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

84. Summary Paper Prepared by the Interdepartmental Group for East Asia¹

Washington, August 2, 1971.

PREFACE

The enclosed response to NSSM 122 was substantially completed before President Nixon’s announcement of his intention to visit Peking. That announcement caused major shock waves in Japan. The Japanese will be some time in sorting out the implications for their domestic politics, their own position with respect to Peking and Taipei, and the relationship with the United States. Initially, however, the fact that Japan was not consulted about this move has been interpreted within Japan as a heavy blow to the waning prestige of Prime Minister Sato, the more so because it came on the heels of a series of other political setbacks for the conservative leadership. It has also inspired speculation in Japan about the future of the US/Japan relationship, demands for a more “independent” foreign policy, and fears and recriminations about Japan’s own China policy. Most importantly, it greatly complicated the domestic political situation, raising doubts about the ability of the mainstream elements of the ruling party, those who have promoted the close relationship with the US and the GRC, to survive the ferment.

The Japanese, however, tend to overreact to surprises. It will therefore not be possible to assess the lasting impact of this development on Japan’s internal political alignments or its view of the US/Japan relationship until more about its future direction is known and more of the dust in Japan has settled. For the moment, the possible adverse effects on the US/Japan relationship can be tempered by acting with an awareness that this development has shaken the position of those who favor a close relationship with the US and on whom we must rely to achieve our goals with Japan.

Specifically, this suggests a resumption of the closest possible consultation with the Japanese on the China problem, including tactics at the UN. It suggests avoiding the appearance of a soft US policy toward Peking and an excessively tough policy toward Japan.

Things seemingly unrelated to China also apply in this context, since everything we do for the immediate future will be interpreted in Japan in terms of how important we regard Japan in comparison with China. For example, the Japanese will be looking with special anxiety now to see how we treat the Emperor’s stopover in Anchorage in September, and at the degree of support given by the Administration to the Okinawa Reversion Treaty. Finally, Japan’s responsiveness to our economic pressures can also be influenced by the extent to which the leadership sees Japan’s interests affected by China policy developments.

NSSM 122

POLICY TOWARD JAPAN—SUMMARY²

I. Introduction:

Japan is the second largest and the most dynamic industrial power in the free world, and the only non-Communist power in Asia. Japan’s economic capacity is growing rapidly; if present trends hold, Japan’s GNP could surpass that of the USSR in the 1980’s. Japan’s military potential, if freed from present inhibitions, could be formidable.

A pivotal factor in determining the state of the entire Pacific area during the 1970’s and beyond will be the evolution of the relationship between the United States and Japan. Neither Communist China, the Soviet Union nor the smaller nations of the Pacific can remain indifferent to Japan. For the United States, as a review of the past half century or a look at any projection of Japanese growth will show, there is no relationship which offers so great a potential for mutual benefit—or for misunderstanding and misfortune. There is one basic question: What can be done to maintain a friendly and constructive relationship between the US and Japan? The other issues are subsidiary to this.

II. US Interests:

At present, Japan is critically dependent on us, politically, economically and militarily, but the US also has a major stake in preserving the relationship, including broad interests we would not wish to endanger to achieve other goals:

—Political stability in Asia: Japan is a major factor today; despite domestic inhibitions in Japan and apprehensions about Japan in third countries, Japan’s dynamic economic performance will ultimately translate itself into corresponding political influence, which will be tempered by the alliance with the US. Japan has so far chosen to pursue a non-military great power role and, barring a major rupture with the US, would probably persist in this line.

—Trade: Japan is our second largest, and by far our most rapidly growing, export market; it is a matter of highest concern that this market be aggressively exploited and that steps be taken to assure maximum feasible access to American exporters and investors.

—Reduction of tension in Asia: This long-term process will deeply involve Japan, notably in the evolution of the relationship among Japan, China and the US. It will require the avoidance of new tensions between China and Japan, which would surely arise if Japan became dubious about US security commitments and if Japan were to acquire a major military force.

—Nuclear non-proliferation: The development of nuclear weapons by Japan would be highly destabilizing by itself and could prompt others to follow. Japan’s policy of rejecting nuclear weapons rests in large part on Japan’s faith in the US deterrent.

—Burden sharing: We want Japan to contribute more to the stability and development of East Asia in partnership with us; Japan is the only nation of Asia that has a significant stake in Asian development as well as the resources with which to promote it.

—Use of Japanese facilities to meet US security commitments in East Asia: In order to carry out our defense commitments to our allies in Asia, including Japan, we must have the maximum feasible use of our bases in Japan and the closest cooperation of the Japanese Government.

III. Stability or Change—Psychological, Political and Security Factors

The relationship with Japan serves both US and Japanese national interests well, but it is coming under new strains in the 1970s. At present there are major problems in the economic field; these coincide and overlap with an immediate potential for friction in securing passage of the Okinawa Reversion Agreement and in achieving a mutually satisfactory adjustment of policy with respect to the China problem.

NSDM 13—The steps taken to implement NSDM 13 were highly successful. The agreement to permit the reversion of Okinawa, which preserved the essentials of our military position, weakened the psychological basis for public opposition to the Security Treaty and helped preserve the LDP’s political hegemony. There are some possibilities for strain in the months ahead. We will retain substantially our present base structure on Okinawa with attendant possibilities for friction, and obtaining approval by the Senate and the Japanese Diet of the Okinawa Reversion Agreement presents some potential major difficulties, particularly if the debates reflect emotions aroused by economic problems and become entangled in Japan with the China debate. But to date the policies laid down in NSDM 13 have successfully protected the overall political and security aspects of this key relationship.

The Japanese Scene—Despite pressure from political elements antagonistic to close ties with the US, the present ruling elements in Japan and their heirs would probably prefer to continue the close relationship with the US through this decade and to avoid the acquisition of a major military establishment. In Japan, where the political leadership must contend with intense intraparty factional rivalries, a generally hostile media, and extra-parliamentary harassment, while building a consensus for policy action, major departures develop very slowly.

Today’s leaders are the political descendents of former Prime Minister Shigeru Yoshida, who decreed over 20 years ago that the preservation of a close relationship with the US was essential at any cost. Their own political skill, their demonstrated success and the lack of an issue on which the badly fragmented opposition could combine against them seems to assure that they will remain in office. Furthermore, the accumulated inertia of the past 20 years, good prospects for continued economic expansion, and the vast benefits of our relationship seem to ensure that they will continue to follow Yoshida’s dictum for as long as the basic premises remain valid—the credibility of our security guarantee, an opportunity for political and economic growth, and a reciprocal US attitude about the importance of the relationship.

The Japanese are not psychologically prepared to abandon a policy that has served them so well. Economically aggressive, growth and export-minded, they still have not developed any consensus for a Japanese political or security role beyond their borders. Japanese policy to date has, outside of the relationship with the US and, to a lesser extent, the ROK and the GRC, carefully avoided direct entanglement with foreign regimes and concentrated on multilateral endeavors where political exposure is limited. Deep cultural and psychological barriers close Japanese society to the rest of the world, except on Japanese terms and public opinion remains opposed to foreign involvements and large scale re-armament.

Catching Up—Americans tend to assume from Japan’s third-ranking GNP and spectacular economic growth that Japan’s economic prosperity is secure and that the Japanese have a living standard that is rapidly approaching our own. The Japanese feel that Americans are overly impressed by Japan’s post war “economic miracle” and have a distorted view of Japan and its position in the world.

The Japanese view their economic achievements as the result of nearly a century of patient and determined effort to build a modern economy, organized in the image of the West but designed to avert Western domination. On the basis of their own experience of the past forty years the Japanese regard their economic position as extremely fragile, considering that Japan is almost totally dependent on the outside world for natural resources in contrast to the continental powers which are for all practical purposes wholly self-contained.

Japanese are acutely aware that Americans and many Europeans are individually vastly better off than they by any standard of measurement in terms of living conditions and social overhead. They are, in effect, still striving to catch up and feel they have a long way to go.

Factors for Change—There are factors that could compel Japan to abandon its reliance on the US. There is the sheer arithmetic of Japan’s growing economic involvement with all of Asia and the rest of the world, which has already caused serious friction between the US and Japan. There is also the American drawback from Asia which has led to unease in some Japanese circles about the credibility of our security commitments. China’s emergence on the world stage could also alter Japan’s stance, and Japan’s latent emotionalism and racial sensitivities could be roused by frustrations or slights arising from a denial of the status which Japanese feel is warranted by their accomplishments.

The China Problem—The China problem is especially delicate because of its tremendous importance to Japanese domestic politics. This goes well beyond the question of whether or not the US consults with Japan on China policy developments, although that is certainly part of the problem. The more important aspect is that, despite intense agitation for better relations with Peking from virtually the entire spectrum of the opposition and from within its own party ranks, the ruling mainstream of the Liberal Democratic Party has clung to its strong and longstanding ties to the GRC. The LDP leadership is continually vilified by Peking, whose propaganda proclaims that Japan’s present rulers are reviving Japanese militarism. Japan and China are far more likely to be bitter rivals for influence in Asia than not, and the Japanese leadership feels that Peking’s main objectives are to bring down the Sato Government and split the US-Japan relationship. For these reasons, moves by the US in the China field have an immediate and potentially explosive impact on the domestic political fortunes of the conservative leadership, and in turn on the US-Japan relationship.

IV. Policy Options—Political and Security

There are roughly four broad options for the future conduct of US political and security relations with Japan. The complexity of our relationship offers an infinite variety of possible combinations. Changes in the security and political aspects of our policy toward Japan would have a major impact also on our ability to attain our economic goals. Nonetheless, the following suggest a general range. The first represents in essence the major long range conclusions of NSDM 13.

1. Continue the present close relationship with Japan as our major ally and economic partner in Asia, encouraging Japan to continue to modernize its conventional forces but to rely on the US for overall leadership and strategic defense; avoid pressure for larger forces or a larger security role in the area.

PRO:

—Maintains a relationship which still serves our interests well.

—Assures maximum US influence over Japan.

—Avoids disruptive political/security changes that would inhibit the solution of economic problems.

—Avoids a destabilizing Japanese military role, particularly nuclear arms.

—Reassures Japan’s neighbors, including the PRC and USSR.

—Ensures maximum retention of US base structure.

CON:

—Reduces US security burdens only moderately.

—Frustrates growth of healthy nationalism and assumption of greater responsibilities.

—Not acceptable to Japan for long run and might lead to backlash.

—Risks political dissatisfaction in US with Japanese “free ride.”

—Perpetuates “hot house” atmosphere for Japan.

2. Same as option one, but in addition, actively encourage Japan to play a more active political and developmental role not only in Asia, but on a global basis; e.g. actively support Japanese efforts for greater access to the EEC and other areas of economic importance; support Japan’s desire to become a non-military great power by inclusion in “great power” meetings; encourage selected adjustments in Japan’s security posture.

PRO:

—All of the PROs of option 1, plus:

—Could alleviate US economic difficulties.

—Provides more elements of great power status for Japan without resort to extensive rearmament.

—Channels Japanese energies into constructive direction.

—Reasonably acceptable to Japan’s neighbors, without arousing undue fears of military (or nuclear) role.

—Exposes Japan to greater pressures for expanded aid and acceptable economic behavior.

—Reduces Japan’s dependence on US, easing bilateral, particularly economic, strains.

CON:

—May create some apprehension that the US is moving to turn Asia over to Japan.

—May stimulate Japanese competition with US economically and politically in other areas.

—Does not materially reduce US security burden.

—Makes Japan less amenable to US influence.

3. Same as Option 2 except in addition: Encourage Japan to assume a regional military role, including direct assistance to the ROK and ROC.

PRO:

—Should reduce US expenditures on Asian defense.

—Japan attains great power status.

—Preserves some measure of present US/Japan relationship.

CON:

—Has generally destabilizing effect throughout Asia.

—Arouses Chinese fears of Japanese militarism and suspicions of US intentions; endangers detente.

—Ignores ROK/Japan antagonism.

—Increases risks that Japan may embark on road to complete military independence and nuclear rearmament.

—Leads to more competitive relationship with US, politically and economically.

—Weakens US influence in the area.

—Creates major domestic political problems in Japan; would require authoritarian approach to enable Japan to assume any overseas military aid or troop presence.

4. Actively encourage Japan to assume some or all the present US security role in East Asia.

PRO:

—Relieves US of present defense burdens in Asia, at least temporarily.

CON:

—Has very destabilizing effect throughout Asia.

—Leads to China-Japan confrontation.

—Destroys Japanese political system; would be accomplished only by authoritarian means.

—Leads to likelihood Japan will seek nuclear shortcut to military power.

—Probably would eliminate US influence throughout Asia.

V. Adjustments in Japan’s Defense Role

Under either of the first two options discussed above, and perhaps the third, Japan would continue to rely on the alliance with the United States at least through the mid-70’s and probably well beyond. Under the Fourth Five Year Defense Plan, 1972–76, Japan will significantly strengthen its ability to defend the home islands, plus Okinawa, against conventional attack—a threat which the Japanese do not consider large. Japan’s ability to project military power beyond its surrounding waters and airspace will not have increased appreciably. Japan’s defense expenditures will remain at something less than 1% of GNP under this plan; nonetheless, in absolute terms, Japan’s expenditures for defense will more than double under this plan, which calls for a total outlay of some $16 billion.

It is doubtful that the United States, even if it were desirable, could obtain a substantial revision of the Fourth Defense Plan short of a very drastic pull-back of the United States from the Western Pacific and a sharp deterioration in the security situation in East Asia. There are possibilities, however, for adjustments in Japan’s security role within the context of this plan and the Nixon Doctrine. These include efforts to:

1. Strengthen US-Japanese bilateral defense cooperation. Examples: greater cooperation in ASW, intelligence, contingency planning, military equipment sales.

2. Encourage Japan to provide as grant aid at least non-lethal military equipment to friendly forces in East Asia on an expanding scale. (Because of broader policy implications, this possibility would have to be examined separately for the ROK, the ROC, and potential Southeast Asia recipients.)

3. Draw Japan more directly into operational cooperation with the ROK and the ROC for the air defense of Northeast Asia. These approaches would involve Japan more deeply in the security of the area while strengthening US-Japanese cooperation. Each has already been tried in some measure with varying degrees of success. Each likewise involves progressively greater political sensitivities in Japan, and Japanese involvement in the defense of other areas (particularly the GRC) is a controversial and sensitive political issue in those countries. Nevertheless, under careful political guidance, each approach has some possibility of success.

VI. Inducements

Simply stated, Japan’s interests in preserving the relationship are greater than ours, since Japan’s entire foreign policy is based upon it. Japan is accordingly amenable to persuasion from us, at least up to the point where the Japanese become convinced that we put a much lower value on the relationship. Obtaining our negotiating goals with Japan would be easier, therefore, if in the process we provided incentives bearing on Japan’s own interests in preserving the alliance and its need for reassurance that we do regard Japan as an ally, an equal, and a major power in its own right.

The following are some suggested courses of action which bear on Japan’s own ambitions and concerns.

A. Acknowledge Japan’s major power status and its coincidence of interests with us, and seek to confine its growing nationalism in constructive channels.

1. Take very seriously and support by all means possible Japan’s desire for a permanent seat on the UN Security Council. This is Japan’s next major policy goal. It will become crucial to Japan if the People’s Republic of China obtains the Chinese seat. If, as seems likely, there is greater rivalry and tension between Tokyo and Peking, Japan will find it increasingly intolerable to play Asian second fiddle to the PRC. The Japanese already feel strongly that the composition of the Security Council—especially the presence of France and the UK—no longer reflects today’s power realities except in nuclear terms.

2. Include a place for Japan in any great power conference, particularly one designed to bring about a settlement in Southeast Asia. There would doubtless be opposition to this from Peking and other communist areas, as well as from some groups in non-communist Asia and perhaps within Japan itself. However, Japan’s self-esteem would suffer grievously if Japan were barred from participation and its willingness to support the results—and to provide assistance—would be materially reduced.

3. Coordinate policies with Japan—not merely consult or inform—well in advance of US policy decisions affecting major Japanese interests. This is particularly important with respect to China. The Japanese intensely dislike surprises and are prone to over-react.

4. Support a more prominent Japanese role in certain multilateral institutions, such as staffing the OECD and UN Secretariats.

B. Maintain Japan’s confidence in our security commitment.

1. Retain an adequate force structure in the main islands and Okinawa. The Japanese welcome efforts to reduce tensions in the area and reject an overseas military role for themselves for domestic political reasons and because of their awareness of the suspicions their neighbors harbor of Japanese ambitions. Insofar as the defense of Japan is concerned, they believe their own efforts are consonant with the Nixon Doctrine. But there is concern in Japan that the US military drawdown in Asia may pass beyond the point where credibility in our security commitments can be maintained.

2. Bring the US and Japanese military into a closer relationship through joint planning and exercises. This is politically delicate in Japan, where any indication of joint planning for military purposes can be sensationalized and exploited. However, within politically controlled limits, it can constitute a message of reassurance to Japanese desirous of maintaining the alliance.

3. Carry out any further redeployments in Northeast Asia with the maximum possible consultation with the Japanese. If further realignments are necessary for budgetary or other reasons, we should at least avoid unpleasant surprises.

C. Seek to assure that Japanese technological developments are, to the extent feasible, compatible with ours.

1. Continue support of Japan’s space exploration program. This is one of the most visible forms of cooperation and should be encouraged to the extent possible within the limits imposed by security considerations.

2. Cooperate with Japan and other Pacific nations in multilateral nuclear enrichment efforts. Japan’s power requirements for the future are staggering in scale and Japan accordingly has an immense nuclear power program. Japan is uncertain about our ability to supply its future fuel needs and seeks to participate in a joint program. There are many drawbacks to this possibility, but it would be one way of ensuring the Japanese do not develop a capability exclusively their own.

VII. The Economic Setting

Our political and security interests in maintaining a healthy cooperative relationship with Japan were stressed early in this NSSM. Our economic relationship with Japan is also important—it affects, and is affected by, our political and security relationships with Japan.

In spite of a vast and profitable trade between us, our economic problems are the subject of increasing concern. How these problems are resolved will bear on our material well-being and, more generally, our relations with one of the world’s major industrial powers.

VIII. The Economic Problems

Three inter-connected problems can be delineated in the US-Japan economic relationship. The balance-of-payments position of both countries is in serious disequilibrium. US imports from Japan are growing fast and are leading to widespread apprehension and hostility by much of American business and labor. Japan maintains restrictions on imports and on investment from abroad out of keeping with its new economic strength, while other countries besides the US maintain restrictions against Japan.

1) The US balance of payments is in excessive deficit and the Japanese balance of payments is in excessive surplus. In both countries the problem is acute and requires early attention. While the US payments problem is of long standing, it has become much more serious in recent months as our traditional trade surplus has given way to a trade deficit. Meanwhile, Japan, whose balance-of-payments position was a precarious one until a few years ago, has moved into solid surplus but its mentality has not adjusted rapidly enough to this shift.

This is not to say, however, that the problem is purely a bilateral one. Each country is in disequilibrium with the world as a whole, and the measures that are adopted to deal with the balance-of-payments problem by each country must take into account the impacts on trade and payments with third countries.

The fact that Japan is in excessive surplus and the United States is in excessive deficit does not necessarily mean that there is an adversary relationship between the two countries in the balance-of-payments area. Japan has much to gain from reducing its surplus. Instead of adding further to its reserves (which have increased from $3 billion in 1968 to more than $7 billion now), Japan could make better use of its resources to meet pressing needs for social capital and to improve the living standards of Japanese consumers. The United States has much to gain, particularly in terms of world monetary stability and the ability to fulfill political and economic objectives, from reducing its deficit. Thus the issues in the balance of payments area concern how to achieve the obvious goal of better balance in the payments positions of each of the two countries.

2) The rapid growth in US imports from Japan is the most visible and dramatic aspect of a more general US problem: a sharp rise in total imports relative to domestic spending and output. Whatever can be done to deal with the general problem will also help solve the specific problem of imports from Japan. Beyond this, difficulties will no doubt remain with respect to specific industries that are injured by imports. For these cases, remedies in the form of escape clauses and adjustment assistance exist but need to be improved. A return of the economy to full employment will also help. The open issue concerns the advisability of specific import restrictions by the United States or export restrictions by Japan. The debate on this issue turns on the trade-off between reducing the pressure of imports on employment and profits in specific industries and imposing costs on other sectors of the US economy.

3) Japanese import restrictions take the form not only of tariffs or quotas but also of various other non-tariff barriers, both formal and informal. It is clearly in the US interest that these practices be abandoned.

The US Government also seeks a dismantling of Japan’s restrictions on investment in Japan. There is disagreement about whether the gains from US investment in Japan would be offset by short-run balance-of-payments losses and the disaffection of US labor concerned with “exporting jobs.”

IX. Japanese Actions

Japan is beginning to recognize that its substantial economic progress has reached the point where policies of economic nationalism are no longer compatible with its own interests, with those of its major partners, or with the requirements of the international economic system.

Since 1968 Japan has been liberalizing its restrictions over foreign trade and investment. This has been accelerated recently and in June Japan announced an 8-point program designed to deal with our current economic problems. As a result, during the rest of this year we will see a further reduction in Japanese controls over trade and investment:

—By September, Japan will have substantially reduced the number of items subject to import quotas which are inconsistent with GATT.

—Since July 1, Japan has had no formal limitations on direct or portfolio investment abroad by their nationals.

—Though foreign investment in Japan is still heavily restricted, recent policy statements and specific actions (for example, Chrysler’s joint venture has been approved and General Motors’ negotiations are all but formally completed) suggest that a thawing is under way.

—An extensive shakeup at the senior levels of the Ministry of International Trade and Industry may signify a switch from MITI’s traditional restrictive approach to foreign trade and investment to a new, more international approach. Of the senior hierarchy, the vice minister, deputy vice minister and all bureau directors save one have lost their jobs. The new Japanese government has given better relations with the US top priority.

Nevertheless, Japan continues to maintain import and investment restrictions that are more onerous than those maintained by any of our major trading partners. Among the import restrictions are the import licensing system, “administrative guidance”, and the standard method of settlement. The investment restrictions effectively bar majority foreign ownership in the bulk of Japan’s industries.

X. US Objectives in Its Economic Relations with Japan

There is general agreement in the US Government on the broad US objectives in our economic relations with Japan. We would like to see:

—the removal of Japan’s artificial restraints on imports;

—the avoidance, or amelioration, of problems caused by a sharp increase in Japanese exports of specific products;

—the opening of Japan to foreign investment;

—the reduction, if not the elimination, of Japan’s overall balance-of-payments surplus which could help to reduce the US deficit.

But we do not agree on the priorities each of these objectives should be given, on the exact interpretation of each objective, and, most important of all, how these goals are to be achieved.

XI. The Economic Options Open to Us

There are three broad lines of approach open to the United States in dealing with the economic problems in our relations with Japan. These options range from (1) taking general, multilaterally-directed measures to alleviate U.S. trade and payments problems, to (2) increasing diplomatic pressures on Japan within the existing international framework, to (3) developing a centrally-directed strategy which would involve unprecedented bilateral commitments from Japan to help resolve our trade and payments problems with Japan.

These options are constructed to provide graduated pressures or leverage in US-Japan negotiations, with Option 1 representing relatively minor pressure and Option 3 representing quite heavy pressure.

Option 1. Take prompt, multilaterally-directed measures to eliminate or alleviate US trade and balance-of-payments problems, without directing actions at Japan in particular.

A. Take steps to improve the US balance-of-payments position via measures of general applicability. Such measures would include action to obtain a better international alignment of exchange rates, to bring about a better distribution of the free world’s defense and aid burdens, and various short-term, stop-gap provisions not directed against our economic relations with any one country in particular.

B. Protect injured US industries against the burden imposed by too-rapid adjustment to increased imports by prompt and vigorous implementation of available safeguards, including escape-clause actions, anti-dumping provisions, adjustment assistance and full use of our GATT rights.

C. Take the lead in a worldwide program of reducing all types of barriers to international trade and investment. The recent US initiative towards establishing a high-level trade group in OECD is an important step in this direction.

PRO:

1. The problems of the US balance of payments and international competition are problems we have with the rest of the world in general and not with Japan in particular. If we have a balance-of-payments deficit, it matters little to us who has the surplus (and may be better for it to be Japan than some other countries). As far as our industries suffering from foreign competition are concerned, it matters little whether the competition is Japanese or Zambian. Approaching such problems multilaterally reduces the danger that we solve the Japanese problem without solving the US problem. That is, it reduces the danger of cutting the Japanese surplus by means which might increase the European surplus, or cutting Japanese competition by means which might increase European competition.

2. Insofar as Japanese restrictionism is extraordinary, even-handed insistence on equal treatment all over would call for major liberalization by Japan.

3. A non-discriminatory approach would be least irritating to our political relations with Japan and easiest for the Japanese government to cooperate with.

4. A non-discriminatory approach would avoid fanning anti-Japanese attitudes in the US which give rise to demands and expectations that are impossible or undesirable to meet.

5. A general approach to trade liberalization is most likely to help reduce the adverse effects on the US of the expansion of the Common Market and other regional groups.

6. Finally, working together with Japan and the other industrial countries toward our common economic objectives could resolve many of the current tensions among us.

CONS:

1. We cannot predict how rapidly the general measures of Option 1 will bring about improvement in the US trade and payments situation, or if indeed they can be accomplished. Because of the urgency of the US-Japan problems, these measures may operate too slowly to bring adequate relief to the US balance-of-payments.

2. Japanese exports to the United States and Japan’s trade and payments surpluses have grown particularly rapidly and have therefore become the focus of strong protectionist pressures in the United States. We may stand the best chance of neutralizing these pressures by taking action directly against the phenomena which caused them.

3. The political heat produced by the present friction in US-Japan relations will stimulate Congressional action if direct and forceful moves are not made by the executive branch. Congressional action based on the short-run interests of pressure groups could be harmful to the long-run national interests of both the US and Japan.

4. Bilateral efforts to achieve improved US-Japan economic relations should not be condemned as “bilateralism”. Bilateral undertakings can make a significant contribution to the solution of our overall trade and payments difficulties. For example, bilateral efforts to this end with Canada and the EC are considered normal practice.

Option 2. Increase pressure on Japan, in bilateral and multilateral forums, to stimulate its domestic economy (in order to achieve a better international balance) and to follow internationally-agreed rules on trade and investment. (This is in addition to the measures of Option 1.)

A. We would use the US-Japan Cabinet talks in September for a thorough discussion of the current state of both our economies with the express purpose of convincing the Japanese that, as a necessary part of the international adjustment process, they must take aggressive action to stimulate their economy and, consequently, increase their imports while moderating their exports.

B. We should also use that occasion and the Fund meeting to conduct a discreet but determined campaign to achieve yen revaluation.³

C. Where acute political pressures require it, we should seek ad hoc “voluntary” restrictions of specific exports by Japan. But this should be used only in very exceptional cases and should be applied for a clearly limited period of time.

D. We should also assert our legal rights to better Japanese behavior. In particular:

1. Seek authorization under Article XXIII of GATT to retaliate against Japan’s exports to the United States unless Japan removes its remaining illegal quotas on items of trade interest to us (such as, but not limited to, computers and light aircraft) by October 1, 1971. (In accordance with GATT rules, the proposed retaliation under Article XXIII could be discriminatory and could exceed the injury we complain of.)

2. Press Japan to abandon its import licensing system and, if necessary, take it to GATT as a violation of the rules.

3. Pursue every case where we find non-tariff measures used to restrict imports or stimulate exports. (Our laws on dumping and foreign subsidies can meet some of the problems in this area.)

4. Continue to press the Japanese to ease their investment restrictions. (But we must recognize that the financial structure of the Japanese industry and the present under-valuation of the yen put limits on the extent to which Japan will allow foreign “takeovers” of existing investment in contrast to new investment.)

E. We should encourage Japan with its large and growing international surplus, to import more, by reducing import duties, lowering some of its commodity taxes, liberalizing its agricultural policies, overcoming its present economic slow-down and generally raising consumption levels at home.

F. We should also use the Cabinet-level discussions in September to reach agreement with the Japanese on a common view not only of the international adjustment process but also on appropriate aid policy for a major industrial power. More specifically, we should press Japan to live up to its one percent aid commitment and to soften substantially the terms on which it extends aid to less developed countries.

PRO:

1. Continued pressure, diplomatically applied, has gotten results, especially in the last 2 to 3 years. The possibilities for further progress at this time seem very good.

2. These measures would not discriminate against Japan. It is now a full-fledged power, no different from the United Kingdom or Germany, with sensitivities at least as acute as those of other great powers. We must treat Japan as we treat the other powers.

3. These measures envisage the use of all the legal instruments at our disposal to protect our interests. The retaliation under Article XXIII which we propose is a powerful sanction, virtually unprecedented, but it is a legitimate one provided for in the GATT. In June, the Secretary of State gave Foreign Minister Aichi a note warning him that we intended to invoke this GATT article.

4. Use of fairly conventional instruments for asserting our rights need no special justification or legislation.

5. Even a modest revaluation of the yen might have an important impact on the Japanese trade surplus. (Specifically, the staff of the Federal Reserve estimates that a 7½ percent revaluation would cut Japan’s overall trade surplus by about $2 billion and would improve the US trade balance by roughly $750 million.) Yen revaluation is probably the single most effective way of dealing with the balance-of-payments problem.

6. By relying on diplomatic pressure, international opinion, internationally accepted rights and procedures, and Japanese self-interest, we would not stimulate a nationalistic counter-response by Japan nor impair our political-security relations.

CON:

1. This option does not establish any quantitative targets for our bilateral trade and payments.

2. Option 2 may not satisfy domestic pressures in the US.

3. Actions to date by Japan provide no assurance that the US can rely solely on this option to achieve its objectives.

4. Yen revaluation should not be stressed until all significant import restrictions have been removed, or unless the revaluation is part of a package which includes the removal of import restrictions. Moreover, revaluation could slow Japanese trade liberalization. Therefore, the effects of yen revaluation cannot accurately be estimated.

5. Easing of Japan’s restrictions on inward investment would increase Japan’s balance-of-payments surplus, might be used by Japan to avoid taking other action desired by us,⁴ and alienate US labor.

Option 3. A CIEP-directed strategy for negotiation, including the measures of Option 2 plus additional measures and a time schedule and targets.

Establish a special working group under the Council on International Economic Policy to develop for the September ECONCOM meeting priorities, a timetable, targets, etc. for achieving solution to our economic problems with Japan. The negotiating plan would embody some or all the elements of Option 2A through F plus:⁵

G. Seek a commitment from Japan to eliminate or to reduce substantially Japan’s trade and payments surplus with the United States by the end of 1973 or 1974. These means may include a Japanese policy to promote imports, limit or diversify exports.

H. Seek to work out with Japan an arrangement, including an “early warning system,” for assuring that Japanese exports of particular commodities to the United States do not expand at such a rate as to disrupt the domestic market.

PRO:

1. By providing that a central negotiating strategy be developed under CIEP, the option furnishes the best forum under present circumstances for coordinating the planning of US foreign economic policy toward Japan. The CIEP was formed to provide a clear top-level focus for the full range of international economic policy issues, including trade, investment, balance of payments, and finance. The responsibility for central direction from the White House of the complex task of resolving our economic problems with Japan fits ideally into the designated role of the CIEP from both policy and organizational standpoints.

2. Option 3 provides for a specific bilateral trade and payments target for Japan and the timing for its achievement. Some agencies believe that the absence of such specific targets in the past has contributed to Japan’s ability to make vague policy statements to liberalize but in fact to move at its own deliberate pace.

3. The early warning system of this option corresponds in purpose to the special safeguard mechanism which the EC is currently attempting to negotiate with Japan. This EC mechanism would replace the national measures maintained by the EC member countries regarding sensitive imports from Japan.

4. The time seems ripe for some arrangement with Japan to guard against undue expansion of exports to the U.S. of particular Japanese products. The Keidanren (Japanese Federation of Economic Organizations), for example, is urging that “each industry establish a watch-dog committee to guard against export increases which have an undue impact on markets overseas.

5. The approach of Option 3 is needed now if the pressures building in US business, labor and agricultural circles as well as in Congress for harsh unilateral measures aimed at Japan are to be defused.

6. Prompt and decisive action by the US Government is needed to redress the overall US payments imbalance to which Japan is a major contributing factor.

CON:

1. We have never asked another country to achieve a balance in its economic relations with us. We have never asked another country to limit exports of a number of products to us.

2. The target outlined in 3 could not be negotiated. The Japanese Government could not respond constructively to demands which would be interpreted by the Japanese public as discriminatory. The present Japanese Government is already under heavy attack from within the ruling party and from the opposition on issues—China policy and the Okinawa agreement—directly involved with the US relationship.

3. Although we must press our legitimate demands, doing so in a way which could be interpreted as singling out Japan for uniquely unfavorable treatment could severely strain our general relations with Japan. This could turn a healthy, cooperative relationship into a hostile one.

4. No market economy could “ensure” any given balance-of-payments with another market economy—especially with one as large and dynamic as ours. Moreover, even if Japan were to eliminate its surplus with the US, there is doubt about how much the overall US balance-of-payments would improve. (For example, if Japan were to reduce its exports of automobiles to the US, Americans might switch to buying small cars from Europe.)

5. A bilateral approach would be a long step back to a barter world economic system and would establish a precedent which might be used against us by others; for example, by Western Europe which now has a $3 billion deficit in its trade with us.

6. The attempt to require Japan alone to achieve a balance-of-payments target vis-à-vis the US without a new direct reciprocal commitment by the US would have adverse consequences for our political and security interests. Moreover, such costs would be incurred for the sake of economic gains which have not been shown to be significant and which some believe to be negative.

7. Under Option 3 H, “voluntary” controls would become the rule rather than the exception in our trade with Japan, discriminating against Japan. It would set aside the “escape clause” which requires that the American industry seeking protection demonstrate that it is being injured by imports. It would strengthen the role of cartels in Japan and increase government intervention in the detailed control of the economy. Option 3 H could set a precedent which could ultimately be used against us.

8. The NSC’s Undersecretaries’ Committee would be the most appropriate forum to work out and coordinate a “negotiating plan” for Japan, particularly given its high political impact.

Note: All of the above options assume a continuation of U.S. efforts to obtain satisfactory solutions to the textile and steel import problems.⁶,⁷

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files) Box H–182, National Security Study Memoranda, NSSM 122 [2 of 3]. Secret. The Chairman of the NSC Interdepartmental Group for East Asia and the Pacific, Winthrop Brown, sent this study to Kissinger on August 2. (Washington National Records Center, RG 330, OSD Files: FRC 330–76–197, Box 67, Japan, 092, SRG Mtg. material) For NSSM 122, see Document 72.
2. The full paper is in two parts: the first focuses on “Political, Psychological, and Security Aspects of the Relationship,” while the second is titled “U.S.-Japan Economic Relations.” (National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–058, SRG Meeting—Japan (NSSM 122) 8/6/71) Only the Summary is printed here. Holdridge analyzed the paper in an August 5 memorandum to Kissinger, noting: “The Departmental paper as it now stands is seriously deficient, particularly as regards its parochialism and its lack of integration.” Holdridge commented, “These deficiencies reflect the enormous contention between State, which fears the damage which several of the economic agencies (Commerce, Treasury, Agriculture, and Peter Peterson) will inflict on our relationship if they have their way, and these economic agencies, which are inclined toward heavy pressures on the Japanese as the only way of bringing Japan around on trade and investment matters. The conservatism of the ʽPeace Blossom Societyʼ in State (the old Japan hands) was also such that State refused to consider any basic options other than to maintain our present Japan policy even though events may move either the U.S. or Japan away from the relationship which now exists.” Holdridge continued that the August 6 SRG meeting should be used to integrate the economic and security aspects of U.S. policy toward Japan, as had failed to occur in the original paper. The interdepartmental group responsible for drafting both the original and summary papers, acted, according to Holdridge, “at our insistence to give some unity to the paper and to lay out genuine options.” As to the summary paper, Holdridge felt that it “fails to define the policy problem at the outset clearly in terms of the inter-relationships between, on the one hand, reducing tensions with the PRC and ameliorating our trade problems, and, on the other inducing Japan to share a larger portion of the burden regionally in Asia.” (Ibid.)
3. Yen revaluation is a sensitive subject and should not be pressed with the Japanese, privately or publicly, until there is complete agreement at the highest level that such pressure is timely. [Footnote in the source text.]
4. The Department of Commerce does not accept these two arguments against pressing Japan on investment. [Footnote in the source text.]

5. Commerce proposes consideration of the following measure:

   Inform Japan that if it fails to liberalize inward investment from the United States, as required by the FCN Treaty, within a reasonable time period, given that such failure produces an adverse effect on U.S. exports to Japan, then the U.S. will consider moving to restrict the imports of products of those industries with respect to which Japan’s investment liberalization remains inadequate. [Footnote in the source text.]

6. The Departments of Commerce and Labor believe that the above options assume that U.S. Government efforts to negotiate satisfactory solutions to the textile and steel import problems will be successful. Failure to accomplish such solutions by negotiation in the near future will make it necessary to consider other approaches involving unilateral action. This option has not been included in this paper in accordance with the guidance of NSSM 122 to continue to deal with the textile issue separately, but as a matter of policy such a course of action is not precluded. [Footnote in the source text.]
7. The Department of Commerce believes that the objectives of the integrated negotiations strategy envisioned in Option No. 3 can be significantly advanced by charging CIEP with the responsibility for negotiations currently under way with Japan, including steel. [Footnote in the source text.]