Foreign Relations of the United States, 1969-1976, Volume XIX, Part 2, Japan, 1969-1972

10. Paper Prepared by the National Security Council Staff¹

Washington, undated.

U.S. Trade Mission to the Far East

Three major policy issues must be decided for the forthcoming trade mission to the Far East which leaves on May 9: the U.S. position toward Japan’s import barriers; Japan’s barriers to foreign investment; and the U.S. position on textile imports from all four places to be visited—Japan, Korea, Taiwan, and Hong Kong. The issues are intimately related to each other and, because of the importance of trade to these countries, to overall U.S. foreign policy toward each of them.

I. Background

Japan

In the twenty years since Japan’s economic miracle began, an over-populated, war-devastated, resources-poor country has become the third largest economic power in the world, and the world leader in many industries. Japan’s growth rate continues to be the highest of any developed country; its exports continue to expand at the highest rate in the industrialized world; and it has recently recorded large balance of payments surpluses. The U.S. and Japanese economies are closely linked by large and rapidly growing trade and a common reliance on the strength of the dollar.

The growth of Japan as a major economic power base in East Asia, its integration into the free world’s economy, and its close relations with the United States have been greatly assisted by the United States. We have encouraged and assisted these developments to a substantial degree by shouldering the costs of defending Japan, by extending preferred access to the U.S. capital market and by continued efforts to draw Japan into international organizations.

The process has also been of great benefit to the U.S. Japan, second only to Canada, is the most important market for United States exports. Our agricultural exports alone are about $1 billion annually. Japanese and U.S. policies are generally in accord in the GATT, the OECD, the IMF, the Group of Ten and other international organizations such as UNCTAD.² Japanese economic growth has also formed the foundation of the growing sense of U.S.-Japan partnership.

But the current pattern and size of our economic relations are producing serious problems which are primarily focused in the balance of payments, particularly trade and military expenditures. The U.S. bilateral trade deficit with Japan in 1968 was $1.1 billion and the U.S. bilateral payments deficit was about $1 billion. A major component of the latter was U.S. military expenditures in Japan of about $570 million. To a large extent, the deficits are directly related to the impact of the Vietnam war and the continuing high rates of economic growth in the United States. The trade deficit is also the result of a strong Japanese export performance based on competitive advantage and keyed to the U.S. market, combined with Japanese protectionism. Our balance of payments position has benefited from cooperative Japanese action, but we have not achieved a full financial offset by Japan of our military expenditures.

U.S. concern with balance of payments and net trade position has arisen only in the past few years, when it became apparent that restoration of equilibrium in our overall balance of payments was essential. If the U.S. is to balance its payments, only countries in surplus positions can afford to absorb the impact of U.S. adjustment. It has accordingly become increasingly clear in recent years that surplus countries must play an important role in any solution of the adjustment problem. The more directly the impact of U.S. adjustment falls on the major surplus countries, such as Japan at present, the less likely it is that American adjustment will force countries not now in surplus to adopt deflationary and restrictive policies.

Japan’s economic strength, its large trade surplus with both the United States and the world at large, its recent status as one of the world’s strongest surplus nations, and the important trade and economic implications of its future growth—all warrant the assumption by Japan of greater economic responsibility and acceleration of constructive policies in fields of concern to the United States.

Trade frictions between the U.S. and Japan have arisen in recent years because of (a) sharply increasing Japanese penetration of the U.S. market for manufactured goods, which has in turn fostered protectionist sentiment in the U.S., and (b) Japan’s protectionist attitude on certain problems and unwillingness to accord U.S. producers ready access to the Japanese market (which contrast with Japan’s general stance on international trade issues). Both issues have aroused the concern of U.S. businessmen and some Members of Congress.

Japan uses a variety of policies and procedures to protect its domestic markets. Quota restrictions, maintained contrary to GATT rules, are more extensive than those of any other major industrialized country. The extensive Japanese system of import control procedures equally poses serious obstacles to American exports. At the same time Japan has been forced to enter into agreements with developed countries other than the U.S. to limit its exports of at least one major product, textiles. And informal restrictions resulting from Government-industry ties, reflecting deep-seated elements of Japanese culture, add to the difficulty of foreign penetration of the Japanese market.

The problem of Japanese penetration of American markets is not amenable to easy solution. The penetration is fundamentally based on a strong Japanese competitive position in world markets at present exchange rates, aggravated by inflationary pressures in the United States in recent years. Voluntary restraints by Japan on some of its exports to Europeans may divert some sales to the U.S., but at the same time Japan maintains such restraints on 73 exports to us as well. (This includes about 38 cotton textile products under the LTA and about 15 steel items.)

The immediate gain for U.S. exporters of a relaxation of Japanese import quotas would probably not be dramatic because of the relatively small amount of U.S. trade which is directly affected (probably less than $100 million of our total exports). Removal of other Japanese barriers to imports and some of their informal barriers would result in an additional (but difficult to quantify) increase in trade. However, removal of Japanese quota restrictions would reduce a major irritant in U.S.-Japan relations.

Japanese restrictions on foreign direct investment also hinder the ability of U.S. firms to surmount Japanese trade barriers and have engendered strong U.S. business and political resentment. Although currently of secondary importance because of the U.S. balance of payments program to restrain foreign direct investment, Japanese liberalization of such investment offers increasingly attractive potential for U.S. investors to improve their position in Japan and other Asian markets and is fervently sought by some important U.S. industries.

For its part, Japan greatly fears growing pressures in the United States to restrict imports. The Japanese view with extreme concern actions by other countries which might restrict Japan’s trade. For example, Japan reacted frenetically to the possibility of a U.S. border tax in 1968 and subsequently supported a KR tariff cut acceleration as a trade expanding alternative. Japan is also concerned about current U.S. restrictions such as the ASP customs valuation procedure (which the U.S. has decided to seek legislation to remove). The Japanese also resent being forced into “voluntary” restraints on exports which they have adopted to defuse protectionist sentiment in the U.S. but regard as a form of U.S. non-tariff barrier.

II. Issues for Decision

There are four major economic issues between the U.S. and Japan at this time: (1) Japan’s import restrictions, (2) Japan’s barriers to foreign direct investment, (3) textiles, and (4) Japan’s help for the U.S. balance of payments. The U.S. may at some point have to decide on its priorities among these four areas, considering both desirability from our standpoint and possibility of achieving Japan’s cooperation.

Since the forthcoming trade mission to the Far East will deal only with the first three of these issues, this paper will focus on them although referring at several points to the implications for our balance of payments arrangements with Japan. Our textile decisions must of course relate to Korea, Taiwan, and Hong Kong as well as Japan.

Japan’s Import Restrictions

Present U.S. policy is to press vigorously for significant reductions in the quota restrictions presently employed by Japan, since both countries agree that their interests are best served by trade expansion rather than contraction. However, we have indicated in bilateral negotiations that the lack of a satisfactory response at an early date will make it necessary for the U.S. to seek GATT authorization for retaliatory actions against Japan. The United States has also made continuing representations for removal of other non-tariff barriers.

Any U.S. approach toward achieving these objectives will be handicapped by a simultaneous effort to obtain new voluntary export restraints from Japan, e.g., on woolen and synthetic textiles, or by any other U.S. protectionist action affecting Japan. On the other hand, new U.S. initiatives to liberalize trade will reinforce our efforts with Japan and minimize to some degree the costs listed under each alternative. Specific liberalizing steps of particular interest to Japan, such as repeal of ASP and other customs valuation procedures which affect Japanese exports, would be particularly cost-limiting.

The Review Group is agreed that the U.S. should continue to pursue Alternative I below.

Alternative I: (a) Continue the present policy of pressing hard for removal of specific barriers of greatest interest to the U.S., and (b) Apply specific countermeasures (e.g., formal invocation of GATT Art. XXIII) if satisfactory progress is not forthcoming in a reasonable amount of time.

Pro:

1. Japan has a major interest in trying to forestall a GATT authorization for retaliatory actions against Japan, fearing that it might have a chain reaction in other major Japanese markets, particularly Europe.

2. Pressure through the multilateral GATT framework would ease the task of the GOJ in justifying domestically the removal of trade and investment barriers.

3. A selective and flexible policy which also uses multilateral channels affords only the degree of incentive or sanction warranted by circumstances and avoids the damage to our overall relations with Japan which is inherent in unilateral U.S. resort to sanctions.

Con:

1. The policy is slow, complex, and difficult to apply in a consistent fashion.

2. It has not worked very well to date.

3. It could deteriorate into a de facto policy of retaliation or be overtaken by Congressional action imposing mandatory sanctions.

4. Even if successful, the policy will not have a significant immediate impact on actual trade.

Alternative II: Move promptly and aggressively to force removal of all unsanctioned Japanese trade barriers through a credible threat of unilateral counter-measures against Japanese exports to the U.S. (e.g., quota restrictions).

Pro:

1. Japan’s economic and financial dependence upon the U.S. gives us great leverage.

2. Under existing domestic legislation, we could increase duties or impose quotas.

3. It might have successful prospects in trade terms because Japan would: (a) presumably liberalize access to its market rather than seriously damage the major market for Japanese exports, and (b) limit the extent of its retaliation since the economic cost of a trade confrontation would be far greater for Japan.

4. Using the measures available on a discretionary basis could obviate Congressional action to impose mandatory sanctions, which would be permanent and even more damaging to our relations with Japan and other countries.

Con:

1. U.S. trade retaliation or sanctions would damage our overall foreign policy relationship with Japan by inviting charges of intimidation and discrimination and would weaken the pro-U.S. faction within Japan on security and other issues.

2. Unilateral imposition of U.S. import quotas would not be legal under GATT and would therefore seriously affect our position of leadership in international economic matters.

3. Since it is unlikely that U.S. QRs could be limited to Japan, this policy could lead to a full-scale trade war with other major countries.

4. It would reduce Japanese willingness to maintain export restraints or adopt new ones.

5. It would likely lead to Japanese retaliation against key U.S. exports.

6. It could lead to reduced Japanese willingness to cooperate with the U.S. on international monetary matters, such as continued neutralization of our military expenditures in Japan and refraining from converting its dollar reserves into U.S. gold.

7. The policy contains the danger of encouraging the Congress to pass a flood of import quota legislation not limited to Japan.

8. It could cause Japan to explore relationships with Communist China and/or the USSR which it would not, under present circumstances, otherwise do and which might hurt our interests.

Restrictions on Foreign Direct Investment in Japan

The U.S. has also made continuing representations for liberalization of Japan’s restrictions against foreign direct investment. Mainly in response to our prodding, liberalization has taken place and the Japanese assure us that further steps will be forthcoming. Nevertheless, Japan’s restrictions remain by far the tightest maintained by any industrialized country and they continue to argue that much of their industry could not stand direct competition at home from foreign (mainly U.S.) corporations.

Several U.S. industries, such as automobiles, are intensely interested in gaining direct access to the Japanese market. It is impossible to quantify the volume of U.S. investments which might enter Japan if barriers were lowered but it could be quite large—probably much larger than the increase in trade which would result from corresponding reductions in Japanese import barriers.

Alternative I: Reduce pressure on Japan to liberalize.

Pro:

1. Achieves major political gain with Japan.

2. Avoids possibly significant short-term costs to U.S. balance of payments.

3. Removes obvious conflict with U.S. balance of payments program which seeks to restrain foreign direct investment by U.S. firms.

Con:

1. Forgoes probably significant long-term commercial gains to U.S. firms.

2. Reduces progress toward achieving our objective of freeing all types of international transactions.

3. Could seriously hurt our relations in the U.S. business community and risk losing their support for a liberal trade policy.

Alternative II: Continue to press the Japanese to speed their liberalization time table, without punitive action if they respond unsatisfactorily.

Pro:

1. Avoids risk of major political confrontation with Japan.

2. Provides opportunity for a selective and flexible policy which affords continuing chance to vary incentives and sanctions as warranted by circumstances.

3. At least partly responsive to interests of U.S. businessmen.

Con:

1. Only slight likelihood of getting accelerated Japanese response.

2. Risks dissatisfaction by U.S. business and possible reduction of their support for liberal U.S. trade policies.

3. Perpetuates the conflict with our balance of payments restraints program.

Alternative III: Eliminate preferred access to the U.S. capital market for Japan if they do not respond satisfactorily. (Japan has a $100 million annual exemption from the interest equalization tax and is to receive priority treatment under the voluntary control programs on foreign lending by U.S. financial institutions administered by the Federal Reserve Board. Both aspects have significant political as well as economic meaning to the Japanese.)

Pro:

1. Given the political and economic importance to Japan of their preferred treatment, would add significant leverage to the U.S. position.

2. If the threat were implemented, could marginally help the U.S. balance of payments by reducing capital outflows to Japan.

Con:

1. Would appear as a decision by the Nixon Administration to repudiate the past U.S. recognition of Japan’s special economic relationship with the U.S. and hence could raise a major political row with Japan.

2. If the threat had to be implemented, could lead to Japanese retaliation in the overall balance of payments field, such as unwillingness to neutralize U.S. military expenditures in Japan and conversion of dollar reserves into gold.

3. Given Japan’s shift into a sizable and reasonably stable balance of payments surplus, and its reduced reliance on U.S. capital, the preferred treatment may no longer be needed anyway—this approach, if successful, would implicitly tie our hands in eliminating the preferences in the near future. (This con becomes unimportant if we are successful in eliminating the controls and the IET altogether since the preferences would obviously then disappear.)

Alternative IV: (a) Adopt trade restrictions, as in Alternative II in the previous section on trade; (b) and/or restrictions on Japanese investment in the U.S.; (c) and/or Alternative III, if Japan does not respond satisfactorily.

Pro:

1. Would increase our leverage in achieving our objectives. (In the case of restrictions on Japanese investment in the U.S., could deny them access to U.S. natural resources which they covet.)

2. Would force Japan to coordinate its trade and investment policy, as they should do.

Con:

1. Either duplicates the cons of Alternative II in the trade section or, if combined with Alternative III, cumulates with the cons cited there.

2. In the case of restrictions on Japanese investment in the U.S., would be highly discriminatory and would hurt our balance of payments in the short run.

Textiles

The issue is how to deal with the growth in imports of woolen and synthetic textiles into the U.S. within the framework of our overall policy of freer trade, in accordance with previous Administration statements on textiles, and taking into account overall U.S. foreign policy interests in Japan and the Asian LDCs. The three Asian countries publicly and privately and Hong Kong privately have expressed opposition to any voluntary arrangement and have discussed joint opposition to our proposal.

In the case of Japan, any agreement on textiles will be accompanied by a corresponding reduction in Japan’s responsiveness on the other two economic issues already discussed and perhaps by adverse political reactions. In the case of the three LDCs, any textile approach will run counter to our professed policy of supporting economic development through trade as well as aid; this contradiction will be particularly embarrassing in Korea and Taiwan, where our aid efforts have stressed expansion of their exports. In addition, the three LDCs—especially Korea and Taiwan—are greatly concerned about the impact on their economies at the end of the war in Vietnam. U.S. expenditures for the war have provided them with an added economic stimulus, although its importance has been declining, and they are actively seeking opportunities to further increase their exports to compensate for the expected decreases in U.S. expenditures. Since textiles are a key component of any such increases, a request for restraints at this time will be particularly troublesome to our overall relations with them. In the specific case of Korea, we will face demands for compensatory aid since woolens and synthetic textiles account for 75 percent of their total textiles exports to the U.S.

The magnitude of the costs (and benefits) differs among the alternative specific approaches outlined below. In addition, the costs will be affected by the context in which our proposal is made. They can be reduced, especially vis-à-vis Japan, by a firm Administration commitment to seek elimination of ASP and possibly other customs valuation procedures, to take other trade liberalizing steps, and to firmly resist protectionist legislation. In addition, the Asians would, of course, be more willing to accept restrictions if they were convinced that unilateral quota legislation was a real possibility in the absence of voluntary restraint agreements.

Whichever option is eventually chosen, the Review Group agrees that Secretary Stans should make it clear in the forthcoming Asian trip that we consider our textile problem to be extremely serious. He should say that we believe that the multilateral approach (Option 1) is the best available and, in low key, express our hope that other countries will agree to discuss it with us at a GATT meeting. But he should clearly leave open all options for shifting to a different approach if a multilateral arrangement cannot be negotiated.

1. Proceed with efforts to bring wool and manmade fiber textile products under control through a multilateral agreement.

Pro:

(1) The President’s commitment to the industry would be fulfilled.

(2) It would remove a major political obstacle to new trade legislation and could thus help confine pressure for protectionist actions to textiles.

(3) Avoids risk of legislated quotas and hence risk of forcing retaliation which could produce a trade war.

(4) A GATT-sanctioned agreement would have a greater aura of respectability and provide an internationally agreed set of ground rules.

(5) Reduces costs in Japan, since it would not be so clearly singled out for restraint. (However, could increase costs in Europe for same reason.)

(6) Enables us to deal with non-cooperating countries without the threat of retaliation if negotiated under GATT auspices.

(7) Meets the tests of current legislation for limiting imports from countries with whom we do not have agreements.

(8) Provides a mechanism for selective use of controls on sensitive items, as rapidly as necessary to deal with fast-moving trade situations.

(9) Prevents restraining countries from getting specific trade compensation from us or retaliating legally.

Con:

(1) Will increase apprehension about the future direction of U.S. foreign trade policy.

(2) Would foster appearance of U.S.-European coalition against the Asians.

(3) Requires cooperation of Europeans and Canadians who have already limited textile imports from Asia via bilateral or unilateral controls and who have already indicated reluctance to help U.S., for a variety of reasons, including their doubts about the U.S. economic case.

(4) Would encourage other industries in U.S. and abroad, with stronger economic cases for protection, to seek similar arrangements.

(5) Distorts basic trade liberalizing purposes of GATT.

2. Negotiate bilateral restraints with exporting countries without a multilateral framework.

Pro:

(1) Concentrates on specific problem areas, thereby minimizing political costs with countries (mainly in Europe) which would not be asked to restrain anyway.

(2) Leaves GATT out of the picture (although in principle we prefer to see GATT as the focal point for trade issues).

(3) Probably avoids quota legislation and hence risk of retaliation.

(4) Also prevents restraining countries from getting specific trade compensation from us or retaliating legally.

Con:

(1) Industry would be dissatisfied.

(2) Fails to provide a means of preventing new exporters from rapidly building up a base level at the expense of countries who have signed agreements. (This is particularly objectionable to Japan.)

(3) Japan and the other Asians would be singled out by this approach and hence costs with them would be increased. (This could be partially offset by U.S. statements which would indicate our intention of negotiating agreements with others as need arises.)

3. Market Disruption—Escape Clause

Concentrates on providing protection where there is a genuine economic need for it, by using GATT Article XIX and our own escape clause. Compensation could then be negotiated bilaterally.

Pro:

(1) Protection is selective and limited to cases where real problems exist, thereby neutralizing major source of foreign opposition to U.S. effort.

(2) Since explicit compensation is provided, damage to other U.S. interests is sharply reduced and perhaps wholly avoided.

Con:

(1) Industry has been dissatisfied with this approach in the past and thus this approach might not remove political obstacles to new trade legislation.

(2) The controls might be ineffective. A machine used to make one textile article could easily make another and slight variations in an article can change it from a controlled item to an uncontrolled item.

(3) Present escape clause provisions would have to be amended to make this approach possible. The President has already decided to seek such amendment in this year’s trade legislation, but to do so in this context might get us a clause which permitted excessive escaping, since textile industry support would be needed.

(4) The President would need tariff-cutting authority to provide compensation, but a decision to seek sufficient authority has already been made.

4. Seek limited legislation to deal with the problem.

The Administration could indicate that it would support, at least tacitly, a bill which did not restrict imports too severely (e.g., no rollbacks from present levels and some sharing of market growth in the future).

Pro:

(1) Could avoid uncontrolled legislation, which could be so restrictive that it would generate severe retaliation, seriously damaging overall U.S. foreign policy.

(2) Would provide straightforward approach to the problem permitting U.S. to provide compensation through compensating tariff reductions (when authority to do so is obtained) or foreign countries to retaliate legally.

(3) Would relieve us of ongoing burden of negotiating and administering voluntary foreign controls.

Con:

(1) Would run risk of allowing legislation to get out of control as per pro (1) unless a Presidential veto were threatened in response.

(2) Would cost the U.S. in terms of compensation or retaliation as per pro (2).

(3) Would be difficult to avoid similar treatment for other industries.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–036, Review Group Meeting, Asian Trade Problems, 5/2/69. Confidential. On April 28, Nixon decided to devote a full NSC Cabinet Committee meeting on economic policy to the consideration of U.S. trade relations with Japan and the other Asian countries that Secretary of Commerce Stans was scheduled to visit during his May trip to East Asia. (HAK talking points, Review Group meeting, May 2; ibid.) To prepare for this meeting, the NSC staff drafted on short notice a paper concerning the “US Trade Mission to the Far East,” which drew upon the Interagency Group paper prepared in response to NSSM 5 and another paper in response to NSSM 16 on trade policy. The NSSM 5 paper is ibid., Box H–128, National Security Study Memoranda, [1 of 2], NSSM 5. The NSSM 16 paper on trade policy is summarized in Foreign Relations, 1969–1976, vol. IV, Foreign Assistance, International Development, Trade Policies, 1969–1972, Document 189. The NSC Secretariat sent this paper to the Review Group on May 1. No record of this Review Group meeting has been found, but Kissinger did receive talking points for the meeting. (National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–036, Review Group Meeting, Asian Trade Problems, 5/2/69) Following discussion by the Review Group, a few revisions were made to the paper. (Ibid.) After telephone comments from the relevant agencies, a second revision of the paper, which is the version printed here, was discussed at the 10 a.m. May 7 NSC meeting. See Document 11.
2. General Agreement on Tariffs and Trade (GATT), Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF), United Nations Conference on Trade and Development (UNCTAD). [Footnote in the source text.]