Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

97. Memorandum From the Director of the Office of International Monetary Affairs, Department of the Treasury (Syvrud) to Secretary of the Treasury Blumenthal¹

Washington, January 17, 1978

SUBJECT

• United States-Japan Trade Talks—An Insider’s Assessment

In the U.S./Japan trade talks on January 9–13 Ambassador Strauss laid on the line his personal credibility with the U.S. Congress in return for the Japanese commitments described below.² He made it clear that the credibility of the U.S. Delegation and specifically his own personal credibility was at stake in these talks. He wanted to insure that the Japanese commitments would permit him to counter effectively the growing protectionism in the U.S. Congress. I don’t think Strauss was completely convinced that the statement he went home with achieved this purpose but he knew that the alternative of not having an agreed statement was even less acceptable.³

Ambassador Strauss recognized publicly that the agreement did not eliminate protectionist pressures in the United States but those forces, he said, would have been stronger without the agreement.⁴ So the significance of the agreement lies as much in what we avoided as in what we achieved. We avoided confrontation in trade issues with the Japanese. We possibly avoided an increase in protectionist pressures in the United States, and we certainly avoided a sharp deterioration in U.S.-Japanese relationships.

The Joint Statement announced by Ambassador Strauss and Ambassador Ushiba on Friday, January 13, covered three important areas: macro-economic policies, multilateral trade negotiations and some bilateral trading issues. (copy attached)⁵

Macro-economic Policies

The Japanese committed themselves to a 7 percent growth target and to reducing the current account surplus considerably (to $6 billion) in fiscal year 1978, aiming at equilibrium by the end of FY 1979 and thereafter, with a deficit accepted if it should occur. (The Japanese fiscal year is from April 1 to March 31.) While the Japanese had previously announced the 7 percent growth target, their previous commitment was for “around 7 percent”. The commitment is now firmed up for 7 percent and the economic policies are directed toward achieving that target.

During the talks, there was some skepticism raised about the ability of the Japanese Government to meet its 7 percent growth target. There is some justification for this skepticism since a great deal depends upon private sector consumption and investment. I have suggested that we publicly avoid raising skepticism since it would tend to affect adversely the confidence factor and in a self-fulfilling way bring about that lower growth rate.

The focus of the Japanese economic program is on domestic demand. This means a structural shift in the Japanese economy away from the export-oriented growth, resulting in additional bankruptcies, unemployment, and a lower growth rate than otherwise would be the case, but it is clearly an emphasis which is consistent with the needs of the international economy and should be welcomed.

The language on the current account reflects a significant shift in the Japanese position. I was told that this position was approved by Prime Minister Fukuda. What it really means is that, in the medium-term, Japan’s objective has shifted from equilibrium on basic balance to an equilibrium on current account.

MTN

Ambassador Strauss’ STR team (he was accompanied by his number two man, Alan Wolff, his number three man and chief negotiator at Geneva, Alonso McDonald, and his General Counsel) focused heavily on achieving Japanese commitment to a partnership in the multilateral trade negotiations which begin next week. They sought partnership with the Japanese to achieve basic equity on their trading relations by the end of the MTN period, eight to ten years. (See paras 5–7 of Statement) Strauss emphasized that the objective of parity in the levels of bound tariffs (para 6) was the only non-negotiable element in the statement.

Bilateral Relations

On the bilateral side, the Strauss team sought specific commitments on a range of trade items: oranges, hotel beef, citrus juice, timber, etc. This group of commitments on the part of the Japanese was estimated in value to not more than $100 million of total Japanese imports, of which perhaps the United States would benefit from $30 million. It is obviously peanuts in terms of amounts, but Ambassador Strauss placed heavy emphasis on the symbolic importance of these items. They are the kinds of things that the unsophisticated understand much more than the current account commitment. Moreover, they are of interest to specific Congressmen in key committees.

Follow-Up

There are many areas of follow-up to these trade talks. We did not use the word “monitor” or “surveillance” but obviously the implementation of Japanese commitments and the performance of the Japanese economy is vital to the achievement of our objectives. There are a number of study groups and purchasing missions to the United States to follow up on the bilateral issues, listed in paragraph 8 of the Joint Statement. These involve Agriculture and Commerce. The Subcabinet Group involving State and Treasury is expected to meet in the spring in Washington to review macro-economic developments. There will also be a follow-up in the MTN with Ambassador McDonald and his Japanese counterpart instructed to work hand in hand throughout the negotiations. Ambassador Strauss and Ambassador Ushiba will be present in Geneva to begin the proceedings and the Joint Statement includes an agreement that they will meet again in October to review the progress under this agreement.

Some Questions

The major unanswered questions are:

(a) The probabilities of achieving the 7 percent growth target?

(b) The probabilities of achieving the $6 billion current account surplus?

(c) The seriousness of the Japanese commitment to opening up their markets?

(d) The effectiveness of the exercise in stemming protectionism in the United States?

Summary Comment

Ambassador Strauss is correct in his assessment that the significance of this agreement with the Japanese is that it is a longer-term commitment for opening Japanese markets and that it will stem the rise in protectionism in the United States Congress from what it otherwise might have been. He has taken on what I believe to be a significant risk to his credibility but I think the risks are clearly worth taking, and he should be given every support.

I believe that this agreement represents a consensus within the Japanese Government, including the Finance Ministry, the Economic Planning Agency, the Foreign Ministry, and possibly other ministries, to open the Japanese markets to imports. Once this consensus is achieved in the Japanese decision making process it is likely to be reflected in many policy areas which are not included in the statement.

1. Source: Department of the Treasury, Office of the Secretary, Executive Secretariat, 1978 Files, 56–83–69. Confidential. Sent through Solomon. Printed from a copy that bears a handwritten notation indicating that Solomon initialed the original. Copies were sent to Bergsten, Widman, Hufbauer, Karlik, Junz, Leddy, Cross, and Fisher (not further identified; possibly Assistant to the Secretary of the Treasury Richard W. Fisher).
2. Wolff and other U.S. officials met with Japanese officials for two days of trade talks in Tokyo in advance of Strauss’ January 12–13 discussions in Tokyo. (Telegram 396 from Tokyo, January 10; National Archives, RG 59, Central Foreign Policy File, D780014–0852)
3. The statement issued at the end of Strauss’ discussions with Japanese officials in Tokyo was printed in The New York Times on January 14. (“Text of Communique Issued by U.S. and Japan on 2 Days of Trade Talks,” The New York Times, January 14, 1978, p. 4)
4. According to a report published in The New York Times on January 14, Strauss said of the growth of American protectionism: “I do not think we have eliminated these forces, but had we not reached agreement, they would have become much stronger.” (Andrew H. Malcolm, “U.S. and Japan Reach an Accord on Easing of Tensions in Trade,” The New York Times, January 14, 1978, p. 1)
5. Attached but not printed. See footnote 3 above.