Congressional Research Service: CRS Issue Brief, IB94008 August 31, 1994 -ti- Japan-U.S. Relations: Issues for Congress in the 1990s By Robert G. Sutter, Coordinator Office of Senior Specialists SUMMARY Japan-U.S. relations are more uncertain and subject to greater strain today than at any time since World War II. Longstanding military allies and increasingly interdependent economic partners, Japan and the United States have worked closely together to build a strong, multifaceted relationship based on democratic values and interests in world stability and development. But Japan today is our foremost economic and technological competitor. It consistently runs the largest annual international trade surplus with the U.S. ($59 billion in 1993). The end of the Cold War, lackluster international economic conditions, and the focus on economic issues in U.S. politics have raised new questions about the appropriate U.S. policy toward this Asian ally. While endeavoring to reduce the U.S. budget deficit that underlies the large U.S. trade deficit with Japan and other countries, the Clinton Administration has pressed hard for changes in Japanese economic practices that would have a measurable impact on U.S. Japan trade. The two governments agreed in July 1993 on a negotiating framework for resolving market access disputes and speeding reform in five areas within a fixed timeframe. Japanese politicians, backed by strongly entrenched bureaucratic and prominent media opinion, have resisted Clinton Administration efforts to reach "results oriented," quantifiable agreements. Japan's policy has been complicated by political confusion in Tokyo and poor economic conditions. Prime Minister Hosokawa began the process of changing an election system that had remained in place for 40 years and was partly responsible for Japan's unwillingness to alter political and economic practices. Hosokawa resigned on Apr. 8, 1994, setting off rounds of political maneuvering by Japanese politicians. A successor, minority government of Tsutomu Hata was formed on Apr. 28, 1994, but fell on June 25. An unusual left-right coalition headed by Socialist Party Chairman Murayama and backed by conservatives of the Liberal Democratic Party (LDP) took power on June 29. Japan's room to maneuver in meeting U.S. demands is further circumscribed by a protracted Japanese recession, which reduced Japanese willingness to make economic concessions. Many in Congress share the divided counsel seen facing the Clinton Administration in dealing with this situation. On one side are those who argue for moderation in U.S. pressure for change at the present time. They wish to create favorable conditions for Japanese political reforms, which are believed to give greater voice to Japanese constituents anxious to open Japan's consumer market to outside competition and which support other economic changes sought by the United States. On the other side are those in Congress and the Administration who are skeptical that Japan's bureaucrats, economic leaders, and politicians will take significant steps to meet U.S. concerns unless the U.S. can show tangibly that inaction would create serious repercussions for Japan. The Clinton Administration refused to paper over big differences during a summit meeting with Prime Minister Hosokawa in February 1994. It subsequently added pressure by reinstituting "Super 301" trade procedures, eased up in May 1994 with a compromise agreement to resume bilateral trade talks, and threatened sanctions in July 1994 as a result of the failure of those talks. MOST RECENT DEVELOPMENTS Political realignment and confusion in Tokyo complicated Japan's responsiveness to U.S. initiatives in 1994. Reformist Prime Minister Hosokokawa's government fell on April 8; it was replaced by Prime Minister Hata and a minority government of reformers, which lasted until June 25 and was succeeded in turn by an unusual left-right coalition of socialists and conservatives led by Socialist Party Chairman Murayama. The new government's prospects seemed uncertain, but they held out little hope of breaking new ground in areas of change sought by the United States (i.e., trade policy, policy to North Korea, and political-economic reform in Japan). President Clinton held a cordial meeting with Prime Minister Murayama at the G-7 Summit, July 7-9, 1994. The failure of U.S. Japan talks on trade issues prompted the United States on July 31 to initiate proceedings possibly leading to trade sanctions against Japan. Reports that Japan was going to cut back its host nation support for U.S. forces in Japan prompted a critical Senate resolution on Aug. 11, 1994. BACKGROUND AND ANALYSIS U.S. Japan Cooperation and Interdependence The United States and Japan have long shared goals of mutual economic well being and regional stability. In economic terms, the two countries have become increasingly interdependent: the United States is by far Japan's most important foreign market; and Japan's market is the most valuable single country market for the United States, after Canada's. The trade flow runs heavily in Japan's favor. Annual U.S. trade deficits with Japan had been around $50 billion for 5 years, declined to about $41 billion in 1990, rose to $49 billion in 1992, and hit a record $59 billion in 1993 (see Table l below). Japan is the largest source of foreign investment in the United States (including portfolio, direct, and other investment). (See CRS Issue Brief 92057, Japanese-U.S. Trade Relations.) The U.S.-Japan alliance establishes a U.S. guarantee for Japan's security (but does not obligate Japan to help defend the United States); gives Japan maneuvering room in dealing with its militarily more powerful neighbors; and supports an American strategic role in the Pacific. As the world's leading industrial democracies, the United States and Japan work closely together in dealing with international economic issues and other global and regional issues, ranging from nuclear nonproliferation to mutual consultations regarding official responses to North Korea's nuclear program, political repression in China, and peace efforts in Cambodia. Growing Strains in Relations Strains in bilateral relations have grown markedly in the last 20 years. At the core is American concern about U.S. ability to compete economically with Japanese firms, which are seen to benefit from limited foreign access to Japan's home market and other unfair trade practices. In the mid-1960s, U.S. manufacturers of textiles and light electronic goods complained about Japanese imports. Later, American manufacturers of automobiles, steel, and sophisticated electronic goods saw Japanese products take an ________ page 2 increasing share of markets formerly held by the United States. Meanwhile, the end of the Cold War and collapse of the Soviet Union have called into question some of the strategic underpinnings of the alliance. With ever-growing interchange, communications, and interdependence in U.S.Japan relations, critics have focused on a broader range of policy issues. Japanese business practices, international and security policies, environmental approaches, and other aspects of social, economic, and political affairs are regularly cast in a negative light by Americans who are critical of Japan. In Japan, a growing number of commentators, including prominent political leaders, are prepared to publicly criticize a range of perceived U.S. social, economic, and political weaknesses. Economic Issues Japan-U.S. Trade Japan ranks second to Canada as the largest U.S. trade partner, while the United States is Japan's largest trade partner. Despite the economic interdependence, or perhaps because of it, trade has been a source of bilateral friction that at times has threatened the stability of the overall relationship. Two major categories of issues have plagued the relationship: macroeconomic imbalances manifested in the perennial U.S. trade deficits with Japan and problems of market access in Japan for U.S. producers. At the end of 1993, the U.S. trade deficit with Japan stood at about $59 billion, the highest it has ever been, surpassing the previous peak of $57 billion of 1987 (see Table 1). Most economists expect the deficit to continue to climb as long as slow economic growth dampens Japanese demand for imports while economic expansion in the United States generates American demand for imports. TABLE 1. U.S. Trade with Japan, 1987-1994 ($ billions) Year Exports Imports Balances 1987 27.8 84.6 - 56.8 1988 37.4 89.8 - 52.4 1989 44.5 93.5 - 49.0 1990 48.6 89.7 - 41.1 1991 48.1 91.6 - 43.4 1992 47.7 96.5 -48.7 1993 47.9 107.3 -59.3 1993* 15.7 34.5 -18.8 1994* 17.2 37.7 -20.5 * Data for Jan.-Apr. Source: U.S. Department of Commerce, Bureau of the Census, Trade Net Data Retrieval System. Exports are total exports valued on an f.a.s. (value before reaching port) basis. Imports are general imports valued on a customs basis. ~ ________ page 3 U.S. trade policymakers have focused much of their attention on problems U.S. industries and investors face in penetrating the Japanese market. Japan is not protectionist in one sense (high tariffs and import quotas), but U.S. industries have claimed that a system of standards and regulations, "buy Japan" procurement practices, and a structure of Japanese business relationships that promotes local-sourcing have prevented them from gaining what they would consider to be their fair share of the Japanese market. The United States has engaged Japan in bilateral negotiations to encourage Japan to open its markets in a number of sectors, such as construction services, semiconductors, auto parts, telecommunications equipment, and supercomputers. In most cases, Japan has agreed to reduce its barriers, albeit after facing a threat of U.S. retaliation or protectionist measures by Congress. But very often, the two sides have had to renegotiate issues, even after agreements have been reached, because of U.S. claims that Japan has failed to comply. The centerpiece of the Clinton trade policy toward Japan is an emphasis on achieving measurable results in trade negotiations with Japan. The Clinton Administration has tried to implement a "results-oriented" trade policy under "The United States Japan Framework for a New Economic Partnership," an arrangement for trade negotiations with Japan. The framework was proposed by President Clinton in April 1993 and agreed to by Japanese Prime Minister Miyazawa the following July. It sets out a "set of rules" to be used in future economic negotiations. The framework includes significant, yet potentially problematic, steps in the U.S. Japanese trade and economic relationship. The centerpiece of the framework is the set of five "baskets" or categories of current and prospective issues in U.S. Japanese relations: (1) government procurement -- to expand Japanese government procurement of foreign goods and services, especially computers, supercomputers, satellites, medical technology, and telecommunications equipment; (2) regulatory reform and competitiveness -reform of Japanese laws, regulations, and bureaucratic guidance that have impeded imports of foreign goods and services, including financial services and insurance; (3) trade in other major sectors, including autos and auto parts; (4) economic harmonization -- issues affecting foreign direct investment in Japan and the United States, intellectual property rights protection, access to technology, and relationships between buyers and suppliers (for example, keiretsu); and (5) implementation of existing agreements and measures, including the Structural Impediments Initiative (SII). Within the framework, the United States and Japan agreed that the issues would be addressed within specific timeframes -- six months for some issues and 12 months for the others. In addition, the framework provides for the use of "objective criteria," both qualitative and quantitative indicators to gauge compliance with agreements. Furthermore, the President and the Prime Minister agreed to meet twice a year to review and announce the results. Under the framework, Japan agreed to take the necessary measures to achieve "a highly significant decrease" in its current account surplus and promote a "significant increase" in global imports in the "medium term." The United States agreed to take measures towards "substantially reducing' its Federal budget deficit, promoting domestic saving, and strengthening its international competitiveness. The framework ________ page 4 also commits the two countries to work jointly on global issues -- environmental protection, technology development, human resources development, population growth control, and AIDS abatement. The framework agreement left important questions unresolved, such as definitions of terms such as "objective criteria" and "highly significant decrease in Japan's global surplus." These questions have caused serious problems in the negotiations that have taken place under the framework. The United States has insisted that numerical indicators, such as market shares, be included in any agreement. Japan has strongly opposed "managed" or results-oriented" trade. President Clinton and Prime Minister Hosokawa met on Feb.11, 1994, for the first of the semiannual reviews. It had been hoped that by that time, U.S. and Japanese negotiators would have completed a series of agreements on market access for specific categories of goods. However, in a press conference following their meeting, the President and the Prime Minister announced a failure to come to agreement. While carefully separating the economic relationship from the political/security relationship, the President indicated that the time had come to cease glossing over the lack of progress in the trading relationship. The Prime Minister reiterated that Japan would not accept numerical targets by which to measure progress, equating them with managed trade. He called for a cooling off period and resumed efforts. On May 24, 1994, after numerous discussions, the United States and Japan announced a decision to restart the negotiations under the framework. In a press conference, USTR Kantor indicated that the two countries reached a consensus that Japan would take measures to reduce its trade surplus and increase purchases of foreign goods and services. In addition, they agreed that "objective criteria" would be used to evaluate progress in implementing the agreements, but that the United States agreed that it was not looking for numerical targets. Furthermore, "both quantitative and qualitative" criteria would be applied to sector agreements. On June 7, the two sides agreed to add intellectual property rights protection and market access in Japan for financial services and, on June 15, to add market access for flat glass to the framework negotiating agenda. Concern over U.S. Japan trade has provided impetus for a number of bills in the 103rd Congress. Some of the bills would revive Super 301, others would encourage closer monitoring of U.S. trade partners' compliance with trade agreements. (For more information, see CRS Issue Brief 92057, Japanese-U.S. Trade Relations: Cooperation or Confrontation?) Japan's Domestic Economic Concerns Japan's economic bubble -- rapidly expanding growth in the late 1980s characterized by a sharp run up in real estate values and stock prices -- burst as the economy slipped into recession in 1991. Most economists believe the economy remains fundamentally sound and that it should recover sometime in 1994 or 1995. Background. Japan's current economic troubles largely stem from economic and financial policies the government pursued in the 1980s. At the same time the Ministry of Finance was loosening controls over the financial sector, including controls on capital outflows, the nation followed a mix of monetary and fiscal policies that provided the _________ page 5 catalyst for the speculative boom of the 1980s and the slowdown of the 1990s. These policies sparked a rush of capital out of Japan, which pushed up the dollar-yen ratio nearly 50% between 1980 and 1985. To bring the value of the dollar down and to coordinate economic policies, the United States and Japan struck a number of informal agreements in the 1980s. Under these agreements, Japan targeted its monetary policy as the main economic coordinating mechanism and it agreed to increase the growth rate in its money supply to bring down domestic interest rates. These agreements boosted the growth rate of the nation's money supply and effectively sowed the seeds for much of Japan's speculative boom in the last half of the 1980s. What followed was a period of economic expansion and asset price inflation that is unprecedented in modern Japanese history. This period, termed the "bubble economy," is characterized by an increase in the growth rate of the money supply that fueled a speculative boom in real estate values and in stock prices: residential land prices in Japan's six largest cities tripled between 1984 and 1990. The speculative boom was curbed in 1990 and 1991 when the Ministry of Finance slowed the growth rate in the money supply and began gradually to ratchet up the official interest rate to 6.0%. By the second half of 1991, however, the Ministry of Finance started easing up on these policies. Between July and December 1991, the Bank of Japan lowered the official discount rate three times. In 1992, the ruling Liberal Democratic Party fashioned two economic stimulus packages to boost the economy. During 1993, the Japanese government offered two additional stimulus packages to perk up the economy, and the Bank of Japan lowered the discount rate two additional times to its current rate (as of Feb. 1, 1994) of 1.75%. The Hosokawa government promoted additional measures to stimulate the economy, including a cut in the personal income tax rate. The tax cut has been touted by business groups for a year as an antidote to the economic slump. Until mid-December 1993, however, the Ministry of Finance had opposed any cut in income taxes unless it was linked with an increase in consumption taxes to reduce the negative budgetary impact of a change in income taxes. Domestic political problems, primarily legislation to overhaul electoral districts and the composition of the Lower House, had taken priority and had placed the tax and economic measures on the back burner until recently. Prospects. Most forecasts expect the Japanese economy to pick up in 1994, but business sentiment remains decidedly negative. Private research institutions in Japan have revised downward their projections of Japan's real gross domestic product growth in 1994 to fall in the 0.3-1.5% range from forecasts above 2.0% they had made in 1993. The Organization for Economic Cooperation and Development (OECD), which issued in September 1993 its forecast of Japan's real gross domestic product growth in 1994 of 1.4%, recently revised its forecast down to 1.0% real growth. Opinions differ over how extensively the cyclical contraction has affected the economy. Some economists believe the recession will have only short-term effects and that by the mid-199Os the Japanese economy will be well-positioned for another burst of fast-paced growth. Others believe the cyclical recession will have a lasting effect on _________ page 6 the economy because it is altering some structural elements -- such as lifetime employment guarantees -- that have been hallmarks of the postwar economy. The current recession is affecting some institutions in Japan that have served as the foundation of the postwar economy. Faith by businesses and others in the government's ability to handle the economy has been shaken. In addition, the relationship between firms and their employees, characterized especially by the lifetime employment system, is being challenged as firms seek ways to trim their workforces. The continued economic slump is forcing firms to target parts of their core, white-collar, predominantly male workers for layoffs. Such layoffs could push Japan's unemployment rate above the current 2.9% but also could make the labor market less structured over the long term. Science and Technology Issues Science and technology issues may play a prominent role in the ongoing framework discussions. Several of the "baskets" that constitute the framework negotiations, such as government procurement and trade between the two nations, will likely involve the transfer or trade of advanced or critical technologies. Negotiators will also address the trade of goods such as automobiles, which often are "carriers" of innovative technologies (e.g., advanced materials). Outside of the framework negotiations, there is a proposed Intelligent Manufacturing Systems (IMS) program between Japan, the United States, and the European Union. The IMS would attempt to increase manufacturing knowledge and enhance international cooperation in scientific research and development. Over 80% of R&D in Japan is undertaken by industry. The current recession affecting Japan, now over two years old, has curtailed investment in technology innovation and commercialization. According to the Ministry of International Trade and Industry, industrial R&D declined by 5.6% in FY1992 and further declined by a projected 1.9% in FY1993. In the United States, where industry accounts for approximately 51% of all R&D, the National Science Foundation reports that industry spending on R&D rose, albeit modestly, by .96% in 1992 and by .98% in 1993 (the United States spends nearly twice as much as Japan on total R&D). Such comparisons are subject to differences in currency valuations, varying fiscal and calendar years, and may not necessarily constitute a long-term trend. However, a decline in Japanese industrial investment in R&D may indicate that Japanese firms will emerge from this recession with fewer R&D resources than some of their major competitors, including those in the United States. It may be equally true that Japanese firms will emerge from this recession leaner, smaller, and more able to capitalize on developing technological innovations. Still, many current and recent proposals for a U.S. "technology policy" are based in part on Japan's successes in developing and commercializing technology. Therefore, changes in Japanese R&D funding and support may warrant close attention by U.S. policymakers. ________ page 7 Japanese Political Issues Japan's political uncertainty deepened in mid-1994. The new uncertainty stems partly from former coalition Prime Minister Morihiro Hosokawa's surprise resignation on Apr. 8, 1994, amid a personal financial scandal; this set in motion a flurry of succession infighting not only within the coalition but also in the factious Liberal Democratic Party (LDP), which was voted out last summer after 38 years of stable oneparty rule. Later came the defection of a key coalition partner the 74-member Social Democratic Party (SDP), from a new coalition under Tsutomu Hata, only hours after Hata was elected prime minister on Apr. 25, 1994. On June 25, Hata's minority government was forced to resign en masse under threat of an LDP-filed motion of noconfidence. On June 29, the bitter Cold War rivals -- the conservative 206- member LDP and the Socialist party -- formed a three party ruling coalition, including a minor, liberal group called the Sakigake (Harbinger) party. In an effort to calm domestic and foreign concerns about the regime led by Socialist Prime Minister Tomiichi Murayama, the sensitive portfolios dealing with foreign affairs, trade, and defense were assigned to veteran LDP members with previous cabinet experiences. Although the Socialists long had policies diametrically opposed to those of the LDP, initial indications suggested a willingness by both sides to paper over policy gaps for the convenience of the political marriage. Four center-right parties -- the mainstay of the Hosokwa and Hata coalitions--now form the core of the opposition: the Japan Renewal Party (Shinseito) under the co-leadership of Hata and Ichiro Ozawa; Komeito (the Clean Government Party), Ozawa's key ally linked to a Buddhist lay movement; the Japan new party, founded by Hosokawa ; and the Democratic Socialist Party, a right-of-Center Socialist splinter since the early 1960s. Allied with these parties are minor, center-right, reform-minded parties including the Liberal Party, the Reform Association, the Mirai (Future) party, and the Koshi Kai (High Aspirations) party. The Japan Communist Party is also in opposition but is spurned by both the Conservative and the Socialist parties. A notable aspect of the new coalition is the apparent Socialist shift to the right ideologically. In speeches, Socialist Prime Minister Murayama public disavowed his party's post-1955 left wing views on foreign and defense policies; thus he now says that Japan's military (Self-Defense Forces) is constitutional and that the Japan-U.S. security treaty is legal, as are Japan's national anthem and national flag that the Socialist party long rejected as symbolic remnants of prewar militarism. Murayama's shift to the right seems likely to deepen the latent left-right fissures among the Socialists and even reinforce the emerging trend toward a political realignment in Japan. Further political realignment is likely to follow the historic political reform bills enacted in January 1994, crafted under the leadership of Hosokawa/Hata/Ozawa. The centerpiece of the reform package is a sea change in Japan's electoral system whose current 129 multi-member (2 to 6) electoral districts will be replaced by a new system consisting of 300 single-member districts and 200 members to be filled w proportional representation. The change is aimed at fostering the development of a two-party system similar to the American model. The reform package also contains provisions for tighter control on campaign financing, designed to weed out the chronic "money politics" scandals. In addition, it allows a partial public funding for political parties. The task _________ page 8 of electoral redistricting is now in progress under a nonpartisan commission and an appropriate redistricting bill will be taken up for parliamentary approval in October 1994. In time the intended reform could make Japanese politics more policy-oriented and transparent and possibly less prone to endemic political scandals. From the U.S. perspective, the reform might produce in the long term a political system more responsive than in the past to Japanese as well as American concerns on issues bearing on quality of life, trade, and Japan's quest for a new global role. In immediate terms, however, potential benefits deriving from Japan's political reform or realignment may be limited, at least until Japan's current uncertain political transition remains on track. Eager to please their traditional allies and constituents, especially the bureaucracy, the Murayama coalition seems likely to pursue, on balance, a status quo-oriented, "domestic-interests-first" policy. That is because Japanese parties will have to scramble for votes in 1995 -- for the upper house election in summer and more importantly, for the lower house contest anticipated to follow shortly thereafter. Even then, it remains to be seen whether the first post-reform elected government will be stable and cohesive enough to dictate to the powerful -- and protectionist -- Japanese bureaucratic elite. Security Issues, Foreign Policy Differences Policymakers in Congress and the Administration continue to show interest in adjusting the costs and benefits of the extensive U.S. security relationship with Japan. The U.S. military presence in Japan (45,000 personnel at a cost of over $7.6 billion per year) sustains U.S. interests in relations with Japan and supports American regional interests (e.g., provides reinforcements for South Korea, if needed) and global interests, especially concerning Russia and China. The Japanese government helps to defray the costs of U.S. forces in Japan with a contribution of about $3 billion per year. The Japanese government announced in December 1990 that it would increase its contribution by $600 million over the course of 5 years. This would increase Japan's contribution for American forces in Japan from 40% to 50%. Japan also has undertaken to defend its sealanes within 1,000 nautical miles of Japan, allowing greater flexibility in deploying U.S. forces throughout Asia and other regions. Japan's defense budget, based on a NATO formula that includes veterans costs, is over $30 billion a year, the third largest in the world after those of the United States and Russia. Japan's 1993 defense budget passed in March 1993 allotted a 2% increase -- the smallest increase in 33 years. The 1994 defense budget saw a 1 % increase. Congress has complained at times about the small percentage of Japan's gross national product devoted to defense (under 1%, vs. 4% for the United States) and Japan's seeming slowness to assist with allied burden-sharing. A crisis came in late 1990 amid U.S.-Japanese bickering over Japan's slow and limited response to U.S. calls for aid in the allied confrontation with Iraq. The House passed legislation (H.R. 5803) requiring substantial U.S. troop withdrawals from Japan unless Tokyo paid all direct costs of U.S. deployments in Japan. ________ page 9 More recent congressional attention to allied burden-sharing sometimes has singled out Japan for special praise as the ally most generous with host-nation support. On May 18, 1994, the House rejected (163-260) an amendment to the 1995 Defense authorization bill, H.R. 4301, that would have required a pullout of all U.S. troops by 2000 if the allies, including Japan, did not begin paying all costs of overseas U.S. forces. Reports from Tokyo in August 1994 indicated that Japan was preparing to cut back its financial and other support for U.S. forces. The Senate reacted promptly and critically with an Aug. 11, 1994, amendment to the defense appropriations bill (H.R. 4650) warning of "harmful consequences" if Japan did not fulfill its host nation commitments. Japan's current interest in working with the U.S. to develop a possible missile defense against North Korean attack coincided with Congress' specification in the 1994 defense authorization bill that allies who benefit from U.S. theater missile defenses should help to pay for the costs of the defenses. In the recent past, proposed transfers of U.S. technology and know-how for the joint development of Japan's new jet fighter, the FSX, prompted strong congressional concerns that Japan was exploiting U.S. technology without returning sufficient benefits. Japan's recent active role in UN peacekeeping operations -- most recently in Rwanda -- is strongly welcomed by the U.S. Government. Japan also argues that it supports allied security interests through economic aid. Japan has long been the largest donor in Asia and recently became the largest donor in the world. Many in Congress have looked to Japan to bear major responsibility for U.S.-backed multilateral aid initiatives in Cambodia, the former Soviet Union, the West Bank, and elsewhere. Critics charge that Japanese aid is often in the form of infrastructure and development projects that require large purchases of Japanese goods and services and otherwise assist the growth of Japanese industry. Finally, the post-Cold War evaluation in Japan has prompted some activists and politicians, especially in Okinawa, to press for the return of lands used by U.S. military forces and to curb activities of U.S. forces (e.g., night flights) that disrupt local civilian life. Foreign Policy: Although Japan and the United States closely coordinate their policies on a variety of important international issues (such as stability in Korea), Japan has shown significant independence on a number of recent foreign policy issues. Japan has been less forthcoming than some Americans wish in providing aid to Russia; has differed with the strong emphasis on human rights in U.S. policy toward China and elsewhere in Asia; and conducted an active aid program in Vietnam despite a continuing U.S. embargo. These actions stem from Japanese interests being different from U.S. interests: Japan has territorial disputes with Moscow and is skeptical of Yeltsin's reforms; Japan believes that economic reform in China will eventually lead to better human rights conditions; and Japan is eager to integrate Vietnam into a web of growing Asian economies. Such independent actions also reflect growing Japanese government willingness to act on these differences despite possible U.S. disapproval. _________ page 10 U.S. Policy Approaches Americans broadly agree across party, ideological, and interest group lines on the need to reduce the U.S. Japan trade deficit while maintaining Japanese support for U.S. international political and regional security policies. Differences in approach to achieving these goals spring from a variety of sources, including philosophical differences over the role that Government should play in influencing trade and other economic relations; special interest politics related to the objectives of labor unions, industry interests, and different geographic regions; and tactical differences over how best to influence the Japanese. Every U.S. Administration during the past decade used a variety of means to pressure Japan to adopt measures to reduce the trade deficit. The Reagan and Bush Administrations tended on philosophical and foreign policy grounds to be reluctant to use trade weapons provided by Congress that they regarded as "protectionist" or to adopt negotiating strategies that intruded into private business transactions; they preferred to encourage structural change in Japan. At times, however, both Republican Administrations felt compelled to resort to activist measures, such as threatening trade sanctions under "Super 301" trade law, imposing anti-dumping penalties, and pressuring Japan to limit exports of automobiles and steel, or to agree to minimum access targets for U.S. and other foreign semiconductors. Notwithstanding the precedents for "results-oriented" trade agreements, the Clinton Administration's emphasis on numerical targets across the board represents a significant departure from past approaches. In addition to adopting a new trade strategy, the Administration also has raised the relative importance of trade issues visa-vis international political and security issues in the U.S. Japan relationship. In contrast with the Cold War era, when U.S. Administrations generally had powerful foreign policy motives for avoiding harsh confrontations with Japan, Administration policymakers now appear to feel much less need to subordinate their trade policy goals to American geopolitical or security interests. However, Administration officials, Members of Congress, and others involved in the U.S. policy process still face practical decisions about what objectives to seek and how best to achieve them. They also still need Japanese cooperation on a number of important foreign policy issues, notably the goals of supporting economic reform in Russia, dealing with the threat posed by North Korea's nuclear program, and maintaining the U.S.Japan alliance as the linchpin of U.S. security policy in Asia and the Pacific. As of July 1994, the main challenge for the Administration is to decide how to respond to rising political instability in Japan as reflected in the collapse of the anti-LDP coalition and the election of Social Democratic Party of Japan (SDPJ) leader Tomiichi Murayama as Prime Minister, with LDP backing. The change appears likely to further delay the resolution of trade issues and to complicate other cooperation on issues such as dealing with North Korea. A series of steps by the previous Hosokawa and Hata governments to stimulate the economy and adopt unilateral measures aimed at opening up the Japanese economy to greater foreign participation generally has been regarded as inadequate by Administration officials. _________ page 11 Japan's prolonged recession and political instability have greatly complicated the goal of reducing the U.S. Japan trade deficit, as has recent Administration concern about the unsettling effect of the high yen on the U.S. bond market. The economic slump, now in its third year, has largely negated the expansion of U.S. exports to Japan that might have been expected from the substantial long-term rise of the yen against the dollar. Hard economic times also have tended to make Japanese businesses and their patrons in the Ministry of International Trade and Industry even more resistant than in the past to market-opening trade concessions. To date, the weakness of the coalition government has limited its ability to stimulate the economy and make politically painful bargaining concessions and has raised questions about its control over the bureaucrats. In the short term, at least, the fall of the minority government headed by Tsutomu Hata and the election of Prime Minister Murayama with LDP and Sakigake party support seems likely to postpone indefinitely any concrete moves by Japan to bridge the gap between the U.S. and Japanese negotiating positions. Absent a change in Japan's position, U.S. policymakers would appear to have three broad options to respond to the impasse in the trade negotiations: 1) compromising with Japan on the U.S. demand for numerical targets; 2) waiting until the Japanese political situation stabilizes before making a serious effort to reengage Japan in trade negotiations; and 3) temporarily setting aside the search for a package accord while stepping up the effort to promote U.S. market-opening objectives using a variety of unilateral means such as the Super 301 authority, or taking Japan to the GATT, in the case of disputes that are covered by GATT rules. Congress cannot itself dictate the U.S. approach in these negotiations, but its powers and actions in the areas of trade, technology, defense, and other policy form a backdrop against which both the Administration and the Japanese government must formulate their policies. Congress retains the ability to place additional pressures on Japan and other trade partners, and on the Administration, through the legislative process. Among other pending trade legislation ( H.R. 3900) introduced by House Majority Leader Richard Gephardt seeks to promote the same "results-oriented" objectives being sought in the framework talks by requiring the Commerce Department to develop objective criteria to guide U.S. efforts to press for greater market access in Japan. Congress can also influence U.S. Japan political and security relations by its decisions on the size and funding levels of U.S. forces in Japan. CHRONOLOGY 08/11/94 --- The Senate passed an amendment to H.R. 4650 warning Japan not to reduce its host-nation support for U.S. troops. 07/31/94 --- Failed trade talks prompted the Clinton Administration to begin sanctions proceedings against Japan. 07/07/94--- President Clinton conferred with Prime Minister Murayama at the G-7 Summit meeting in Naples. _________ page 12 06/29/94 --- Prime Minister Murayama succeeded Prime Minister Hata, who resigned on June 25. 06/16/94 --- The Emperor and Empress of Japan left Washington after a several days' official visit. 06/13/94 --- Press reports noted Japan's support for carefully graduated U.S. sanctions against North Korea. 05/24/94--- The U.S. and Japan announced a compromise allowing for resumed bilateral trade talks. 04/28/94 --- Tsutomu Hata formed a new, minority government to rule Japan. 04/08/94 --- Prime Minister Hosokawa announced he would resign. 03/03/94 --- President Clinton signed an executive order reinstating lapsed provisions of Section 301 of the 1988 Trade Act. 02/15/94 --- USTR Kantor accused Japan of violating a 1989 agreement on cellular telephones and began a process to identify possible U.S. sanctions. 12/13/93 --- Japan announced it would follow GATT proposals on opening its closed rice markets to foreign imports. 11/18/93 --- The lower house of Japan's parliament passed Prime Minister Hosokawa's political reform program. 08/23/93 --- Prime Minister Hosokawa forthrightly apologized for Japanese aggression and colonial rule of the past. 08/09/93 --- A new cabinet, made up of seven non-LDP parties and led by reformer Mirihiro Hosokawa, took power. 07/18/93 --- Elections in Japan saw the ruling Liberal Democratic Party lose majority control of the Diet. 07/10/93 --- After often difficult negotiations, the U.S. and Japan reached agreement concerning a "framework" for U.S. Japanese trade talks. 04/16/93 --- President Clinton and Prime Minister Miyazawa met in Washington and registered sharp differences on economic issues. 11/06/92--- Japan announced resumption of aid (around $300-$400 million) to Vietnam. 06/16/92--- Japan's legislature passed a law authorizing Japanese military participation in U.N. peacekeeping activities. _________ page 13 FOR ADDITIONAL READING Choate, Pat. Agents of Influence. New York, Knopf, 1990. Drucker, Peter. "The End of Japan Inc.?" Foreign Affairs, spring 1993. Foreign Affairs. "The U.S. Japan Rift" May/June 1994: 2 12. Prestowitz, Clyde. "It's Clinton's Turn to Bargain with Japan." New York Times, Apr. 15, 1993. U.S. Library of Congress. Congressional Research Service. A Managed Trade Policy Toward Japan?, by Wayne Morrison, William Cooper and Dick Nanto. [Washington,] June 14, 1994. 37 p. CRS Report 94-524 E ----- Defense Burdensharing: Is Japan's Host Nation Support a Model for Other Allies?, by Stephen Daggett. [Washington] June 20, 1994. 16 p. CRS Report 94-515 F ----- Japan and NAFTA, by Dick Nanto. [Washington] Nov. 12, 1993. 6 p. CRS Report 93-982 E ----- The Japan-U.S. Framework for Trade Negotiations, by William Cooper. [Washington] Aug. 6, 1993. 6 p. CRS Report 93-722 E ----- Japan-U.S. Relations: Policy Issues for the Clinton Administration and the 103rd Congress, by Richard Cronin. [Washington] Apr. 29, 1993. 28 p. CRS Report 93-460 F ----- Japan-U.S. Trade Requirements, 1980-1993, by William Cooper. [Washington] June 7, 1994. 18 p. CRS Report 94-481 E ----- Japan-U.S. Trade: The Construction Services Issues, by William Cooper. [Washington] Nov. 4, 1993. 14 p. CRS Report 93-957 E ----- Japan-U.S. Trade: Results of Trade Negotiations -- An Issue Overview, by Dick Nanto. [Washington] Nov. 24, 1993. 6 p. CRS Report 93-1012 E ----- Japan-U.S. Trade: The Structural Impediments Initiative, by William Cooper. [Washington] Mar. 22, 1993. 20 p. CRS Report 93-341 E ----- Japanese-U.S. Trade Relations: Cooperation or Confrontation?, by William H. Cooper. [Washington] (Updated regularly) CRS Issue Brief 92057 __________ page 14 ----- Japan's Foreign Aid, by Nancy Hankes. [Washington] May 5, 1993. 31 p CRS Report 93-494 F ----- Japan's Global Trade Surplus: Its Nature and Significance, by Craig Elwell. Oct. CRS Report 93-941 E ----- Japan's Uncertain Political Transition, by Rinn-Sup Shinn. [Washington] (Updated regularly) CRS Issue Brief 94045 ----- JETRO and International Trade Promotion by Japan, by Dick Nanto [Washington] June 10, 1994. 12 p. CRS Report 94-517 E ----- Russian-Japanese Impasse and Its Implications, by Stuart Goldman. [Washington] Mar. 10, 1993. 16 p. CRS Report 93-312 F ----- U.S.-Japanese Trade: The Semiconductor Arrangement, by William Cooper. [Washington] May 13, 1993. 6 p. CRS Report 93-484 E ----- U.S. Japan Trade Confrontation: Economic Perspective and Policy Options, by Craig Elwell and Alfred Reifman [Washington], June 23, 1994. 17 p. CRS Report 94-526 E ----- The Yen-Dollar Exchange Rate, by James Jackson. [Washington] Aug. 9, 1994. 20p. CRS Report 94-644 E