Global economy concepts and trends

¶ … trade relationship that exists between the world's two largest economies has faced trouble and frustration in the past decade. Japan and the United States have had a strong relationship since they became economic powers in the post world war II period. However, the past decade has not been friendly or cordial become the two economic powers because of a severely lopsided trade deficit. The growing power of Japanese manufacturing has helped push the trade deficit for the United States beyond tolerable levels, and no where else is this more apparent than in the automobile industry.

The current position for the Japanese-American automobile conflict has been lopsided to say the least. The global automotive industry is on the verge of a transcendent transition. The Japanese automobile leader, Toyota, has gained massive new clients and fans with their vastly superior and economically more viable hybrid technology. As a result, it has become the world's number one auto maker in terms of total vehicles produced. Japanese success in the automobile sector has come at a cost for U.S. manufacturers. At a time when both General Motors and Ford are facing dramatic losses, Japanese manufacturers continue to rise (Indiana University, npg). The troubles of GM and the success of Toyota is in itself ironic, because the two has worked so closely in the past few decades even building joint ventures such as the New United Motor Manufacturing company located in California. The current troubles of the American auto makers are forcing us to reconsider the role of trade deficits between the U.S. And Japan, especially in the arena of automobile manufacturing.

The problem is not without any substance, in fact there is much that the United States are angry about when concerned with the Japanese market. The basic U.S. argument about Japanese market is that it is virtually closed to all foreign investment due to severe tariff barriers under the Japanese economic system, such as the "Keiretsu system." However, Japan claims that its market is not closed to the United States, but that U.S. industrial companies have failed to penetrate into their market because they cannot adapt their product to the Japanese local market (JAMA, npg). This is especially true of the automobile market, where attempts by U.S. companies have failed largely because they cannot design cars to the specifications necessary to drive in cramped roads. Despite these denials, the large automobile deficit between the two markets is largely due to a Japanese industrial culture based on traditional cultural values such as brand loyalty (Indiana University, npg).

The goal of this paper is to analyze the Japanese-American automobile conflict and see the implications of Japanese market infiltration on both the American way of life and the automobile industry as a whole.

The relationship between the United States and Japan started in the 1950s. Following World War II, the United States occupied Japan for almost a decade and as a result they commissioned much of their manufacturing from Japan. When the United States entered the Korean War, it commissioned Japanese automobile manufacturers to build a large supply of army trucks. This commission injected large amounts of money into the automobile industry and thus stimulated the growth of the entire industry into a strong domestic brand. By the 1970s, Japanese automobile manufacturers began expanding into foreign markets, particularly the United States, the largest buyer of commercial automobiles (JAMA, npg). Since then, the relationship between U.S. And Japanese auto makers have been confrontational to say the least, each side attempting to gain an advantage through both economic, commercial and political routes. Up until the entry of Japanese auto makers into the U.S. market, General Motors and Ford dominated automobile sales and manufacturing on the world stage. However, Japanese automobiles were able to penetrate the U.S. market because it combined greater efficiency with better design. By the 1980s, strong resentment had started between the two sides that resulted in government attempts at intervention.

At the heart of the 1980s conflict is the lack of bi-lateral trade between Japan and the U.S. While automobile sales of Japanese cars in the U.S. were reaching the billion dollar mark, there was little to no import of American automobiles within the Japanese market. Following many bitter and heated discussions in the 1980s, the two sides agreed on what was known as "Voluntary Export Restraints" or VERs (Misake, npg). This was a policy created to provide numerical restraints on the number of Japanese cars being exported to the United States. This agreement stood for nearly twenty years, and was finally terminated in 1995 (Misake, npg). This agreement stood for the chasm between U.S. And Japanese auto makers. During that period, Japan used a combination of tariffs and the unacceptability of American products in the commercial market to deny U.S. auto makers a chance to penetrate the Japanese domestic market (Indiana University, npg). Japan was reluctant to further open up its own market to American vehicles, however it finally agreed to lift its tariff restrictions and to begin purchasing American made auto parts for its factories in order to increase the volume of sales within the United States.

The trade deficit between the U.S. And Japanese automobile industry is tremendous. In 1995, the U.S. had a 19.9 billion dollar deficit in vehicles and a 13 billion dollar deficit in auto parts (Misake, npg). These two figures combined makes up for more than 55% of the total U.S. trade deficit to Japan, an astounding and almost unbelievable number. Seeing these figures, it does not seem a stretch for the U.S. government to try to limit Japanese imports of their cars and auto parts as well as attempt to gain a greater share of the Japanese market. Using the VERs, they were able to achieve their primary objective of limiting Japanese imports. These efforts were initially success, however, the Japanese auto makers soon found a solution that changed the landscape of American automobile industry forever. They began opening production plants within the United States rather than importing their cars (JAMA, npg). Thus, even as the direct imports from Japan continue to fall, a total of 21% since 1992, its production of Japanese automobiles in the U.S. has grown 36% in the same period.

Although Japanese auto makers argued that by setting up plants in the United States they would be helping the U.S. economy by providing more jobs, U.S. auto makers complained that they were still essentially helping the Japanese system. They claimed that Japanese "transplants" were still following the same supply scheme as from before with the majority of them obtaining their auto parts from their established suppliers in Japan. Thus making sure that the majority of the profit was still going into the pockets of Japanese companies rather than American ones.

The problem with all of this of course is that the growth of Japanese market share in the United States never matched the same penetration in the Japanese domestic market. In 1995, Japan's import market for automobiles was at 10% of the total car market, an increase from 8% the previous year. Of this 10%, U.S. auto makers had barely 1%. This is because of several established reasons. While Japan started manufacturing cars in the United States only after careful research and testing of the market, U.S. auto makers did not adequately research the Japanese market before attempting to sell its vehicles there. As a result, their cars did poorly on the market because they were much too powerful for the Japanese market which has roads that are very different from the conditions in the U.S. Furthermore, none of the "Big Three" automobile manufacturers had competitive cars that had right hand drive, which all vehicles in Japan must have (Indiana University, npg). All of these factors played into why the U.S. had little market penetration into the Japanese domestic market.

The fault for the trade deficit could not be blamed completely on U.S. auto makers however. The Japanese system also had a lot to do with the failure of their cars. The majority of cars in the Japanese market are sold through the Japanese dealer network, which is controlled through the Japanese Dealers Association. Although they claim that 67% of all dealers in Japan sell foreign cars, the reality is that they are reluctant to push such models, instead preferring the brand loyalty of traditional Japanese brands. European auto makers who entered the market have all started their own dealerships after learning the biases within the Japanese network (Misake, npg). The U.S. automobile industry had little understanding of these small nuances in trade, and the market forces in the Japanese market prevented them from making gains as well. It is a combination of all of these factors that made the Japanese-U.S. trade deficit so large in comparison by the 1990s.

In order to examine the real implications of the U.S.-Japanese automobile situation, a review of agreements made between the two companies must be examined. The first of such agreements were made in 1980 (JAMA, npg). The Japanese auto makers had sold a total of 2.4 million vehicles in the United States; all of these vehicles were imported. By 1978, the Japanese market share of the U.S. domestic market was 11%, and had jumped to 22% in 1980. The Big Three auto makers (GM, Toyota, and Chrysler) demanded that there be limitations placed upon the Japanese auto makers because of the large trade deficit. In response to the pressure applied by the auto makers, the government signed the Yasukaw-Askew agreement in May of 1980. This agreement basically committed the Japanese government to encourage greater economically viable investment opportunities in the U.S. By Japanese automobile manufacturers and auto parts manufacturers. It is clear that this agreement has been for the most part followed by the Japanese government. By 1993, Japanese manufacturers have invested well over 11 billion dollars into the U.S. economy in the form of manufacturing plants, equipment, and design and research centers in the U.S.

However, Japan's sole investment in the U.S. market in the form of plants and other centers were not enough as the trade deficit continued to grow. As the production of transplants increased by the mid 1980s, U.S. auto part makers became frustrated that Japanese manufacturers were not purchasing from them, but rather from their traditional Japanese companies. The next major agreement came about on this subject. The talks occurred in the latter half of 1986 to 1987, and it was called the Market Oriented Sector Specific Talks (MOSS). The focus was on the existence of Keiretsu relationships between Japanese manufacturers. Keiretsu relationships allude to traditional Japanese manufacturing relationships where Japanese companies remain loyal to each other in order to promote greater cultural identity. The MOSS report concluded that there was not enough strong evidence to make the claims made by the auto parts makers legitimate and therefore no tangible agreements were made. This represented a victory for the Japanese auto makers, and as a result, their sales continued to sky rocket from late 1980s to the 1990s.

The problem by the late 1980s was of course a trade deficit that had completely become one sided. Japan was gaining huge economic grounds within the U.S. And GM sales of midsized cars to economy sized cars had virtually come to a completely stop. As a result, they proposed a liaison committee consisting of a small group of directors with the purpose of devising a way to develop greater business within Japan. The group developed a more cohesive strategy to define the parameters of Japanese participation in the domestic market. They created purchased manuals, published service catalogues, etc. The success of the private sector initiatives to change their strategy and approach with Japanese auto makers the led to many of the interactive cooperation between Japanese and American auto makers such as Toyota and GM (JAMA, npg). The result as was that companies within JAMA and MEMA increased their overall auto parts sales from 2.5 billion 1986 to over 19.8 billion last year. This dramatic rise has much to do with the willingness of the Japanese auto makers to purchase from the U.S. auto parts manufacturers. The number of U.S. suppliers to Japanese factories rose from well below 300 to over 1200 in the current market.

The bilateral agreements made during this time combined with the success of Japanese automakers in the U.S. brought about a period of wealth to the Japanese economy. The period between 1987 to 1991 is commonly referred to as the "bubble economy," where unprecedented economic prosperity occurred. Riding these waves were the Japanese automakers that set all time milestones in terms of profit as well as production. By 1990, Japanese automobile industry had produced a year total of 13.5 million units and a sales volume of 7.78 million units (Hamberson, 120). They became the world's largest manufacturer of automobiles in 1980 already as the industry as a whole produced a total of 11 million units, thus the new highs achieved in 1990 was a golden era for Japanese automaker sales. However, the economy soon fell in 1991; this was due to the asset-inflation that occurred in the bubble economy. With this fall, the domestic market in Japan collapsed, and sales within the domestic market also fell dramatically. The operating profits during this period for the Japanese auto industry fell as a whole and this forced the manufacturers to implement different restructuring measures to change the history of their domestic and international industry. The focus they realized must be placed on the U.S. market, where they could still gain significant ground on the U.S. automakers. Therefore they changed their strategy from attempting to dominate the Japanese market into making a stronger push for the U.S. market. In the period between 1991 to 1994, the Japanese automakers began to construct even more facilities and cooperatives in the U.S. (Misake, npg). Despite the greater resources being sent to the U.S., overall this meant that competition within the auto industry was even worse for U.S. companies in the 1990s.

With the success of American-Japanese cooperatives, there was still confrontation over the trade deficit but Americans were feeling happy that there were more jobs in the economy as well as better automobiles on the market. Therefore the feeling of mutual success was overwhelming between the two superpowers. As a result, President Bush Sr. visited Japan in 1992, in a historic meeting. At that time the trade deficit on auto mobiles had reached its highest point as of that time, 10 billion dollars. Many thought that by the time Japan had fully synchronized into the U.S. manufacturing market, the trade deficit would reach as high as 22 billion. In this historic meeting, President Bush solicited JAMA members to contribute to the U.S. economy and commit to domestic sales. The JAMA members voluntarily quoted numbers that amounted to 19 billion dollars in the next five years. These pledges attested to how much actual trade volume would soon come into the U.S. As a result of the strong sales figures in the early 1990s. As it turned out, this target amount was actually acceded in 1994, when the total purchasing amounted to 19.8 billion dollars (JAMA, npg). An amazing figure when you consider how much auto makers were trading at that current time. Japanese auto makers single-handed got the U.S. auto industry out of the problems that it was suffering during the recession of the late 1980s. There infusion of money helped us achieve dramatic success and helped The Big Three as well, temporarily giving them the ability to cooperatively create factories and launch brands with the Japanese. It seemed in the early 1990s that the relationships developed through private initiatives would pay off handsomely and that despite the trade deficit, Japanese and U.S. automakers would be happy with the results that they have had through joint partnerships.

This however all fell apart due to the growing interest of Ford, GM and Chrysler in the Japanese market. Again the problem of market penetration created conflict between the two sides. Throughout most of the 1980s, The Big Three did not show a large interest in the Japanese market, all attempts up to that point had failed dramatically due to the incompatibility of U.S. vehicles for the Japanese market. However, they decided that the time was ripe for another attempt at balancing the trade deficit. In this vein the president of Ford at the time proposed the "Poling Proposal"; this proposal was intended to place the reduction of the trade surplus solely within Japan's responsibility, arguing that they should reduce the trade surplus within only five years and in equal annual amounts (Indiana University, npg). At this point, U.S. automakers began making serious plans to regain ground in Japan, but these efforts were much less successful than they originally thought. After two years on the market, they appeared to have not learned any of the lessons of their previous attempts. They did not establish their own dealerships, nor build cars to the specifications of the Japanese market. There market share by the end of the two-year experiment stood at 2%, a paltry figure for the three biggest automakers in the world at the time.

The futility of these efforts by The Big Three led to severe resentment within the U.S. market and it had an influence on the government as well. Soon the Clinton administration was demanding that a mutual purchasing plan was adopted to lower the trade deficit between the two companies, there talks soon came down to a simple "numbers game." U.S. automakers would never concede that the reason there efforts fail short of all their goals was precisely because they never took complete effort to create efficient automobiles that could challenge Japanese automakers in their domestic market. At the same time Japan was conducting deep research into hybrid technology that is currently enabling them to become the top producing automaker in the world. The theme of all U.S. automaker assertions is that as long as U.S. companies sell in one market, it is the fault of another market if they do not sell there. The Japanese market itself is much easier to understand than the U.S. market, where hundreds of different car brands compete against each other. There are three segments in the Japanese market, regular sized vehicles, small sized vehicles and mini vehicles (JAMA, npg). The range of total engine capacity for these cars are all well below 3000cc, with mini vehicles going with less engine capacity than 700cc. The Big Three in contrast have only three lines of cars below 2000cc and none of them are very marketable. They have no cars that would fit into the mini market, and only a very small amount of cars that even fit within the 3000cc limit. By the late 1990s, U.S. automakers had continued to place there bets on large trucks and SUVs instead of smaller more efficient cars that could operate even with the current crunch of gasoline prices (JAMA, npg). Therefore, the Japanese giants could do nothing but to explain over and over again that American cars are just not suited to the Japanese market. Unless they begin designing cars that are suitable within their domestic market there is virtually nothing they can do to help the U.S. penetrate their market. The Japanese government even volunteered to aid U.S. automakers in their efforts to establish a beach head in Japan through providing financial support for exhibitions and demonstrations of their vehicles in Japan. They worked with the Japan Development Bank to provide very low interest loans for constructing facilities in Japan for both production and dealerships. They even created economic incentives for import financing, and loans to facilitate the sales of automobiles to Japanese customers through the Small Business Finance Corporation. These efforts were as much a Japan could do to help the U.S. enter into the Japanese market, but it was largely the fault of U.S. automakers that they could do nothing even given these resources.