Sanctions on Japan are a Lose‐​Lose Game

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

Our government is about to impose 100 percent tariffs on luxurycars imports from Japan. The purported reason: after 20 months ofnegotiation, the Japanese auto manufacturers would not makespecific quantitative commitments to increase their purchase ofauto parts from non-Japanese firms and the Government of Japanwould not make a quantitative commitment to increase the number ofauto dealers that sell and service foreign cars. The Government ofJapan made a number of concessions on other related issues, whichthey plan to implement regardless of the outcome of the instantdispute.

The pending sanctions announced by Ambassador Kantor are bestdescribed as a temper tantrum, the response of a frustrated bullywho did not win concessions on all his demands. Americans should beoffended to know what our government has demanded of the Japanese,specifically that the Government of Japan promote the sale offoreign autos and parts in Japan and the purchase of auto partsfrom American owned companies by the Japanese transplant companiesin the United States. Americans would be properly outraged ifanother government made similar demands on our government.

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

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

The U.S. position in the auto trade dispute threatens ourbroader relations with Japan. The U.S. demands for quantitativetrade commitments are demands for managed trade, not fair trade.The U.S. demands for changes in Japanese domestic regulations andbusiness practices that are not violations of existing agreementsundermine our high ground on other issues, such as the airlineroute dispute, where there is a clear violation of a prioragreement. Treating the Japanese negotiators as the officials of anoccupied nation reduces the prospect of their cooperation on otherissues where we will want or need their support.

Most important, the pending sanctions undermine the rule of lawin international trade. In the auto trade dispute, our governmenthas not charged the Japanese with any specific violation ofinternational trade agreements; otherwise a case could have beenbrought before the GATT dispute settlement process years ago. Thepurchase quotas demanded by the U.S. negotiators and the punitivetariffs that are scheduled in response to the Japanese rejection ofthese quotas are both clear violations of international traderules. The Government of Japan has appealed these sanctions to thenew World Trade Organization in a case that our government willalmost surely lose.

What does Ambassador Kantor have to show as benefits from thedemands 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 toEuropean auto firms. Complete acquiescence by the Japanese to theU.S. demands would have had no significant effect on the bilateraltrade deficit; this deficit is the consequence of macroeconomicconditions that are not affected by trade measures. Mercantilistmachoism may be good politics but it is lousy economics and unwiseforeign policy.

For 60 years, the U.S. Government led the effort to create arule of law in international trade, most recently to win approvalof NAFTA and the Uruguay Round. For the past 10 years, however,under three administrations, our government has operated outsidethe law to use almost any means, so far short of gunboats, to openforeign markets. These aggressive measures have made our governmentthe bully of world trade. Almost all other governments havecriticized the pending U.S. sanctions on the Japanese, possiblyreflecting an anxiety about what country may be the nexttarget.

The confrontation with Japan over auto trade marks the end of anera in U.S.-Japan relations. The Government of Japan has chosen tocommemorate the 50th anniversary of the end of World War II byrejecting the most recent U.S. demands to change their domesticlaws and business practices. Our government should also acknowledgethat the Occupation is over. A mature relation will require thatboth governments accept the outcomes of rules to which they haveagreed and that any change of the rules be based on mutualconsent.

Thank you for your attention.

William A. Niskanen

Subcommittee on Subcommittee on East Asia and Pacific
Committee on Foregin Relations
United States Senate