U.S. State Department Geographic Bureaus: East Asia and Pacific Bureau

U.S. DEPARTMENT OF STATE
95/06/13 Testimony: Stephen Ecton on US-Japan Relations
Bureau of East Asian and Pacific Affairs

U.S.-JAPAN RELATIONS

Testimony for
Senate Foreign Relations Committee
Asia and Pacific Sub-Committee
June 13, 1995

Stephen Ecton
Acting Deputy Assistant Secretary
East Asian and Pacific Affairs
Department of State

Mr. Chairman, Members of the Committee:

I am pleased to have this opportunity to share views with you on the current state of U.S.-Japan relations and the impact of the current trade dispute on our bilateral relationship.

Domestic Political Developments

Let me begin by reviewing Japan's domestic situation. Prime Minister Tomiichi Murayama's coalition has governed since June 1994. His coalition consists of his own Socialist Party

(JSP), the Liberal Democratic Party (LDP) and the small Sakigake Party. Prime Minister Murayama is Japan's first Socialist premier in over 40 years. Because the LDP and the Socialists were bitter ideological rivals for much of the postwar period, many Japanese initially viewed the coalition with skepticism. However, it has demonstrated its staying power over the past year, although the government's approval rating is dropping. The Upper House election in July will be the next big test for the coalition.

The New Frontier Party (NFP), the product of a December 1994 merger of several opposition parties, dominates Japan's opposition politics. It is made up of former LDP, Komeito, and Democratic Socialist Party members and a number of independents. The NFP is smaller than the LDP and much smaller than the combined forces of the current ruling coalition.

In December 1994, the Diet enacted several electoral reform measures that could have a profound impact on domestic Japanese politics. If the reforms work as anticipated, Japan could see more frequent alternation in office of competing political parties. The new electoral system also reduces the number of seats in overrepresented rural areas, shifting them to some urban areas.

We anticipate that Japanese political parties and coalitions will continue to realign for several years, until the consequences of the new electoral system work themselves out. In nationwide local elections held this April voters rejected mainstream candidates in Tokyo and Osaka, indicating growing unpredictability in Japanese politics. The July Upper House elections will be closely watched for trends. The next elections in the important Lower House must be held no later than 1997, but may well be called sooner according to recent political speculation.

Under any election result and government, we are confident the ruling group will continue to pursue a policy of strong reliance on the U.S.-Japan alliance. All political entities except for the minor Japan Communist Party now support our Security Treaty and strong U.S.-Japan cooperation.

Economic Developments

Japan's economic situation remains uncertain. Its economy remains bogged down in its most serious post-war economic downturn. After achieving one of the highest economic growth rates in the industrialized world during most of the 1980's, the economy slowed considerably in the early 1990's. Plummeting stock and real estate prices marked the end of the "bubble economy" of the late 1980's. Economic growth in 1994 was just under 1%, following a contraction of approximately 0.2% in 1993. Growth in 1995 is projected to be approximately 1.5%. For the past four years the U.S. economy has grown faster than Japan's.

Inflation remained below 1.0% throughout 1994. Unemployment rose to a seven year high, and considerable hidden unemployment belies the official rate placed at 3.2% in April 1995. Japanese domestic demand generally has been weak. In the wake of the collapse of the "bubble economy," many firms have substantial over-capacity, driving down private investment. Banks continue to struggle with a large number of bad loans. Industrial production was off by 4.5% in 1993. Japanese monetary authorities have responded by reducing official interest rates to historic lows and the government has enacted a series of fiscal stimulus packages, the most recent one aimed at providing government assistance in the reconstruction efforts in Kobe. While these steps are helpful, growth is still anemic.

Japan's economic slowdown helped keep its current account surplus extremely high in 1994, at a level of $129 billion (2.8 percent of GDP), only $2 billion less than the record level of $131 billion set in 1993. As Japan's economy resumes growth over the next several years, its trade surplus is projected to decrease to less than $120 billion in 1995 and to approximately $90 billion in 1996 (less than 2 % of GDP). While Japan's global surplus is declining, there remain serious imbalances in our bilateral trade as evidenced by Japan's still increasing current account surplus with the U.S. This bilateral surplus grew from $60 billion in 1993 to almost $66 billion in 1994.

Many Japanese economic and business leaders have joined outsiders in calling for rapid deregulation. The government's five year deregulation plan announced in March 1995 was judged by both domestic and foreign experts to be weak and lacking in a comprehensive view of the kind of deregulation necessary to make the Japanese economy more open to competition. As they look towards the next century, Japanese also must address effects of currency appreciation, hollowing out of the industrial economy, its aging population and other fundamental issues.

Despite all this, Japan's economic fundamentals remain strong. It has a reservoir of industrial and technical leadership, a well-educated and industrious work force, and high savings and investment rates. Japan's long-term economic prospects are very good.

I will finish this snapshot of Japan's current situation by noting that it has been a difficult few months for the country. A devastating earthquake struck Kobe January 17, killing more than 5000 and destroying housing and infrastructure. Terrorists released deadly gas on the Tokyo subway March 20, killing ten and hospitalizing hundreds. The country's highest police official was shot and seriously wounded in late-March. All of these events, occurring in the space of just three months, have seriously affected public confidence. Meanwhile, the yen has appreciated rapidly as the markets have been frustrated with Japanese efforts to address the country's persistent global current account surplus.

The U.S.-Japan Bilateral Relationship

Let me move on to our bilateral ties with Japan. One of our most important goals for U.S. foreign policy in East Asia and the Pacific is to forge a fresh global partnership with Japan. The President has on several occasions stated that we have no more important bilateral partner than Japan. He made the first foreign visit of his tenure to Tokyo to attend the G-7 in July 1993; appointed one of America's most distinguished political figures, former Vice President Walter Mondale, Ambassador to Japan; and hosted the Emperor and Empress of Japan as his administration's first state visitors in June 1994. He has also met with the Japanese Prime Minister three times in bilateral summits and on a number of other occasions in multilateral settings.

We find it effective to analyze our crucial partnership with Japan in terms of three pillars: our security, political, and economic ties. Before addressing the issue of our economic ties and the current trade dispute between the U.S. and Japan, I would like to comment briefly on the security and political pillars of our bilateral relationship.

Security and Political Cooperation

I'm pleased to report that on issues of security and political cooperation, our relationship is solid. Our approach to security in Asia hinges on our close working relationship with Japan. Our alliance is the cornerstone of our security commitment to the region. Continued regional and global uncertainties make the U.S.-Japan security alliance as important as ever in promoting democracy, stability and prosperity in Asia.

Our alliance is based on the Mutual Security Treaty which, along with our 47,000 military personnel stationed in Japan and some 15,000 persons afloat on the Seventh Fleet forward deployed in Japan, allows the U.S. to protect enduring economic, political, and security interests. The security alliance with Japan is the linchpin of United States security policy in Asia. It is seen not just by the United States and Japan, but throughout the region, as a major factor for security stability in the Asia Pacific. Our alliance structure also serves as a means of promoting American influence on key Asian issues, including enlarging the community of market democracies while deterring a range of threats to our nation, our allies, and our interests. Japan provides some $5 billion a year in Host Nation Support to our forces, more than any other ally, and over 70% of the cost of stationing U.S. forces in Japan. The present North Korea nuclear problem illustrates the continued importance of our political and security ties even after the end of the cold war.

The end of the cold war challenges us to revalidate our bilateral security ties. We are conducting throughout this year an intensive dialogue with the Japanese centered on a series of high-level, security-related meetings. Most recently, Secretary Perry hosted Defense Minister Tamazawa in Washington May 2, and Assistant Secretary of Defense Joe Nye and Assistant Secretary of State Winston Lord hosted our Japanese counterparts in Security Subcommittee meetings May 3 and 4. This dialogue will continue through the remainder of this year, hopefully culminating in a meeting of Secretary of State Christopher and Secretary of Defense Perry with their Japanese counterparts some time this fall.

Our discussions will strengthen our bilateral security ties across the board. We are looking at such things as cooperating on peacekeeping operations; addressing overall force levels in Japan; resolving base issues; and consolidating cooperation on other important items on the bilateral security plate: Host Nation Support (HNS); Theater Missile Defense (TMD); technology exchange; FSX development; and Access and Cross Servicing Agreements (ACSA). We also are working with Japan in promoting regional security dialogues, including the ASEAN Regional Forum (ARF) and the Northeast Asia Security Dialogue (NEASED).

Japan is our essential partner in promoting common values and interests around the world. We coordinate closely on Asian regional issues; examples include the North Korean nuclear program, human rights and nonproliferation in China, POW/MIA accounting in Vietnam, and the peace process in Cambodia. We cooperate as well on important issues in other regions such as reform and democratization in Russia and the NIS, the multilateral peace process in the Middle East, and peacekeeping in Cambodia, Mozambique, Rwanda, Haiti and other crisis areas. The U.S. and Japan work closely in the UN where we are the world's two largest donors. We support Japan's goal of a permanent seat on the Security Council.

Similarly, Japan and the U.S. are the world's largest donors of official development assistance. We agreed in July 1993, as part of our Framework Agreement, to cooperate on a "Common Agenda" of global initiatives in such areas as environment, technology, human resources, population and HIV/AIDS. We have announced a number of achievements, including a $12 billion program in population and HIV/AIDS assistance to developing countries, a program for environmental assistance to Central and Eastern Europe, and agreements for development of transportation and environmental technologies. We are also working closely on Russian nuclear waste dumping. Additionally, we are developing plans on other global issues including international wildlife and heritage conservation, children's vaccines, climate information networks and narcotics.

The U.S.-Japan Economic Relationship

Japan is our largest overseas export market and import supplier, and an important source of investment, technology, and profits for U.S. firms. However, significant imbalances continue to characterize our economic relations with Japan. Japan is running a global current account surplus equal to roughly three percent of its GDP. U.S. and other foreign firms in certain sectors continue to encounter serious difficulties exporting to and investing in Japan.

The United States is committed to opening Japan's markets more fully and to ensuring that competitive foreign goods have fair access to the Japanese market. The world trading system cannot sustain a continuation of Japan's persistent current account surplus. We believe it is in Japan's interest to admit more foreign products and to give its consumers the opportunity to purchase goods based on quality and price. The United States has made it clear to Japan that it must correct its persistent global current account surplus, open closed areas of the Japanese market and more rapidly deregulate.

We are working hard to come to grips with trade problems through our Framework for Economic Partnership, which we concluded in July 1993. We have made significant progress. In total, we have signed a total of 14 trade agreements with Japan during the Clinton Administration. U.S. and Japanese negotiators concluded results-oriented agreements on insurance and government procurement last October, on glass in December and on financial services this January. Earlier, we concluded agreements on cellular phones, intellectual property rights, construction and various agricultural products, including apples.

It is important to stress that progress in gaining access to Japan's market is difficult, but not impossible; we've seen some success in recent years. In addition to specific agreements, in the past decade Japanese imports from the United States have more than doubled. The portion of manufactured goods in our exports to Japan has steadily increased and now approaches two-thirds. Japan is the United States' largest foreign market for commercial aircraft and agricultural goods. Despite that progress, much remains to be done. We will continue to highlight the urgency of opening Japan's market.

The U.S. and Japan have worked closely to promote growth of APEC which is a cornerstone of our efforts to build a "Pacific Community". Japan's chairmanship of APEC this year presents exceptional opportunities for new cooperation. Positive and effective Japanese leadership will do much to promote trade and investment liberalization in APEC. We look to Japan, as chair, to show leadership in vigorously transforming APEC from a dialogue to an action-oriented organization aimed at implementing the free trade goals that were set at the Seattle and Bogor leaders meetings. The trade liberalization that APEC will produce is good for our bilateral relationship, Japan, and the entire region. Japan, together with the U.S., stands to benefit most from such liberalization.

The Autos Dispute and other Trade Friction

However, in one of the priority areas identified in the 1993 U.S.-Japan Framework Agreement, the autos sector, we have been unsuccessful in reaching agreement with Japan. Despite years of negotiations, greatly increased competitiveness of American manufacturers and targeted efforts to enter the Japanese auto market, we continue to encounter an essentially closed market and a huge deficit in the auto sector. Our trade deficit with Japan in the autos and auto parts sectors accounts for almost 60 percent of our total deficit of $66 billion in 1994.

I will leave to Ambassador Shapiro the details of our current trade negotiations with Japan, but I will just briefly mention a few points on our approach to this dispute before discussing the potential impact of these actions on our overall relationship.

We have decided after 20 months of negotiations to take a two track approach to our autos dispute with Japan. First, the U.S. has announced a list of proposed sanctions against Japan under Section 301 of the trade act. This action came after a seven-month investigation of Japan's auto parts repair market concluded that Japanese policies deny U.S. and foreign auto parts suppliers reasonable access to the Japanese market. If we are not able to reach an acceptable resolution to this problem by June 28, we will be forced to implement the proposed sanctions list.

The second track of our approach to the autos dispute was our submission on May 10 of a pre-filing notification to the World Trade Organization challenging discrimination against U.S. autos and auto parts in the Japanese market.

We hope to resolve this problem through dialogue and negotiation. We do not want to impose sanctions on Japan or on any other country. However, if we are unable to resolve this problem through dialogue, we reserve the right to use our own domestic trade laws to address policies or practices that serve to harm American industries and workers, and particularly where these practices fall outside the jurisdiction of the World Trade Organization.

We should not lose sight of the fact that the problem here is the closed market in Japan. The U.S. maintains the most open and competitive markets in the world. Japan needs to take action to open its markets if it wants to be taken seriously as an equal partner.

As is not unusual in U.S.-Japan trade relations, a number of other high profile issues have arisen at the same time as the current dispute over autos. I want only briefly to mention two of these issues -- the Section 301 petition filed by Kodak against Fuji Film and an ongoing disagreement with Japan over civil aviation rights.

On May 18, Kodak filed a Section 301 petition alleging barriers to the sale of its film and photographic paper in Japan. The basis of Kodak's complaint consists of the charge that Fuji, with the support of the Japanese Government, gained control of distribution networks for photographic products which help Fuji to maintain a 70% share of the Japanese market for film. I cannot comment on this petition other than to say that the interagency Section 301 Committee is currently considering the merits of this case and must decide by July 2 whether or not to accept the case for investigation and possible action.

The U.S. and Japan are also seeking to resolve a dispute regarding civil aviation. Japan has taken steps to prevent U.S. air carriers from operating certain services between Japan and other Asian destinations. U.S. carriers have the right to operate these services under the current bilateral civil aviation agreement. Federal Express has been particularly affected because the services it wants to operate are critical to the successful operations of its new cargo hub at Subic Bay in the Philippines. In addition, United intends to operate flights from the newly opened Kansai International Airport to Seoul, Korea.

The current dispute reflects the fundamentally different approaches of the U.S. and Japan towards civil aviation. The U.S. wants a free and open market for international aviation, while Japan is trying to strengthen bureaucratic control over a private industry. The difference in approach has been longstanding, however, and the current dispute should not be seen as part of coordinated U.S. effort to raise the heat under our bilateral trade and economic relationship. In this regard, the civil aviation dispute remains entirely separate from our efforts to lower Japan's barriers to its autos and auto parts markets.

As we deal with these issues in the coming days and weeks, let me be very clear on one basic point. Our two nations must not and will not allow trade frictions to affect our other positive areas of cooperation and collaboration. In particular trade frictions will not affect our security ties which are of crucial importance to both our nations, the entire region and the world. President Clinton has made this policy clear and I only want to underline this fact for you today.

That said, however, it is necessary for our two nations to deal openly and directly in resolving these problems. Two trading countries as large and important as the U.S. and Japan are bound to have big trade problems. We have had these problems in the past and it is likely that trade frictions will emerge from time to time in the future. What is most important is to deal constructively with these problems and not allow them to fester. We have made it clear to the Japanese that we are open to further discussions on these issues and that we hope that discussions will bring us to a friendly resolution of our differences.

Clearly, our partnership with Japan rests on solid ground. Since taking up his duties, Ambassador Mondale has stressed that no matter what problem confronts the world, it will be easier to resolve if the United States and Japan work together. The United States and Japan are steadfastly united in a partnership of momentous importance and global proportions. What we should do -- what we have to do -- is put our economic relationship on as firm a footing as the rest of our ties.

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