This Page Intentionally Left Blank 10 United S tates-Japan Economic Relations

The bilateral relationship with Japan now dominates American thinking on the benefits and costs of foreign trade. Japan has become the model of all things modern and efficient, the standard against which the United States measures its own economy and finds itself wanting. But Japan is also firmly established as the villain in the industrial adjustment woes that have plagued the United States in recent years; most Americans remain unaware that Japan has encountered many of the same diffi-culties in reducing excess capacity, often in the same industries. Such paradoxes typify the intense and stormy relationship between the world’s economic superpowers. Against a background of ever-increasing bilateral imbalances, ever-escalating protectionist rhetoric, and even some action at the official level, individual Americans con-tinue to vote with their dollars for still more Japanese imports. Can U.S. producers hope to reverse the trend? Can American consumers be persuaded to give up their Toyotas and their Sonys in favor of domestic goods? These questions are themselves rapidly becoming obsolete. Thanks to the recent flood of Japanese direct investments into U.S. manufacturing industries, it is now often possible to “buy American ” without sacrificing Japanese design and quality. This chapter reevaluates the past and future course of United States-Japan economic relations. The first section asks whether there is indeed a “Japan problem ” and, if so, exactly what that problem is. Section 10.2 examines the macroeconomic roots of the United States-Japan bilateral trade imbalance and weighs alternative macroeconomic rem-edies. Section 10.3 deals with trade issues at the sectoral level. Sectio