Testimony

Sanctions on Japan are a Lose-Lose Game

By William A. Niskanen
June 13, 1995
Subcommittee on Subcommittee on East Asia and Pacific
Committee on Foregin Relations
United States Senate

Mr. Chairman and members of the subcommittee: My thanks for the opportunity to testify on the U.S.-Japan auto trade dispute. Unless resolved, this dispute will generate substantial economic losses, both in the United States and Japan. More important, this dispute threatens our broader relations with Japan and undermines the rule of law in international trade.

Our government is about to impose 100 percent tariffs on luxury cars imports from Japan. The purported reason: after 20 months of negotiation, the Japanese auto manufacturers would not make specific quantitative commitments to increase their purchase of auto parts from non-Japanese firms and the Government of Japan would not make a quantitative commitment to increase the number of auto dealers that sell and service foreign cars. The Government of Japan made a number of concessions on other related issues, which they plan to implement regardless of the outcome of the instant dispute.

The pending sanctions announced by Ambassador Kantor are best described as a temper tantrum, the response of a frustrated bully who did not win concessions on all his demands. Americans should be offended to know what our government has demanded of the Japanese, specifically that the Government of Japan promote the sale of foreign autos and parts in Japan and the purchase of auto parts from American owned companies by the Japanese transplant companies in the United States. Americans would be properly outraged if another government made similar demands on our government.

The pending U.S. sanctions are a losing game for almost all concerned. Let me count the ways:

  • American consumers would have to pay about $6 billion more for the same volume of Japanese cars subject to the punitive tariffs. More likely, consumers will switch their purchases to the closest substitutes”the luxury cars produced in Europe.
  • Japanese auto manufacturers would lose to the extent that the reduction of U.S. sales of the cars subject to the punitive tariffs could not be offset by an increase in sales of these cars in other markets or of other cars in the U.S. market.
  • The largest proportionate losses, however, would be to the American dealers and their 80,000 employees that specialize in the sale and service of the luxury cars subject to the punitive tariffs.
  • Other Americans, such as those who supply leather seating for these cars, would also experience substantial losses.

The U.S. position in the auto trade dispute threatens our broader relations with Japan. The U.S. demands for quantitative trade commitments are demands for managed trade, not fair trade. The U.S. demands for changes in Japanese domestic regulations and business practices that are not violations of existing agreements undermine our high ground on other issues, such as the airline route dispute, where there is a clear violation of a prior agreement. Treating the Japanese negotiators as the officials of an occupied nation reduces the prospect of their cooperation on other issues where we will want or need their support.

Most important, the pending sanctions undermine the rule of law in international trade. In the auto trade dispute, our government has not charged the Japanese with any specific violation of international trade agreements; otherwise a case could have been brought before the GATT dispute settlement process years ago. The purchase quotas demanded by the U.S. negotiators and the punitive tariffs that are scheduled in response to the Japanese rejection of these quotas are both clear violations of international trade rules. The Government of Japan has appealed these sanctions to the new World Trade Organization in a case that our government will almost surely lose.

What does Ambassador Kantor have to show as benefits from the demands on the Japanese and the pending sanctions? Almost nothing. There will be no significant benefits to the American auto firms; most of the sales diverted by the punitive tariffs will go to European auto firms. Complete acquiescence by the Japanese to the U.S. demands would have had no significant effect on the bilateral trade deficit; this deficit is the consequence of macroeconomic conditions that are not affected by trade measures. Mercantilist machoism may be good politics but it is lousy economics and unwise foreign policy.

For 60 years, the U.S. Government led the effort to create a rule of law in international trade, most recently to win approval of NAFTA and the Uruguay Round. For the past 10 years, however, under three administrations, our government has operated outside the law to use almost any means, so far short of gunboats, to open foreign markets. These aggressive measures have made our government the bully of world trade. Almost all other governments have criticized the pending U.S. sanctions on the Japanese, possibly reflecting an anxiety about what country may be the next target.

The confrontation with Japan over auto trade marks the end of an era in U.S.-Japan relations. The Government of Japan has chosen to commemorate the 50th anniversary of the end of World War II by rejecting the most recent U.S. demands to change their domestic laws and business practices. Our government should also acknowledge that the Occupation is over. A mature relation will require that both governments accept the outcomes of rules to which they have agreed and that any change of the rules be based on mutual consent.

Thank you for your attention.