Trade Wars: Could Lessons Learned From Japan in the 1980s Apply to China Today?

Trade Wars: Could Lessons Learned From Japan in the 1980s Apply to China Today?

Japan Inc. didnt kill U.S. manufacturing, but did the United States learn from that competitive era?

Three decades ago, an economic behemoth from the Far East was poised to crush U.S. manufacturing with cheap goods, undervalued currency and policies that significantly tilted trade in its favor. Back then, that fast-expanding economy became known as Japan Inc. At the time, many trade groups, academics and politicians warned that without government intervention Japanese businesses would soon control much of the U.S. economy.

Fast forward to today, and a similar story of unfair competition is playing out, but this time with China. Japan, though still the world's third-largest economy, has been largely cast to the shadows. While there are significant differences between the economic systems of China and Japan, the United States' experience with Japan in the 1980s and early 1990s may offer manufacturing and policy lessons for dealing with today's emerging markets.

But economic experts and manufacturers disagree on the potential takeaways. One school of thought points to policies enacted by the Reagan administration as evidence that action is necessary with China and other trading partners that engage in alleged unfair trade practices. "We did a lot of things, and they did have a huge impact," says Clyde Prestowitz, president of the Economic Strategy Institute and a former counselor to the commerce secretary in the Reagan administration. "Today, as you know, Japanese auto companies do a lot of production in the United States. A major reason why those Japanese companies are here is because we had these voluntary restraints."

In addition to voluntary restraint agreements, in 1986 Reagan negotiated a semiconductor pricing pact with Japan that prevented the Japanese from dumping product into the U.S. market.
Clyde Prestowitz, president, Economic Strategy Institute
Prestowitz is referring to voluntary restraint agreements President Reagan negotiated that limited the number of exports to the United States by certain industries, including the auto, steel and machine-tool sectors, from Japan and other countries. The agreements encouraged Japanese manufacturers to build plants in the United States rather than relying solely on exports.

In the other camp are those who believe Japan provided U.S. manufacturers with a much-needed dose of competition that raised the levels of quality and innovation domestically while benefiting consumers. For the most part, they also view the potential risks of punitive measures against trading partners as outweighing the benefits. "Open trade -- free trade -- does not mean that every single company survives or every single industry survives," says William Strauss, senior economist and economic adviser with the Federal Reserve Bank of Chicago. "But what does survive is going to be world class."

Japan Today

Did Japan turn into the dominating industrial powerhouse that many people feared decades ago? The answer depends on whom you ask and the industry. The United States entered the 1980s as the world's leading machine-tool producer, but the industry was less than half the size of those in Japan and Germany by the end of the decade, according to a 1994 Rand Corp. study. U.S. machine-tool producers fell victim to a Japanese industry that was subsidizing and dumping into the United States products below fair market value, says Alan Tonelson, a research fellow with the U.S. Business Industry Council. The council, which represents small and midsize manufacturers, has pushed the federal government to adopt tougher trade policies with countries that engage in alleged unfair trade practices.

The semiconductor, auto and steel industries also saw declines during the decade. But Reagan took actions to stem the flow of Japanese goods into the United States, encourage foreign investment and open the Japanese market to U.S. manufacturers.

In addition to voluntary restraint agreements, in 1986 Reagan negotiated a semiconductor pricing pact with Japan that prevented the Japanese from dumping product into the U.S. market. It also allowed foreign companies to secure at least 20% of the previously impenetrable Japanese market. Today, U.S. semiconductor manufacturers have approximately 35% of the Japanese semiconductor market, says Prestowitz. The administration was also involved in an agreement called the Plaza Accord that strengthened the yen and weakened the dollar to reduce the U.S. trade deficit with Japan.

By the 1990s, Japan endured its own financial crisis that began with a bursting real-estate bubble. The country has not fully recovered from the downturn that became known as the nation's "lost decade." In January, Japan reported that 2011 marked its first global trade deficit since 1980. The nation maintained a trade surplus of about $53.6 billion with the United States in 2011, down 8.2% from the previous year.

Healthy Competition

While quotas and other trade restrictions may have propped up some U.S. industries, not everyone agrees they were necessary or beneficial. For the U.S. consumer, voluntary restraint agreements may have had a negative impact by encouraging Japanese exports of higher-end vehicles into the United States, says the Fed's Strauss. "It wound up boosting car prices not just for the Japanese automakers but also U.S. manufacturers," Strauss says. "So the auto industry liked this, but it came at the expense of the U.S. consumer who wound up paying a very hefty price for their products."

Japanese auto manufacturers moved from selling small, relatively low-priced cars in the United States to family sedans and eventually luxury vehicles, says George Haley, director of the Center for International Industry Competitiveness at the University of New Haven. "Through these moves, the Japanese companies went from markets where the U.S. companies were not competitive into markets that had been dominated by the U.S. companies," Haley says.

Conversely, consumers may have benefited from the flood of Japanese goods by adding competitive pressure to U.S. industries that had become complacent. U.S. machine-tool manufacturer Haas Automation Inc. was founded in 1982 at the height of Japan's market surge. The company ships more than 1,000 machines a month out of its Oxnard, Calif., plant, says Peter Zierhut, director of Haas Automation Europe and special programs. The company's goal for 2012 is to ship about $1 billion worth of machine tools, which would make Haas one of the highest-volume machine-tool producers in the world, says Zierhut, who has been with the company for 27 years.

The company thrived during this turbulent time by observing market trends and Japanese quality, Zierhut says. Haas realized the Japanese were focusing on specialty, high-performance products, so the company set its sights on higher-volume commodity-type machines, Zierhut explains. Although the company has found its niche, it must maintain focus on an increasing number of competitors from China, Taiwan, Korea and Europe. Just like with Japan, Zierhut says, he expects Haas to remain a market leader by focusing on quality, service and customer satisfaction.

Overall, Zierhut says Japanese competition in the machine-tool industry served as a wake-up call for U.S. manufacturers. "With or without any kind of product dumping or price fixing by the Japanese, which they were accused of, I think much of the American [machine-tool] industry was going to go away anyways," Zierhut says. "We didn't learn how to build products efficiently; we didn't meet the market demands; we didn't build at a low enough cost; we didn't build it well enough. So eventually these companies lost out to overseas competition."

Lessons Learned

John Shook first visited Japan in 1977 and spent 11 years there working for Toyota Motor Corp. During that time, he learned about the company's lean management systems and became its first American manager in Japan. In 1983, he helped Toyota establish a joint venture with General Motors Co. in Fremont, Calif., called New United Motor Manufacturing Inc., or NUMMI. The Japanese industrial boom created a lot of excitement among academics, says Shook, now CEO of the Lean Enterprise Institute.

Japanese automakers introduced U.S. manufacturers to concepts such as just-in-time manufacturing, one-piece flow and building in quality at the production source, Shook says. He believes if U.S. automakers had adopted these principles earlier, their financial difficulties during the recession would have been much less severe. The now-closed NUMMI plant transformed itself from having one of the worst workforces to one of the highest-performing staffs in the GM network, Shook says.

Manufacturers tend to lose sight of the bigger picture when they zero in on policy issues and not enough on their own operations, Shook says. While things like exchange rates and labor rates are important, he concedes, "What we need to look at is how any company is creating value for their customers, understand where and how they create that and how they can better provide customers with what they want, when they want it, at a price that is attractive."

But Prestowitz says the United States is trying to play ball with nations that aren't playing the same game. "There are a lot of lessons to be learned, but I don't think we've learned most of them," he says. When it comes to foreign relations, the United States' priority is national security rather than economic development, Prestowitz says. That needs to change for the nation's manufacturing base to remain viable, he says. Other countries provide tax investment incentives to attract foreign manufacturers that the United States doesn't match. There's also a lack of what Prestowitz calls "moral persuasion."

In other words, the federal government will kowtow to corporate demands on issues such as intellectual property theft but doesn't request more investment by these companies domestically. "When a company marches into the U.S. Trade Office and demands a representative go into Asia or wherever and get those governments to stop it, the U.S. government is in a position to say, OK Mr. Executive, we understand the problem, but by the way, aren't you doing a lot of this work in China? Why don't you do it in America?' They're not doing that," Prestowitz says.

The federal government has policy organizations in place to investigate whether unfair trade practices are occurring, and they should move forward with appropriate actions, if violations can be proved, says Strauss. But eventually as developing economies advance, their production costs increase, making it more attractive for manufacturers to localize their manufacturing operations, Strauss says. Years after voluntary restraint agreements expired, Japanese automakers continue to make investments in the United States. Honda Motor America, for instance, announced in January it would construct a new facility in Ohio to build the Acura NSX supercar, LEI's Shook points out.

"Going to China to get the lowest-possible piece price takes us down a path of narrowly focusing on piece price instead of total cost and quality and delivery to the customer," Shook says. "More and more companies are realizing that and to me that's reminiscent of the lessons we learned from Japan back in the 1980s."


Japanese Imports in the United States

The tsunami and earthquake that hit Japan in March 2011 reignited some discussion about U.S. dependence on Japanese suppliers. Manufacturers from auto producers to chipmakers reported supply chain disruptions stemming from the disaster. In response, the U.S. Business and Industry Council issued a report highlighting the United States' vulnerability to Japan supply shocks. For instance, the share of Japanese-made transmission and powertrain parts, which comprise the largest individual share of a motor vehicle's value, rose to 10.1% of overall U.S. market share in 2010, up from 9.8% in 2009. Below is a sample of Japanese import data from various industries noted by USBIC in its import-penetration report. The data compares market-share percentages from Japanese imports in the United States between 2009 and 2010 and 1997 and 2010:

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