How to Solve the U.S.-Japan Trade Problem
Author(s): DOMINICK SALVATORE
Source: Challenge , JANUARY/FEBRUARY 1991, Vol. 34, No. 1 (JANUARY/FEBRUARY
1991), pp. 40-46
Published by: Taylor & Francis, Ltd.
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DOMINICK SALVATORE
How to Solve the US. -Japan
Trade Problem
In a world of imperfect competition and all sorts of market failures,
strategic trade can improve on the free-trade solution and enhance
U.S. global industrial competitiveness.
The United States now has a trade deficit with practically
Japan's
all of its major trade partners. While trade need not, of
trade pattern
The
U.S. bilateral merchandise trade deficit with Japan
course, be balanced bilaterally with each country, the
U.S.
increased from about $4 billion in 1972 to a high of
trade deficit with Japan has grown so large and persistent,
even with its modest decline in recent years, that the nearly
United $60 billion in 1987, before falling to nearly $56
States can be said to have a specific trade problembillion
with in 1988 and $50 billion in 1989 (Table 1). As a
percentage of the U.S. overall total trade deficit, our
Japan. Moreover, during the past decade or so, the United
States has lost competitiveness with respect to Japan bilateral
in one trade deficit with Japan ranged from nearly 30
percent in 1984 to nearly 46 percent in 1981, and it was
industry after another. There are now only a few high-tech
over 43 percent in 1989. Thus, Japan, singlehandedly, is
industries in which the United States retains undisputed
now responsible for over 40 percent of our overall trade
leadership over Japan. But even in these, Japan is gaining
deficit
fast and may surpass the United States by the turn of
the and this ratio has increased sharply since 1984.
An examination of the distribution of the overall U.S.
century in the absence of corrective action. Thus, the U.S.Japan trade problem has two interrelated aspects:
trade deficit among its major trade partners shows the
U.S. bilateral trade deficit with Japan in 1989 to be
(1) The bilateral deficit with Japan is a dis$49.8 billion. This was nearly four times larger than our
proportionately large part of the overall, or macroecosecond largest trade deficit (with Taiwan), and more
than five times larger than our third and the fourth
(2) The changing composition of U.S.-Japan trade
nomic, trade deficit.
largest trade deficits (with Canada and Germany). Inreflects a growing loss of U.S. technological competideed, the U.S. bilateral trade deficit with Japan in 1989
tiveness at the microeconomic level.
DOMINICK SALVATORE is Director of the Graduate Program and Professor of Economics at Fordham University, New York. This article is adapted from
the author's study conducted for the Economic Policy Institute in Washington, D.C.
40 Challenge/January-February 1991
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Table 1 U.S.-Japan Bilateral Merchandise
Table 3 Import Penetration Ratios in
Trade and Trade Balance
Manufacturing, 1975, 1985 and 1986
(imports as percentage of apparent consumption*)
(in billions of U.S. dollars)
Imports From: United States Germany Japan
Percentage of
Exports Imports Trade Balance Total U.S. Trade
Year
1972 5.0
1976 10.2
1980 20.8
1981 21.8
1982 21.0
1983 21.9
1984 23.6
9.1 -4.1 43.2
15.5 -5.3 31.0
33.0 -12.2 33.7
39.9 -18.1 45.7
39.9 -18.9 44.4
43.6 -21.7 31.3
60.4 -36.8 29.8
1985
1986
1987
1988
1989
72.4
85.5
88.1
93.2
93.5
22.6
26.9
28.2
37.7
43.7
Source:
IMF,
-49.8
-58.6
-59.9
-55.5
-49.8
33.5
34.5
34.5
40.2
43.3
Direction
World
1975
7.0
24.3
1985 12.9 39.5
1986
13.8
37.2
4.9
5.4
4.4
O.E.C.D.
1975
1985
1986
2.9
3.2
2.6
4.9
8.8
9.3
20.5
32.5
30.6
Developing
1975
1985
1986
of
2.1
3.9
4.2
2.6
4.5
4.4
Countries
1.8
2.0
1.8
♦Apparent
consumpti
Trade Statistics, Washington, D.C
exports.
Source: Advisory Committee for Trade Policy Negotiations, Analysis of the
US. -Japan Trade Problem, Washington, D.C, February 1989, p. 10.
Table 2 U.S. Bilateral Trade Balances
(in billions of U.S. dollars)
for Japan. The ratio for imports from developing coun-
Area
Japan -12.2 -49.8 -58.6 -59.9 -55.5 -49.8
E.C.C. 18.9 -22.6 -26.3 -24.3 -12.8 -0.9
Germany -1.3 -12.2 -15.5 -16.3 -13.1 -8.3
France 2.O -3.9 -3.4 -3.3 -2.6 -1.3
U.K. 2.4 -4.3 -4.6 -3.9 -0.3 2.4
Italy 0.8 -5.8 -6.5 -6.2 -5.5 -4.8
Canada -6.6 -22.1 -23.4 -14.1 -12.2 -9.7
Brazil 0.4 -5.0 -3.4 -4.4 -5.7 -3.7
Mexico 2.3 -5.9 -5.2 -5.9 -2.9 -2.4
Taiwan -2.8 -11.2 -14.6 -17.5 -13.0 -13.3
Korea 0.3 -4.7 -7.1 -9.9 -9.9 -6.7
Hong-Kong -2.3 -6.2 -6.3 -6.5 -5.1 -3.4
Singapore 1.0 -0.9 -1.5 -2.3 -2.5 -1.6
Oil Exporting
United States, from 20.5 percent to 30.6 percent for
Germany, but declined from 2.9 percent to 2.6 percent
Country or
Countries -40.2 -9.6 -9.3 -13.6 -10.2 -6.6
tries rose from 2.1 percent to 4.2 percent for the United
States, from 2.6 percent to 4.4 percent for Germany, but
remained unchanged at 1.8 percent for Japan.
In the past, Japan' s low import ratios for manufactures
has been explained by its relative resource-poor economic base, by its geographical distance from other
world markets, and its other economic attributes. More
recently, however, Japan's imports of all goods were
estimated to be between 25 percent and 45 percent lower
than they should be, based on the usual criteria of indus-
trial structure, size, and level of economic development.
In addition, the prices of traded goods in Japan are
estimated to be 86 percent higher on average than in the
United States. Without trade barriers, international arbi-
Source: IMF, Direction of Trade Statistics, Washington, D.C.
tration - the purchasing of goods where they are cheaper
and reselling them for a profit where they are more
- would
have essentially eliminated internawas larger than the sum of all the other expensive
ten trade
deficits
shown in Table 2.
tional price differences in the two nations (except for
Between 1975 and 1986, the average transportation
import penetracosts).
international
tion of the U.S. market for manufactured Thus,
goods
from price
all comparisons strongly sugcountries rose from 7.0 percent to 13.8
in
the high trade barriers that
gest percent
that Japan has
relatively
United States. Table 3 shows this penetration
effectively
rising
restrictfrom
imports of manufactured goods. Indeed,
1989 Reportwith
of the Advisory Committee for
24.3 percent to 37.2 percent for Germany
(athe
country
Trade
Policy
Negotiations (see For Further Reading)
an economic structure similar to Japan's),
but
itand
actually
"In summary,
in the response to the quesdeclined from 4.9 percent to 4.4 percentconcludes,
in Japan.
For the
tion, manufactured
'Is there anything different about Japan's pattern of
same years, the import penetration for
especially manufactured
trade?' the studies [regoods from the twenty-four member trade,
countries
of the
viewed]
suggest
the answer is an unqualified yes." (See
Organization for Economic Cooperation
and
Developespecially,
Alan Blinder
in For Further Reading.)
ment (OECD) rose from 4.9 percent to 9.3
percent
for the
January -February 1991 /Challenge 41
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Table 4 Changing Composition of U.S. Trade in High-Tech Manufactured Goods with Japan
(in billions of U.S. dollars)
1972
0.3
0.5
1976
0.4
1.0
1980
0.9
2.5
1985
1.8
9.9
1986
2.0
11.6
1987
2.6
13.9
-0.2
-0.6
-0.6
-0.8
-1.6
-1.1
-8.1
-5.5
-9.6
-6.2
-11.3
-6.3
1988
-13.1
3.7
16.8
-5.7
-0.4
-0.5
-0.8
-3.8
-4.5
-4.6
-4.1
Machine Tools
1972
0.3
0.3
-0.0
1976
0.5
0.8
-0.3
-0.4
1980
0.9
2.3
-1.4
-1.0
1985
1.0
5.7
-4.7
-3.2
1986
0.9
6.7
-5.8
-3.7
1987
0.9
7.5
-6.6
-3.7
1988
1.5
8.4
-6.9
-3.0
Other
-0.3
-0.7
-2.2
-2.7
-2.7
-2.2
Machinery
an
Exports Imports Trade Balance TB as % of TME TB as % of TE
1972
1976
1980
1985
1986
1987
1988
0.8
0.9
2.3
3.2
3.8
4.3
5.4
1.1
1.7
3.6
7.5
9.1
10.6
12.7
-0.3
-0.8
-1.3
-4.3
-5.3
-6.3
-7.3
-0.9
-1.1
-0.9
-2.9
-3.4
-3.5
-3.2
Total
-0.6
-0.7
-0.6
-2.0
-2.5
-2.6
-2.3
Engineering
Exports Imports Trade Balance TB as % of TME TB as % of TE
1972
1.4
5.6
-4.2
-12.7
-8.8
1976
2.0
10.7
-8.7
-11.6
-7.9
1980
4.4
24.8
-20.4
-14.6
-9.6
1985
6.4
59.0
-52.6
-35.4
-24.9
1986
7.1
72.0
-64.9
-41.6
-30.2
1987
8.2
74.2
-66.0
-36.8
-27.1
1988
11.4
77.7
-66.3
-28.6
-20.7
TB=trade
balance;
TME=total
Source:
GATT,
International
The U.S. microeconomic trade
manu
Trade
parts and engines. The first three classifications include
all the suppliers (as opposed to the users) of high technology and are of particular relevance in evaluating the
change in the competitive position of the United States
While the size and growth of our overall bilateral trade
vis-à-vis Japan during the past two decades.
deficit with Japan is certainly a major problem for the
problem with Japan
United States, it is Japan's trade and industrial practices
From Table 4, we see that while our competitive
position deteriorated throughout the 1972-1988 period,
at the microeconomic or industry level that are potentially
that deterioration rose to truly massive proportions from
more dangerous to our future well-being. The commodity
1980 to 1985. In five short years, the United States develcomposition of U.S. trade with Japan changed significantly from 1972 to 1988 in: (1) office and telecommuni-oped a very large trade deficit with Japan in all these
high-tech sectors both in absolute and relative terms.
cations equipment; (2) machine tools; (3) other
From 1980 to 1985, our bilateral trade deficit with Japan
machinery, such as power generating machinery, and
increased from $1.6 billion to $8.1 billion in office and
transport equipment like railway vehicles and aircraft;
telecommunications equipment, from $ 1 .4 billion to $4.7
and (4) engineering products, which include all of the
billion in machine tools, from $1.3 billion to $4.3 billion
above categories as well as automobiles and automobile
42 Challenge/January -February 1991
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in other machinery and transport equipment, and from
$20.4 billion to $52.6 billion for all engineering products
combined. Our bilateral trade deficit with Japan increased from 14.6 percent to 35.4 percent of total U.S.
manufactured exports to all nations and from 9.6 percent
Japan s unique strategies
for conquering new industries
While mature and high-tech U.S. industry lost compet-
to 24.9 percent of all total U.S. exports.
itive ground by taking a short-term view of profits,
Japan was implementing trade and industrial policies
The U.S. short-term view of profit
strategy for conquering a new industry is by now clear,
that seriously eroded U.S. competitiveness. Japan's
This dramatic decline in U.S. competitiveness is our
having been successfully applied to a number of industries from steel and automobiles to semiconductors and
own fault in some ways. Firms in some U.S. industries,
robots.
especially automobile and steel, became sluggish after
World War II. They enjoyed vast technological superi-
imports and foreign investments in the industry, coor-
ority after the war, they operated in a large and unified
dinates the acquisition of technology abroad, and pro-
In the first stage of this strategy, Japan restricts
domestic market, and they were sheltered from foreign
vides subsidies and tax advantages to master and
competition to some extent by two vast oceans. U.S.
steel producers failed to adopt new technology quickly,
and U.S. automakers failed to improve product quality
introduce the new technology in the targeted industry.
as rapidly as Japanese producers, and both paid excessive attention to short-run profits rather then long-term
growth prospects. Both industries were also hurt by the
In the next stage, the government coordinates a massive expansion of industrial capacity, facilitated by
large availability and low cost of capital. In the third
stage, the industry invades the world market, originally accepting very low profits or even losses while
high value of the dollar during most of the 1980s, at the
acquiring market share and continuing to improve
same time that Japanese producers were reaping the
technology and product quality. In the fourth and final
stage, foreign countries, facing the prospect of demise
benefits of previous strategic governmental support for
these same industries (see Gene M. Grossman in For
of a major industry, restrict Japanese access to their
Further Reading).
markets, often with voluntary export restraints, which
The decline of U.S. competitiveness in high-tech
industries, especially semiconductors, occurred for
different reasons. Most U.S. producers in semiconductors were relatively small, sold only computer
grant substantial market share and ensure high prices
and profits for Japanese firms. By this time, Japan has
dismantled its own formal import restrictions in the
targeted industry and asserts its belief in free trade.
chips, and generally took a short-run view of profits.
Furthermore, their technology could easily be reverse-
Japan has targeted the computer industry for the 1980s
engineered and copied, and they lacked the resources
to defend it effectively in protracted and costly legal
battles. Lack of resources prevented their expanding
at home and precluded their selling or establishing
the 1990s. Without adequate American response, his-
production facilities abroad, especially in Japan.
Often these firms sold or licensed their technology to
Japanese firms in order to increase short-term revenues and profits. Consequently, in the long run the
U.S. semiconductor firms were unable to compete
with their much larger and vertically integrated Jap-
anese competitors. The latter took a long-term view.
They were able to sustain large and even prolonged
losses in their semiconductors line from profits earned
in their many other lines of business. The United
States thus squandered its leadership position in an
industry that only a few years earlier had been the
pride of U.S. advanced technology and the envy of the
entire world, including Japan.
and the commercial aircraft and space industries for
tory is likely to repeat itself.
While not all targeting efforts of Japan's Ministry of
International Trade and Industry (MITI) have been
successful and not all have operated as intended, MITI
was crucial in contributing to Japan's stunning competitiveness and trade successes. The consensus of expert
opinion cited in the conclusion of the 1989 Advisory
Committee for Trade Policy and Negotiations holds that
MITI used administrative guidance, import restrictions,
coordination of investment in plant and equipment,
merger and other methods of production consolidation,
approval of cartels, postponing of liberalization of direct
investment from outside, tax incentives for leading indus-
tries, lower interest loans, and other measures. . . . The
argument that the financial contribution made by the
Japanese government is not a huge sum provides us with
little comfort because of the profound impact the organization of research projects could have on the timing of
January -February 1991 /Challenge 43
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innovation, on patterns of interfirm competition and co-
operation, and on industrial structure. . . . (See Bela
B alassa and Marcus Noland in For Further Reading.)
Several of MTITs strategies and policies have been
particularly effective. MITI fosters competition at home
by simultaneously promoting several domestic firms in
targeted industries and encouraging exports at an early
stage. If foreign companies apply for a crucial patent that
gives them an important competitive advantage, MITI
industrial targeting were as important as domestic
shortcomings.
Dangers arising from Japan's trade
and industrial policies
The sharp decline in U.S. competitiveness in high-technology products in relation to Japan seriously endangers
the future well-being of the United States. That decline
delays awarding the patent until Japanese producers have
is intrinsically more dangerous than our large overall
a chance to catch up or apply for patents to cover similar
trade deficit with the rest of the world and with Japan,
technology. It takes six years to register a patent in Japan
(as compared with two years in the United States and one
serious as those are. Indeed, one could well imagine a
situation in which the United States had no bilateral trade
year in the United Kingdom) and during this time the
deficit with Japan, but where most U.S. imports from
foreign firm is very vulnerable to unauthorized copying
Japan consisted of leading-edge technological products
of its invention by Japanese firms.
while our exports consisted mostly of agricultural prod-
There is more specific evidence that Japan effec-
ucts and raw materials. Since most of the growth in
tively restricts entry into its market directly or through
productivity and the standard of living depends on the
its unique distribution system and buyer preferences.
introduction of advanced technology, a continued deteri-
For example, during the 1970s and early 1980s U.S.
oration in the U.S. competitive position is ominous. It
semi-conductors and telecommunications firms held
could only foreshadow an accelerating trend of slower
growth and decline in our standard of living in relation to
less than 10 percent and 3 percent, respectively, of the
Japan, and perhaps even in relation to the countries of
Japanese market at a time when they dominated the
world market and were the undisputed technologicalWestern Europe, as well as to the newly industrializing
countries. This rather gloomy scenario cannot be disleaders. Impartial observers readily admit that Japan is
informally highly protectionistic. The Office of the U.S.missed out of hand. Another five or ten years of deterio-
Trade Representative (1990) lists more than twice as ration in the trade and competitiveness position of the
many formal and informal trade barriers against U.S.United States of the same order of magnitude as that
exports for Japan than by the entire European Economicwhich occurred from 1980 to 1985, and the United States
Community. The United States today supplies only 6could potentially lose its ability to compete effectively in
most high-technology products with Japan, and in some
percent of the supercomputers bought by Japan's goveven with Western Europe.
ernment and publicly financed universities, although
The rapid and sharp deterioration of our semiconducwe hold an 80 percent share of the world market.
From all of the above, we can safely conclude that:tor industry as a result of Japanese competition has
(1) Japan does effectively restrict entry into its mar-ominous implications for the future competitive position
ket either directly or through its unique distributionof almost all high-technology industries in the United
States. "Downstream industries' ' (industries using comsystem and buyer preferences.
(2) Japan does target industries. While there is dis-puter chips) are much larger than the semiconductor
agreement on the effectiveness of such policies and how industry itself and produce the bulk of U.S. exports. As
much of Japan's stunning competitiveness and tradepointed out by the 1989 MIT study Made In America (p.
successes can be attributed to targeting, evidence is 26), ' 'American computer makers now obtain more than
mounting that industrial targeting was crucial to Japan ' shalf of their semiconductors from Japan . . . from the same
rapid rise to a high-technology leadership position. diversified companies that are their competitors in the
(3) The cause of the U.S. competitiveness and tradecomputer market. (See Michael L. Dertouzos in For
problems with Japan lies with both the United StatesFurther Reading.) By withholding or delaying making its
and Japan. In many high-tech sectors, such as computcomputer chips available to competing U.S. firms, the
ers and telecommunications, in which the United States
Japanese could also seriously affect the United States
was and is the world leader, as well as in some mature
lead in computers. The Office of Technology Assessment
industries earlier when the United States was more
of the U.S. Congress (1989:iii) pointed out another omi-
competitive, Japan's restrictive distribution system and
nous implication: "Foreign companies have made deep
44 Challenge/January-February 1991
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inroads into high-technology markets that had been more
or less the exclusive domain of U.S. industry. In addition
market-opening measures would cut our global trade
deficit during the 1990s in general and bilateral trade
when the technology in defense systems comes increas-
deficit with Japan (the latter cut by only about $11
billion), they are absolutely essential for reducing the
U.S. competitive and trade disadvantage and for estab-
ingly from the civilian sector."
lishing 4 * a level playing field' ' with respect to Japan. That
to causing economic problems, this has fostered dependence on foreign sources for defense equipment at a time
still leaves nearly a $40 billion deficit in U.S. trade, even
if the appropriate macroeconomic policy coordination
Solving U.S. trade and competitiveness
problems with Japan
and the market-opening trade measures work effectively.
Various policies are being or could be used to reduce
sharply or eliminate the large U.S. overall and bilateral
necessity for the United States to adopt further competitiveness measures.
trade deficits, and to overcome the serious U.S. compet-
The still large deficit remaining only underscores the
A growing number of people in the United States doubt
itiveness problem with Japan. These include depreciating
that much can be accomplished by multilateral or bilateral
the dollar further, cutting the U.S. budget deficit, coordi-
market-opening negotiation, the present effort included,
nating international policy, and opening up foreign mar-
especially when it comes to Japan. They point out that
kets, along with other competitiveness measures.
too many times in the past, after strenuous and protracted
William R. Cline has offered a comprehensive and
negotiations, touted success has turned out to be ephem-
elaborate plan for reducing the U.S. overall and bilateral
eral. It may be, as some hold, that no interest group in
trade deficits with Japan (see For Further Reading). His
Japan has the power or political will to bring about
plan calls for the gradual elimination of the U.S. budget
significant change along these lines, even if it wanted to.
deficit, the stimulation of domestic demand in Japan and
The United States, of course, has itself many trade
Germany, and a moderate trade- weighted depreciation of
restrictions against Japanese exports. But these were for
the dollar. According to his estimates, reducing the U.S.
the most part imposed in response to Japanese strategic
budget deficit would eliminate one-third of our trade
trade practices and only after Japan had gained a signifi-
deficit by 1992, while another third would be eliminated
cant market share in a major U.S. market. For example,
by the combined effect of the expansion of domestic
demand in strong currency countries and the trade-
Japan has captured 34 percent of the automobile market
weighted devaluation of the dollar. Cline feels that any
United States has less than 3 percent of the Japanese market
stronger policy action would not be feasible. His plan
would still leave a U.S. trade deficit of about $50 billion
computers despite the greater efficiency of U.S. firms.
by 1992, of which $30 billion would be with Japan.
Cline's proposal, however, implicitly assumes a degree
of international policy coordination among the United
through exports and production by transplants, while the
in telecommunications and only about 6 percent in super-
Pessimism is growing about the ability of the United
the different inflation tradeoff in each country. Even if
States to solve its overall and bilateral trade problems
through multilateral and bilateral market-opening trade
negotiations. Advocates of managed trade are increasingly numerous; they include Rudiger Dornbusch and
the plan were fully implemented, our trade deficit would
Lawrence Summers as well as former Secretaries of
States, Japan, and Germany that is unrealistic because of
remain large, especially with Japan. More importantly,
State Kissinger and Vance. Their strategy holds that the
the plan does not address (indeed, it does not even recog-
United States would negotiate a planned reduction in
nize) the serious U.S. competitiveness and trade problem
U.S. trade deficits over the next few years with its most
with Japan. Clearly, cuts in the U.S. budget deficit must
be supplemented by still other policy tools.
significant creditor nations. Dornbusch flatly states,
"Japan must increase imports of manufactured goods
from the United States at an average rate of at least 15
What about market-opening
percent per year, with adjustments for inflation in each
country." Further, Japanese access to the U.S. market
should be cut with an automatic tariff surcharge.
One method of supplementing U.S. budget deficit cuts to Most economists, however, oppose quantitative con-
trade measures?
reduce our trade deficits is to negotiate forcefully with
trols or targets and thus reject managed trade on principle
other countries (especially Japan) to open their marketsbecause it replaces the market. General targets would also
more widely to U.S. manufactured exports. While these
fail to deal adequately with the serious U.S. microeconomic
January-February 1991 ¡Challenge 45
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competitiveness problem with Japan. With such a policy,
these efforts. The United States should consider, however,
the United States could conceivably correct its overall trade
under what circumstances it should step in and provide
deficit by exporting more traditional and agricultural prod-
seed money, change tax and antitrust regulations, and
ucts, while at the same time relying more and more on
grant temporary trade protection in order to promote the es-
imports of high-tech products. Furthermore, the composi-
tablishment or the survival of aparticularly crucial industry.
tion of U.S. exports would be decided by our competitors.
It is true that a wrong policy response on the part of the
An alternative to managing trade with Japan would be
United States could turn out to be worse than no response
for the United States to impose a temporary multilateral
at all. But a strategic response is needed that would allow
import surcharge of, say, 15 percent on manufactured products. While this would not increase United States access to
the United States to recapture most or all of the loss, and
the Japanese market, it would protect our industries from
moves of its own in the future. While it is very difficult to
targeted and strategic Japanese competition, and thus help
devise and enact such policies and the potential for large
keep them competitive on world markets. These import sur-
losses and abuses exists, one cannot reject strategic com-
charges could also be used as a bargaining tool to pry open
petitiveness policies outright simply because the risks of
Japanese markets to U.S. high-tech exports. To achieve
large potential losses are very great. It may not even be a
possibly even initiate some strategic and preventive
effectivity and avoid breaking GATT rules, however, such
question of choice. The United States may be forced by
import surcharges would have to meet two conditions. First,
other nations, especially Japan, to respond strategically.
they would have to be multilateral rather than imposed only
Put bluntly, once the genie is out of the bottle, it is both
on Japanese manufactured exports to the United States.
theoretically and realistically impossible to put it back in.
Otherwise, Japanese firms could shift production abroad
In other words, strategic trade has demonstrated that it
and avoid the surcharge. Second, they would have to be
applied on imports of manufactured consumer goods such
can improve on the free trade solution in a world of
imperfect competition and all sorts of market failures.
as automobiles and office equipment, for which good do-
Defenders of free trade therefore can no longer ignore the
mestic substitutes are readily available. They could not be
beneficial consequences of a strategic response.
levied on industrial parts and components such as computer
chips that are no longer produced by the United States,
because they would then only reduce the international
competitiveness position of our own firms using them. The
New from M. E. Sharpe, Inc.
import surcharge could be phased out as Japan and other
countries open their markets and allow more U.S. high-tech
exports, and as our bilateral trade deficit with Japan is
significantly reduced.
The United States, however, cannot blame all of its
competitiveness problems on Japan. Indeed, part of the
problem is that the United States has been falling behind
Japan in such areas as education, the commercialization
of new technology, and industrial cooperation. Encour-
aging basic research and improving education and job
training are generally accepted and noncontroversial pol-
icies we must implement to overcome our deteriorating
competitiveness. Other policies which involve providing
trade protection to an industry in trouble are surrounded
by great controversy. One particularly controversial policy is for the government to sponsor and contribute fund-
ing for research and development consortia in crucial
high-tech fields in order to counter foreign targeting and
The Changing Face of
Fiscal Federalism
Thomas R. Swartz and
John E. Peck, editors
This volume brings together seven of the nation's most influ-
ential economists, political scientists, and sociologists on
the subject of U.S. fiscal federalism, its evolution from the
past, and prospects for the future. The essays outline the
historical and philosophical foundations of our system of
governmental finances, from the first revenue sharing ideas
of Henry Clay in the 1 820s, through the developing momen-
tum of the federal program of revenue sharing during the
Kennedy-Johnson administration and Nixon's new federalism. The book examines the radical shift in the U.S. system
of fiscal federalism under Ronald Reagan, whose administration ushered in new ideology that required "separation of
powers," "devolution of responsibilities to governments
that are closer to the people," and "less spending by all
levels of government."
224 pp. ISBN 0-87332-664-4 Hardcover $39.95
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meet foreign competition. This kind of policy is common
in Japan and Europe and is credited with giving foreign
companies an edge over U.S. competitors. This does not
mean that the United States should necessarily match
¿TW. E Sharpe inc.
80 Business Park Drive, Armonk, New York 10504
46 Challenge/January-February 1991
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