A call to US, Japan: police the budget, open up markets

The United States and Japan are on an economic collision course. That doesn't mean the two countries will actually collide, says Thomas K. McCraw, a historian at the Harvard Business School. But with the US racking up a $170 billion trade deficit this year and Japan piling up a $70 billion trade surplus, trouble is brewing. American patience could snap if this imbalance lasts much longer.

``This is unsustainable over a much longer period,'' says Professor McCraw, who won the 1985 Pulitzer Prize for History with his book ``Prophets of Regulation.'' ``It is destablilizing for the world economy.''

McCraw suspects that if blame has to be allocated for this serious trade disparity, the side most at fault would be the US with its massive federal budget deficits. These pushed up interest rates, which in turn boosted the US dollar higher than it should have been.

In a new book edited by McCraw and entitled ``America versus Japan'' (Harvard Business School Press), he and 13 other authors look at the structural differences between these two largest industrial powers in the world. In many ways, it is an old story: the rising sun of Japan, the setting sun of the US.

``We are seeing the debilitation of the United States economy,'' McCraw said at a seminar introducing the book. He cites the $2 trillion of federal debt and the rapid buildup toward $1 trillion of the US international debt.

Money the Japanese earn is being invested in assets abroad, including a lot of US Treasury debt. But the US must service those debts with dividends or interest payments. In effect, Americans could end up supporting much of Japan's aging population a decade or so hence.

The Japanese challenge has been around for more than a decade. The Japanese see it as a failure in US industrial productivity, and they don't get too much quarrel from many Americans themselves. But Americans have become bored with the issue. What's to be done about it?

McCraw advocates getting the US house in order first by reducing the budget deficit. Then, suggests co-author David B. Yoffie, the US must squeeze Japan to change: to open its markets further.

The US might not accept such massive trade deficits indefinitely. It didn't go along with a much smaller trade deficit -- the first in decades -- in 1971. It imposed a 10 percent import surtax until its trading allies agreed on a somewhat disguised dollar devaluation.

McCraw worries about a slump prompting the US to launch a trade war against Japan, damaging the two nations' friendship -- which he calls ``a pearl beyond price.''