The United States have been number one in all the world for about a century now in terms of economy based on their Gross Domestic Product (GDP). The United States held the top spot for having the strongest economy in the world for such a long time and so when Japan’s economy was booming back in the 1980s, it was no wonder that America was horribly appalled and taken aback. Japan’s economy at the time was only the second largest in the world. But what did happen economically during the 1980s that made the United States feel threatened that they might be overtaken by Japan?

This research paper will discuss the US—Japan trade war between the years 1980 through 1990 and Japan’s current economical state in relation to the United States in the present.  Different issues such as tariffs and bilateral versus multilateral trade between the countries United States and Japan will be presented.  The paper will also be comprised of issues present in the General Agreement on Tariffs and Trade (GATT) as it relates to US—Japan war trade and how the World Trade Organization (WTO) superseded GATT.

Also, there will be a brief section of the paper that will discuss current trade issues for either country and the sentiments of each country in regards to trade with introducing factors of labeling flaws within each country’s trading policies. This along with analyzing trade disputes, tensions, and related issues between the two economic powers to reduce trade conflicts and to improve overall trade relations. Another purpose is to suggest common grounds to minimize trade conflicts between two countries.

Overview on the US—Japan Trade War

In the 1980s, the United States and Japan held the top spots of the world’s largest economies. Furthermore, Japan was involved in the largest trade surplus in the world, aside from the United States. All the while, Japan had still been highly dependent on the US market. But ever since the 1970s, United States and Japan were already engaged in serious trade disputes as the United States has had large trade deficits because of large American imports from Japan.

Then when the 1980s came, the US dollar was appreciating, rather unprecedentedly. The United States, in the shadow of their economy’s looming devastation, have desperately thrown allegations against Japan. They accused Japan of conducting restrictive practices like exclusive business deals between local manufacturers and distributors. In addition, the United States alleged that the Japanese government is tolerating and even encouraging this kind of practices. This resulted to many Japanese markets closing their imports to the United States.

Both countries have been involved in a number of trade frictions over the last 50 years. The products the two countries are having conflict with are textiles, agricultural products, steel, semi-conductors, and this should not be forgotten, automobiles. Sometime over the past 5 decades, Japan’s exports had been restricted by the United States and then the United States proceeded to attempt to increase their exports to Japan by opening the Japanese market.

In 1981, the United States began pressuring Japan to open up their market as they see the trade imbalance between their countries unfair. However, even as Japan agreed to this, their trade power grew. Because of this, the value of the US dollar against the Japanese yen fell. This eventually led to an increase of both United States’ exports, which they are not particularly happy about, and Japanese products’ sale.

The United States specifically put that much pressure in Japan in order to reduce their trade deficit against Japan and to simultaneously protect and promote the American industries. However, even after all the effort the United States has put in, they have failed to reduce their own trade deficit while there is no complete success to be reported for their goal to protect and promote their domestic businesses or industries.

On the contrary, Japan proved to be a powerful enemy as they have managed to manipulate the US dollar’s value, had subsidized some of America’s companies, and had erected non-tariff barriers to their imports. The current president of the United States at the time was put in a position where he had to force voluntary restrictions on Japan’s machine, steel, and automobile industries. Aside from that, a 100% tariff was imposed on imported Japanese products including electronics which effectively blocked Japan-made products in the American market.

Since the Japanese were unwilling to compromise on trade issues, the United States countered their proposed policies with the suggestion that these policies are no different than all the previous arrangements made by former Japanese leaders in regards to trade with the United States and the Japanese-centric approach it offered. So in 1982, the Japanese government suggested that they would initiate a market-access package.

Through this initiative, the Japanese said, they would reduce tariffs on agricultural products, address problems with the standards development, and allow foreigners to participate in Japanese technical groups of domestic industry organizations that were formed to draft specifications to submit to Japanese government ministries.   Despite heavy US pressure, the liberalization of agricultural production was not included in this package.

It was in 1983 that Japan made the announcement pertaining to further reduction of tariffs.  This reduction included 28 industrial and 47 agricultural products. This market opening suggested that particular attention to simplification of import testing and other procedures would be accomplished.   Furthermore, the Japanese government made it clear that their intentions in regards to import promoting reforms also included the allowance of retail outlets in order to handle imported tobacco products (Choate, 1992).  

US-Japan trade war

The US—Japan trade war lasted for a decade and yet it is still classified as a small-scale trade war. However, during the time, the United States has been criticized for being too passive in its approach to Japan and their domination of the market. This may be evidenced by how Japanese produced television sets have flooded the American market back in the 1970s. Because of the huge inflow of Japanese products, the United States enforced a quota, but was still set quite high at more than 1.5 million television sets. This enabled Japanese companies to fill their warehouses and thus rendering the imposed quota insignificant.

An event similar to this had also happened in 1980s. Only this time, the product in question are Japan’s automobiles and not television sets. A plethora of automobiles have been sent to the United States to which the United States responded by, again, imposing quotas. Only this time, the United States also gave permission to Japanese businesses to build assembly factories inside the United States which altogether allowed for Japan to completely disregard such restrictions. Because of this, some officials and members of GATT suggested that the United States should seek a more aggressive approach towards unilateralism.

Thus, it may be seen that the United States in turn was being protective instead of Japanese protectionism concurrent with views that Japan is to blame for American gross domestic product problems.  The Japanese however approached the United States with such restraint by making investments in US production facilities in order to insulate themselves from trade barriers. Such a tactic allowed them to establish important design centers, vastly improve their marketing and sale efforts, and better control and expand their distribution system.

This market opening would serve to restrict Japanese products from ‘carpet bombing’ onto the U.S. market.   This simply means that trade between the United States and Japan must be managed. There must also exist realistic product import target figures and products and industries’ properly enforced regulation. This is in regards to possible inflation problems in the United States because an influx of imported goods may lead to a higher unemployment rate.

In 1994, the bilateral merchandise trade deficit, amounted to approximately $66 billion. $37 billion of which was attributed to the automobile sector.  The United States set forth to curb this deficit by changing the buying power. They did this by trying to force Japan to compromise with their purchasing targets for American-made products especially in the automotive industry. However, Japan’s government officials and industry leaders dug in their heels. They categorically rejected Washington’s managed-trade formula and threatened to take the case to the World Trade Organization. However, during negotiation trade talks in Geneva, US Trade Representative (USTR) stated that Japan had not been open to such policy implementations.

The United States attributes such aggressive policy holding by Japan to decades’ worth of Japanese protectionism. The United States had a particularly bad history in trading with Japan when it comes to goods and market trades. And as such, the US industry cannot be expected to make it in Japan without affirmative actions (Latham, 1996).  The United States has not truly been given the free reign in Japan as Japan has received in America (Rozman, Vogel & Wan, 2003).  This history dates back to the end of World War II and automobile trade between these two countries.

General Agreement on Tariffs and Trade (GATT) and the creation of World Trade Organization (WTO) in relation to the US—Japan trade war

The General Agreement on Tariffs and Trade took effect in 1948 to create a reliable system on international trade rules and restrict harmful protectionism, increased international trade, tariffs, dumping, and quotas. GATT was known to be the very first multilateral trade agreement in the world. Until 1994, it was GATT who provided the grounds on world trade and had witnesses some of the world’s highest growth rates in international commerce. However, GATT was just a provisional agreement and organization initially comprised of 23 countries.

At the time, the US—Japan trade was focused on multilateral trade. Not just in policy, but also in practice. Eventually, both Japan and US found the definition of bilateral trade. In GATT, however, the idea of multilateral trade is one of the international issues they wanted to encourage. But it is also the same thing that sparked the US—Japan trade war.  In the paradox of multilateral trade, there exists a paradigm of behavior which offers trade to either country while simultaneously offering a binding trade agreement between US and Japan. In which mandates are set in action and present penalties for deviating from the obligations of trade.

The construction of the provisions of GATT have intrinsic flaws. The GATT coverage is restricted to trade in regards to merchandise and tariffs. But because the fundamental aspects of trade have changed since GATT’s inception in 1948, its once progressive policies are no longer applicable in the global market place setting of the 1980s. Another flaw is that because GATT was a contractual agreement, enforcement depended on the voluntary arbitration of disagreements between signatories (Choate, 1992).

In response to these flaws, the United States has implemented specific actions in which they have tried to counter the outdated policies of GATT. The United States have proposed a policy of reform to GATT. The US put forth issues centered around seven major rounds conducted in varying years from 1949 through 1986.  These rounds are vocal in three major weaknesses and limitations they have observed in the provisions of GATT as it relates specifically to the US—Japan trade.

The first limitation mentioned refers to the unrecognizable factors of change in these two nations and the differences that rest within each nation such as the valuation of the Japanese yen versus the US dollar which elicited tariff wars. Japan and most of the dynamic Asian economies continue to rely on industrial targeting and the line between government and business is blurred, if not nonexistent.  These economies regularly rely on subsidies, protectionism, and dumping to both control their home markets and gain market share in foreign countries (Choate, 1992). Thus, the fact that different countries rely on trade in specific markets goes unrecognized by GATT.

The American economy is market oriented.  This suggests that there exist no limits to their market entry and product availability for trade. But GATT failed to accommodate these fundamental differences between the Asian, European, and American economies.  This gives rise to the other flaw presented by the United States in which they observed that the GATT coverage is limited even though it covers approximately 80% of world trade at the time which resides in merchandise alone.

This means that trade in the areas of textiles, agricultural products, services, among others are not yet included in that number. It turns out that the GATT covered not even 7% of global economic activity. The GATT rounds conducted in the United States are focused on the expansion of GATT’s coverage. But because of the dissent between the United States and Japan at the time, such an agreement will be penetrable that such allowance of trade seems unforeseeable in future trade between these two countries.

The third flaw in GATT in relevance to the US—Japan trade war is when a nation stands in violation of the restrictions and limitations presented by GATT, the resolution for this action finds no quick counter-action. Most importantly, the penalties stated were unenforceable. This stands to reason that essentially, although great in concept, GATT makes no enforcements on its policy. That its validity hinges upon the ethics of each individual nation.  In a counter maneuver to the unpredictable behavior of Japan and the seemingly unresponsive GATT, the United States forged a de facto trade bloc through its negotiations on a North American free trade agreement.

This means that the United States is trying to do what GATT was supposed to be able to do in its inception in 1948. That is to reinforce a multilateral trade between countries instead of the havoc that bilateral trade has proven to be, especially between the United States and Japan. The United States has enforced this free trade with Canada with great success but has yet been unable to find a suitable agreement on this with Japan.

With this, the World Trade Organization was created on the first day of 1995. This marked an even bigger reform on the international trade since the formation of GATT. While GATT’s coverage is limited to merchandise alone and did not cover the trade of textiles, agricultural products, services, and others, the WTO agreements cover all of this including intellectual property. With the birth of WTO, new procedures for settling international disputes in trade was also created.

The WTO’s creation on 1 January 1995 marked the biggest reform of international trade since the end of the Second World War. Whereas the GATT mainly dealt with trade in goods, the WTO and its agreements also cover trade in services and intellectual property. The birth of the WTO also created new procedures for the settlement of disputes. The WTO, much like GATT, makes decisions based on the consensus of their recently expanded 164 members.

The WTO rulebook updates their rulebook, in agreement of the members, to continue to improve the flow of global trade. Their endeavor proved to be successful as they have resolved more than 500 trade disputes in their 20 years of existence. The consensus of the members – representing 98% of the international trade market – ensures that each of their interests are given consideration. It is possible that this is in order to avoid a circumstance like the US—Japan trade war from happening again.

Suggestions on the US-Japan Trade War of the 1980s to the 1990s

In regards to the US—Japan trade war of the 1980s to the 1990s, there are suggested improvements on which Japan could take a move and foster an improved trading system between them and the United States. This includes open markets to be incorporative of global free trade and not Japan-centric trade. Furthermore, it is suggested that Japan could become more multilateral in its dealings with the United States as it had been after World War II in setting up a fairer commerce relationship instead of dominating the United States’ market with Japanese products and goods.

In retrospect, the United States should also initiate a more forward thinking and a free market approach when dealing with Japan instead of the passive approach it has been reported to employ in past dealings with Japan. The weakness that was present in American market trading was the held belief that the Japanese market is similar to the United States market when in fact they are very dissimilar.

Japan operates in a market in which a product is equal to the value it has in trade globally and not just in local conditions. The United States and Japan differ in ways both manifest and subtle. It may be observed if one reflects on each country’s difference in history, culture, national aspirations, and politics. Despite America’s spirited urging of Japan to adopt the US economic model—reliance on market forces, free trade, and deregulation—this system enjoys little appeal in Japan. While its suits the United States, it would never fit Japan and the Japanese know it.

In view of this it is essential that the United States considers the expanse of Japan in the 1990s. And in modernity the country has only increased its trade and money. The US should begin to recognize the fundamental differences between them and Japan.  This means that the United States needs to refocus their trade strategy to incorporate more accommodating products that Japanese market buyers will find desirable. 

Furthermore, the United States must allow for expanding their own trade. Expanding entails a more balanced deficit or budgeting qualities for the year 2007 with efforts to enforce domestic trade and adopting trade-sensitive fiscal, monetary, and exchange rate policies.  The United States must also become more competitive with trade both on a domestic and international level. The United States must initiate goods which are capable of competing with Japanese made products (Rozman, Vogel & Wan, 2003).

Without the improvement of GATT or its lack of legal enforcement at the time with regards to the trade war between the United States and Japan, the United States must counter Japanese trade through their own devices and national trade promotion on an international scale focusing not only on Japan but other countries as well since Japan has dominated the world market place. This may prove to be a difficult undertaking by the United States.

The same, however, is not true with Japan because for 26 years, Japan has run a merchandise trade surplus. In the 1990s, Japan accounted for more than 60% of the US trade deficit. For this reason, the United States must not succumb to the lure of old-fashioned protectionism. Rather, it must be sophisticated enough to discern the difference between closing US markets to avoid foreign competitions and closing them as a device to open Japan’s markets.

US and Japan at Present

A few decades after the US—Japan trade war, has Japan indeed become the world’s leading industrial powerhouse that the world expected it to be? The semi-conductor, steel, and automotive industries had experience decline during the 1990s but the United States president at the time encouraged foreign investment and even opened the Japanese market to US manufacturers. As mentioned earlier, a 100% tariff effectively blocked Japanese products from the US market during the US—Japan trade war. This was also done to prevent the Japanese from storing excessive Japan-made products into warehouses again.

Furthermore, that action made it possible for foreign companies to secure at least 20% of the previously impenetrable Japanese market. Currently, US semi-conductor manufacturers have approximately 35% of the Japanese semiconductor market. In January of 2012, Japan reported that 2011 marked its first global trade deficit since 1980 even though they maintained a trade surplus of about $53.6 billion with the United States in 2011. The number went down 8.2% compared to the previous year (Katz, 2012).

Over the years, various quotas, tariffs, and other trade restrictions have been imposed on the United States. However, only the business owners or industries have found it beneficial since those trade agreements have caused the prices of products like automobiles spike up. Consumers have felt the increase in price of Japanese-made products, in particular automobiles, which also pulled the American automobile industry’s prices higher with it.

The United States, have stepped up their game in the machine industry as they could not afford to lose more sales to Japan. This competition proved to be healthy for the United States as they were inclined to continually improve their products’ quality, make it low-cost, meet the market’s demands, and improve the number of products they produce. This continual development improved the satisfaction of their customers in relation to their products and it, of course, improved their products’ quality.

Recently recorded in 2019 was the trade deficit of the United States of $56 billion with Japan. With the WTO in charge of the world’s rules of trade, the figure mentioned earlier include Japan was the fourth largest trading partner of the United States and was the world’s third largest economy next to United States and China. And both countries came into agreement through the US—Japan Trade Agreement to reduce or complete eliminate tariffs on agricultural and industrial products to improve their bilateral trade.

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