disasters the Western pressreported in the early s were merely symbol-economy losses thathad few if any negative implications for the realeconomy. About the heart of the problem, Japan's inefficient and badlydebt riddled banking system, he had this to say: "In fact, there isprobably no other major Japanese industry that has such anefficiency lead over the Americans as banking! By , it was apparent that Japan was girding itself for a newleap forward with the help of powerful Keynesian economicstimulation via increased public spending.

Keynesianism has, ofcourse, been out of fashion in the West for decades, where its sideeffects such as inflation, increased government borrowing, and arise in imports are deemed intolerable. These side effects havehardly been a concern in Japan, where wage increases are tightlycontained, the national budget is in surplus most years, andvarious natural and artificial barriers to imports ensure that thebenefits of budgetary stimulation do not leak abroad. In short, while American observers continued to dwell on theillusory gloom of the past few years, the Japanese were focusing ona bright future.

Just how bright this future is we will nowsee. Three years and trillions of yen in "powerful Keynesian economicstimulation" later, Fingleton's "bright future" has yet to emerge. But even as evidence of Japan's problems mounted, Fingletonremained optimistic: "The Japanese economy is like a young cyclistpeddling uphill," he said in a speech in Like Fingleton, James Fallows stuck to his revisionist guns wellinto the s. Indeed, he had high praise for Fingleton's analyis.

East Asia's financial crisis, though, seems to have been thestraw that broke the camel's back for Fallows. Writing as thecrisis deepened in November , he admitted that the Asian modelthat once so impressed him has "tragic flaws":. The case against the Asian model is obvious.

The effort todiscourage consumption denies people the full fruits of theirlabor; guidance by bureaucrats invites corruption and seemsham-fisted in a world of instant capital flows and breakneckdevelopment in info-tech.


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Of course, none of these flaws were "obvious" to Fallows only acouple of years earlier. And still, Fallows tries his best toaccentuate the positive:. But the soundness of parts of the model remain underappreciatedin the English-speaking world. In major manufacturingcategories, Japanese, Korean, and Chinese manufacturers have heldor expanded world market share even as banks collapse around them..

As economist Paul Krugman commented recently on Fallows'sobservation: "Shouldn't this make him wonder whether tradesurpluses are such a good thing? Now, however, he is trying tocover his tracks. At a speech delivered before the EconomicStrategy Institute this March, for example, he said: "The disasterof did not refute revisionism but rather confirmed the essenceof the revisionists' message--there are differences amongcapitalist systems that are not trivial and that under the rightcircumstances can blow the system apart.

During the early eighties, when Japan's trade surpluses with theUnited States set new records every month and came close todestroying much of the manufacturing base of the U.


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  6. And we advocated using the full market power ofthe United States--which was, and still is, the main market for allthe East Asian economies--to force them to make international trademutually beneficial by opening their markets. Our policy answer. We called for atrade war.

    The intent was to force Japan into a domestic-demand-ledeconomic strategy by selectively weaning it from the Americanmarket. What was wrong with the so-called revisionists'strategy is that the Cold War was still on and there were manyfools in the U. The reformsthat are now promised in Japan were needed c. If forcing Japan into a domestic-demand-led economic strategywas always Johnson's intent, it was easy to miss it.

    Recall that hewrote: "A policy of pressuring Japan to alter its economic systemto make it look like the American system is doomed tofail. In order to meet the competition of Japan, other countries mustcopy or match Japan's keiretsu -type company structures,its mercantilist industrial and trade policies, its ability to makecapital available on a preferred basis to strategic industries, andits managerial incentives that impose long-term perspectives oncompany operations.

    Neoclassical economic theory is not onlyirrelevant to this challenge, it is downrightmisleading. Of all the revisionists, Clyde Prestowitz has reacted mostdramatically to Japan's current problems. Without explicitlyrenouncing his former views, he has nonetheless turned them ontheir head. They may be necessary to keep thepatient alive, but they won't restore him tohealth.

    Indeed, according to Prestowitz, the whole Asian model--once thesupposed wave of the future--must be scrapped, and the sooner thebetter: "With much of Asia now on life support, it is time torecognize that the Asian brand of capitalism is dangerous to theworld economy's health and that it must be abandoned, particularlyby Japan.

    What the 2018 (and 2020) Elections Mean for U.S. Trade Policy

    Prestowitz once wrote that "it is counterproductive to continueto act the missionary toward Japan in the matter of trade andeconomics. To ensure that Japan takes these or other recommendationsseriously, it might be necessary for world leaders to convene anextraordinary session of the World Trade Organization.

    It was JohnMaynard Keynes who proposed in the s that a world trade bodyshould have emergency measures for handling threats to the worldtrading system arising from chronic surpluses as well as fromexcessive deficits. Perhaps it is time for the WTO to come to gripswith this long-recognized problem in a way that would encourageJapan seriously to consider a thorough opening of its market toboth domestic and foreign enterprises. While Prestowitz's disillusionment with the Japanese model isbetter late than never, his proposal of a WTO remedy for Japan'stroubles is wrongheaded.

    Japan's economic woes are not a tradeproblem and should not be treated as such. Thedysfunctional Japanese policies at issue do not fit thatdescription. Punitive tax rates on corporate and personal income donot discriminate against foreigners; neither does the failure toclean up banks' bad debts; neither does the hopeless attempt tofake economic vitality with wasteful public works spending.