Global Economy Research Paper

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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…

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