Economic Report of the President

THE ISSUE OF U.S. TRADE WITH JAPANThe perception of diminished U.S. competitiveness stems not onlyfrom the U.S. trade deficit but from an impression that U.S. tradeperformance compares poorly with that of other countries, especiallythat of Japan. Japan runs a huge surplus in its manufactures trade,while the United States runs only a small one, and Japan also has alarge surplus in its bilateral trade with the United States. These factsare often attributed to Japanese trade restrictions. Japan does maintainrestrictions which seriously hurt U.S. businesses. Trade restrictions,however, do not in the long run improve the Japanese tradebalance; as discussed more fully below, they lead to offsetting increasesin other imports or declines in exports. The main explanationof Japan's surplus in manufactures trade and in trade with the UnitedStates is that Japan, with few natural resources, incurs huge deficitsin its trade in primary products, especially oil, and with primary producers,especially the Organization of Petroleum Exporting Countries(OPEC). The surpluses in the rest of Japan's trade offset these deficits.Table 3-2 and Chart 3-2 show the differences in the structure ofthe Japanese, European, and U.S. trade accounts. They show clearlyhow the huge Japanese surplus in manufactures offsets large deficitsin primary products.Corresponding to the Japanese sectoral deficit in primary products,especially oil, is a regional deficit with OPEC. Japan makes up for itsdeficit with OPEC by running surpluses in its trade with other regions.The extent of this regional imbalance—and its contrast withthe U.S. position—is shown in Table 3-3. The point here is similarto that already made with respect to the overall U.S. trade balance:looking at Japanese-U.S. trade in isolation is misleading. The Japanesesurplus in trade with the United States is largely a response tothe rise of OPEC.Although Japanese trade policy does not play a central role incausing the bilateral trade imbalance with the United States, Japaneseimport restrictions remain a major source of friction. Japan maintainsa variety of nontariff barriers against imports. These include importquotas for a number of agricultural products and "red tape" barriersagainst manufactured goods, such as stringent inspection requirementsapplied against imported goods but not against Japanese products.These trade restrictions probably do not lead to a larger overallJapanese trade surplus. If they were removed, the yen would depreciateand increased Japanese imports in the currently protected sectorswould be offset by reduced deficits or increased surpluses elsewhere.Japanese trade restrictions do, however, distort the composition ofU.S. trade with Japan, imposing serious costs on some U.S. produc-56