US-Japan Deal Brings Smiles But No Teeth

SOUND familiar?

First, the United States and Japan thump chests and exchange insults in a trade dispute. Next, negotiations go down to the last moment. Finally, when things seem darkest, a deal suddenly emerges - with a relatively moderate result that makes one wonder what all that shouting was about in the first place.

That's been the pattern in past US-Japan economic negotiations, and it appears to be what has happened in the loud dispute over autos that was settled this week. The White House may be claiming victory in the battle - but many trade watchers are not so sure the settlement can be judged an overwhelming US success.

Sure, Japan's biggest carmakers have promised to boost production at their plants in the US and to use more US-made parts. The Japanese government has agreed to help US manufacturers set up more dealerships in Japan.

But after months of threats the US backed down from confronting Tokyo on Japan's clubby business practice of keiretsu monopolies, which effectively block many imported products. "We dodged the bullet this week," allows a senior Senate staff member, "but we've only gone after the manifestation of the problem rather than the problem itself. We're in a cycle of crisis-relief-crisis-relief with the Japanese. And there will continue to be impediments in the way."

What's more, the US will have to keep pushing to make sure the concessions obtained this week are in fact carried out. "It's all going to come down to enforcement," says Lawrence Chimerine, managing director and chief economist with the Economic Strategy Institute in Washington. "These are steps to start to deal with the structural barriers, but we can only get at the fundamental problem if in fact there is follow-through. That's a big if."

GLEN FUKUSHIMA, vice president of the American Chamber of Commerce in Japan and a former US trade official, says the US spends a lot of time reaching an agreement and then expects it to self-execute. "The Japanese idea is to look at an agreement as only one part of a long, drawn-out process," he said.

The agreement in Geneva came mere hours before the US was to make good on its threat of slapping tariffs on Japanese luxury-car imports. It came about, in part, because US negotiators backed off their demands that Japan accept measurable, numerical targets for increased auto trade. The pact explictly states that any hard numbers on increased purchase of US autos and parts, among other things, are estimates of the US government alone. Tokyo ultimately refused to give any government guarantee that the voluntary measures pledged by Japan's private sector would be honored.

Some analysts say that the timing of the agreement merely coincides with Japan's increased interest in imports, given the appreciation of the yen and the low dollar. In Tokyo, Japanese carmakers have found it more economical to boost production in their US plants where labor costs are far cheaper than at home.

Mr. Chimerine says Japan's automotive industry, already flat, could have a very tough time meeting those voluntary targets. Still, Chimerine says: "They may fall short of [purchasing] targets in a just-between-friends kind of way, but the Japanese cannot take the risk of ignoring this agreement."

"The good news is that there is an agreement," says Julius Katz, former trade official and president of Hills & Co., an international consulting firm. Mr. Katz also sees some hope in Tokyo's pledge to work toward deregulating its auto-parts market and its promise to put more resources into its Fair Trade Commission, a government agency designed to address unfair commercial practices.

But Katz is troubled that his successors in the administration tried to impose numerical targets - "Clinton's trade stance has been clumsy and ill-advised," he says.

President Clinton's firm approach - on Tuesday he set himself apart from "decades of American presidents who have tried and failed to open this market" - may serve him well in popularity polls. Export-generated American jobs and the nation's economy will be among his central campaign themes as he prepares for a tough fight for reelection next year. With a US recession looming and unemployment edging up, a triumph over the Japanese could help support his contention that his policies are creating more jobs.

Ryutaro Hashimoto, Japan's chief negotiator and head of the Ministry of International Trade and Industry, was quick to point out that Japan had "maintained its principles" in the agreement. He meant that Japan had not committed itself to specific targets either for opening the Japanese market or expanding Japanese auto- trade manufacturing and parts purchases in the US.

Tokyo-based auto analysts said that Japan had maintained much more than mere principles. The consensus was that although the US had succeeded in increasing its presence in the Japanese market, the gains are marginal.

"If they hadn't made such a fuss over the deal, people would just hoot and haw," says Peter Boardman, an auto analyst with UBS Securities in Tokyo. "There's nothing new."

Seiichiro Iwasawa, an auto analyst at Nomura Research Institute in Tokyo, says the measures will only trim $5 billion off Japan's $20 billion auto-trade surplus with North America, and that with a worldwide auto-trade surplus of $70 billion, the deal will do little to relieve pressure on financial markets.

Long frustrated by a restricted Japanese market, American automakers reacted favorably. Though the Clinton administration did not get a fixed target for increased trade, Big Three officials insisted Washington had still achieved an overwhelming victory. The deal, they said, will provide a clear impetus to grow US exports and shrink the yawning trade deficit.

"This is a historic agreement between us and the Japanese and a significant step forward in bringing Japan into the world trade system," declared Chrysler Corporation Chairman Robert J. Eaton.

"The onus is on us," says Ford Chairman Alex Trotman, stressing that Detroit will have to make the trade deal pay off.

The settlement is no more than a piece of paper, he added, unless US automakers deliver vehicles attractive to Japanese consumers. Until recently, most Big Three imports had their steering wheels on the left - the wrong side for Japanese roads. But Ford will add five new right-hand-drive models in the coming year, and Chrysler and General Motors Corporation have similar plans in the works.

Mr. Trotman said his eventual goal was to capture between a 5 percent and 10 percent share of the Japanese new car market. Last year, Ford held a share of 0.75 percent, with sales of 46,758. But that long-term target is a bit misleading. It includes cars built in Europe as well as vehicles supplied by Ford's Japanese affiliate, Mazda Motors.

To encourage Japanese consumers, Ford announced it is cutting the price of automotive parts. Earlier this year, Chrysler cut the price of its Jeep Cherokee model in Japan. The price-cutting has been encouraged by the weak dollar. The lopsided exchange rate will be especially helpful to US auto-parts manufacturers, who have been stymied so far in cracking Japan's tight keiretsu network.

For the Japanese carmakers, the deal is a "weight off their minds," says Matthew Ruddick, an auto analyst at James Capel (Pacific) in Tokyo. "They don't have to worry about production cutoffs for the next few months, and they haven't had to make any long-range changes. We're back to where we were a few months ago, before the sanctions, except slightly better - as if there were no trade talks."

US dealers of Japanese luxury cars were relieved that sanctions had been averted. Their businesses, after all, would have been the front lines in a sanctions war.

AT the showroom of JM Lexus dealership in Margate, Fla. - the largest volume Lexus dealership in the world - the deal brought cheers from salesmen and customers.

"We are ecstatic," says David Mullen, the general manager of the $100 million a year dealership. "Although we weren't planning any layoffs if the tariffs took effect, we were bracing for a tremendous loss in business."

Salesman Jim Cochran said he and others benefited just from Mr. Clinton's threat of imposing tariffs. "Business went from good to great when the president announced the threat in late May," says Mr. Cochran. "June was a record-setting month for sales and leases, and the reason can be attributed to customers trying to beat the tariff deadline."