Special Report: Does Japan Play Fair?

By Jill Smolowe

To bash or not to bash: that is the question. Whether 'tis nobler to suffer the slings and arrows of outrageous trade practices. Or to take arms against protectionist barriers. To punish, to avenge. Perchance to trigger a trade war. Ay, there's the rub that must give us pause.

The dilemma is as thorny as was Hamlet's: Should the U.S. adopt a tougher, more adversarial trade posture toward Japan? From Silicon Valley to Capitol Hill, many Americans long to retaliate against Japan for what they regard, with some justification, as one-sided trading practices. Yet the urge to lash out is tempered by a self-protective need to maintain harmonious economic and political relations with America's most vital Asian ally. The quandary has ; left the Bush Administration walking a fine line between heated cries to battle by congressional trade hawks and equally urgent calls for restraint by dedicated free traders. Last week President Bush took a congressionally mandated swipe at Japan, but delivered the blow gently -- in the hope that Tokyo would not feel compelled to counterpunch.

Washington unsheathed the newest weapon in its trade arsenal: a law requiring the U.S. Trade Representative to single out countries that systematically restrict American access to their markets. Encouraged by frustrated U.S. trade groups and corporations, legislators had Japan in mind when they passed the provision -- dubbed Super 301 -- as part of last year's trade bill. After listening to the conflicting advice of his evenly divided Cabinet, Bush responded to the prevailing protectionist mood in Congress and gave Trade Representative Carla Hills the go-ahead to put Japan on the Super 301 hit list, along with Brazil and India.

Specifically, Japan was charged with restricting the import of U.S.-made supercomputers, satellites and lumber products. Under Super 301, Washington will negotiate with the targeted countries for removal of the barriers; if no progress is made, the law allows for retaliatory tariffs against some of the offenders' imports.

While moderate legislators saw Bush's limited response as a well-measured step, some members of Congress felt that the President had failed to flex the Super 301 muscle firmly enough. They contended that Japanese barriers extended well beyond the three areas cited, to items ranging from cellular phones and medical equipment to fish products and aluminum. "The Administration's feeble use of the Super 301 provision comes in the face of our continuing trade deficit," said Missouri Democrat Richard Gephardt, whose tough trade proposals gave rise to the Super 301 legislation. "((Bush)) has signaled to the world that he will take ((Japan's)) trade abuse lying down."

Critics of Super 301 fretted that the tactics might backfire, provoking retaliatory measures from a Japan that is tired of being blamed for U.S. economic ills. The rumblings from Japan were ominous. Foreign Minister Sosuke Uno called in newly appointed U.S. Ambassador Michael Armacost to protest Japan's inclusion on the list. "As a result of many market-opening measures, the Japanese market has now become wide open," he insisted. "None of the identified ((restrictions)) can be considered to constitute trade barriers."

; Bush's slap followed by just a week a fierce congressional struggle that set out to avenge Japan's trade challenge, but the Senate wound up sticking with the status quo. By a narrow margin, it defeated an attempt to quash the Administration's agreement with Japan to develop jointly the FSX jet fighter. Although the Senate added some bite by embracing an amendment aimed at guaranteeing U.S. firms 40% of the estimated $6 billion in production contracts for the plane, the vote signaled that for all the determination to pry open the Japanese market and protect U.S. technology, Washington is not ready to risk a deep rupture with its longtime partner.

Still, U.S. protectionist fever is on the rise, and the FSX and Super 301 debates may portend higher temperatures to come. The U.S. trade deficit, which last year narrowed to $119.8 billion, from $152.1 billion in 1987, is continuing to improve but remains huge by any standard. Since 44% of last year's deficit was with Japan, Tokyo is the most likely candidate to take the heat for concern about the gap. What could further aggravate it is the rising U.S. dollar, which is making imports cheaper in the U.S. and making U.S. exports more expensive. Less quantifiable but no less palpable is a growing sense that Japan's economic power poses a threat to America's national security. As fears of the Soviet Union diminish in the glow of glasnost, Japan is fast emerging as a new bogeyman. "The Japanese are perhaps symbolic of the new world," says Gordon Berger of the East Asian Studies Center at the University of Southern California. "That's a world in which the U.S. is not the pre-eminent power."

Resentment is compounded by apprehension that the U.S. may be losing the edge in the one area in which it believed itself to be unassailable: high technology. Last month the Administration determined that Japan had blocked access to parts of its telecommunications market; the U.S. served notice that retaliatory tariffs would follow. With the race against Japan in mind, AT&T, IBM and M.I.T. last week announced formation of a consortium to pursue the development of new uses for superconductors. The venture, which was instigated by a White House-appointed committee, mirrors Japan's coordinated approach to research and development.

As the U.S. seeks new means to compete, many Americans share the sense that the nation is imperiled by Japan's strong economic performance and unfair trade practices. In a poll conducted for TIME in early May by Yankelovich Clancy Shulman, 76% of those polled expressed the belief that Japan's economic success poses a threat to the U.S. economy. More than 6 out of 10 held that Japan is unfairly restricting the sale of U.S. products in Japan, and a nearly equal proportion thought the U.S. should retaliate by erecting barriers of its own. Yet other answers showed ambivalence about the reasons for Japan's economic clout. Asked what the primary source of Japan's success might be, 61% credited "quality products for a good price," while only 23% cited unfair trade practices.

Washington's complaint goes beyond a perception that Japan refuses to grant Americans adequate access to its potentially lucrative market. The FSX battle highlighted concerns that the U.S. might be giving away advanced technology while gaining little in return. At the same time, passions are inflamed by a sinking sense that Japan is buying up America, from cattle ranches to skyscrapers. And in the eyes of the most frustrated Americans, no amount of prodding seems to persuade Japan to change its self-interested habits. "Protectionism has developed momentum as people realize that the promises of the Japanese government to do something about the trade deficit have not been fulfilled," says Frank Gibney, who has written several books about Japan.

Fears that the U.S. has lost its competitive edge go hand in hand with the uneasy feeling that America's standing as the leader of the free world has slipped. "America is scared to death of not being No. 1 any longer," says a foreign banker in Japan. Jagdish Bhagwati, a professor of economics at Columbia University, talks of the "diminished-giant syndrome." A committed free trader, Bhagwati warns that the impulse of declining empires is to throw around their diluted power with such potentially self-damaging measures as trade barriers.

Yet the lack of reciprocity in U.S.-Japan relations is particularly galling. Perhaps that is why Americans react so emotionally to the Japanese buying spree yet all but ignore the far larger British and Dutch investment portfolios. Even Japanophiles like Norman Brown, chief executive of the Chicago-based advertising giant Foote, Cone & Belding, concede that the playing field is not level. "It's this lack of fairness and reciprocity that has deeply antagonized American business," he says. "There have been enough instances to have provoked a groundswell in reaction."

The tenor of Japan-bashing is often xenophobic, and can border on the racist. Two years ago, when Hawaii Senator Daniel Inouye, who is of Japanese descent, chaired the Senate Select Committee in the Iran-contra hearings, Congress was bombarded with hate letters, telegrams and phone calls that assailed him as "that yellow bastard." Says Japanese-born Aki Yoshikawa, research director of the University of California's Berkeley Roundtable on International Economics: "There's definitely an element of racism among many people who criticize Japan. Something about Japan is alien to them."

Even dedicated free traders are sounding increasingly protectionist. "I grew up believing protectionism was pretty dumb, and I still do," says Chrysler chairman Lee Iacocca. "But somewhere along the line we stopped being idealists and started being patsies." Iacocca and other auto executives are well aware that cars, trucks and auto parts account for 64% of the $52.1 billion trade deficit with Japan.

U.S. indignation at Japan's trade obstacles is tainted by hypocrisy, given that America has erected formidable barriers of its own. Despite his rhetorical flourishes on behalf of free trade, Ronald Reagan imposed more import restrictions than the previous six U.S. Administrations combined, doubling the share of U.S. imports subject to some form of restraint. Today more than two-thirds of the goods exported by Japan to the U.S. is subject to some kind of quota, special tariff or other barrier. Moreover, last month the European Community issued a report charging the U.S. with erecting 40 trade barriers, including Super 301, against E.C. exports. When Bush contemplated the Super 301 list last week, even he could not help spotting the hypocrisy. "Maybe we ought to take action against a whole bunch of countries -- including ourselves," he quipped.

How does Washington's Japan-bashing play on Main Street, U.S.A.? Despite a belief that Japan needs to be curbed, passions are far less fiery. "It strikes me that much of the support for protectionist legislation is coming from those in industry who are not doing what they need to do, fast enough, to maintain a competitive edge," says James Haney, president of Wisconsin Manufacturers and Commerce. At Briggs and Stratton, Milwaukee's largest employer, chairman Frederick Stratton opposes protectionist measures even though Japanese competition has forced his company to lay off hundreds of workers. "If you believe in free trade, how can you advocate restrictions?" he says. "The push for protectionism is a pocketbook issue for those who have lost their jobs or whose jobs are threatened."

Moreover, most Americans have filled their homes and garages with all sorts of Japanese brand names that no longer seem foreign -- or all that threatening. While Americans appear to believe in principle that imports should somehow be throttled back, they might oppose measures that would restrict their freedom of choice. At the same time, businesses in many regions of the country have plunged headlong into global commerce and worry about the implications of a trade war. The state of Wisconsin enjoys an $800 million trade surplus, part of it with Japan, from its sales of products ranging from cheese to centrifugal castings. Says Dale Braynard, manager of the international marketing bureau of the Iowa department of economic development: "Our agricultural community would say, 'No, let's deal with it in ways other than a trade war because we are the ones that will get hurt.' "

One reason some politicians want to get tough with Japan is that it neatly avoids the tougher challenge of putting America's own troubled fiscal house in order. Yet no amount of Japan-bashing will tame the U.S. budget deficit or curb America's aversion to saving. As long as Americans inside and outside politics recognize that Japan's trading practices are only part of the problem, moderate pressure on Tokyo may be constructive. The last thing either country needs is an economic cold war.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: WHAT AMERICANS THINK

With reporting by Gisela Bolte/Washington, Scott Brown/Los Angeles and William McWhirter/Chicago