A war between friends

MARCI McDONALD May 11 1987

A war between friends

MARCI McDONALD May 11 1987

A war between friends


They call each other Ron and Yasu, and consider themselves personal friends. But last week Japan’s Prime Minister Yasuhiro Nakasone learned—like Brian Mulroney before him—that friendship with President Ronald Reagan can prove a double-edged sword. After a two-day official visit to Washington at one of the most strained moments in U.S.-Japanese relations since the Second World War, Nakasone discovered that coziness with Reagan could not shield him from the protectionist wrath of the U.S. Congress. Indeed, the friendship might cost him so much crucial support back home that he may be forced out of office before his term ends this fall.

Only hours after Nakasone’s first stop at the White House, where the leaders of the world’s two largest economic powers put on an elaborate show of goodwill, the House of Representatives passed the toughest trade bill in American postwar history by an overwhelming 290 to 137 votes. Among its most controversial provisions: an amendment proposed by Missouri Democrat and presidential candidate Richard Gephardt—and aimed directly at Japan— that would require the President to retaliate automatically against any country whose alleged unfair trade practices allowed for an excessive surplus with the United States. Although the Gephardt amendment squeaked through the Democrat-controlled House by only 218 votes to 214—and is not expected to survive in the Senate—it dealt a personal blow to the embattled Nakasone’s prestige and pro-American policies in Japan.

Analysts predicted that the Prime Minister’s subsequent failure to win a definite date for removal of the first U.S. economic sanctions against Japan since the Second World War—a $390million retaliation imposed on April 17 on semiconductor imports—would force him to resign by this summer. Said William Schneider, of the American Enterprise Institute: “This visit to Washington could have saved him. But now he’s doomed.”

More worrisome were predictions that the grim climate of economic reprisals signalled by the House measures could unleash an international trade war with grave consequences for Canada. Nakasone himself said he was “apprehensive”

that the House bill, if passed into law, would lead to “a contraction of world trade.” The legislation now goes to the Senate, where the finance committee is working on its own, less retaliatory trade bill. A compromise bill is likely to emerge. But a Canadian official in Washington was quick to denounce last week’s bill as “unilateralist and illegal,” capable of inflicting serious injury on U.S.-Canadian economic relations. He added that the protectionist congressional mood boded ill for approval of a Canadian-U.S. free trade agreement in the fall

A series of provisions in the bill would leave a range of goods previously considered protected by international trade rules and bilateral agreements— among them approximately $600 million in Canadian defence sales to the United States—suddenly open to the threat of retaliatory tariffs. Said one Canadian official: “This bill opens up new areas for trade actions. If it were enacted, it would create a higher degree of uncertainty for doing business in the United States.” Added another: “If it goes through, it could make our problems up

The passage of the Gephardt amendment was timed with calculated indelicacy to telegraph to Nakasone the level of congressional frustration with the worsening trade imbalance between the two countries. The Japanese case was further undermined when, in the midst of Nakasone’s visit, the Japanese government announced that the country’s trade surplus for the fiscal year ending on March 31 had mushroomed to a record $130 billion—$56 billion more than the previous year. But other countries with large surpluses are also targets, including Taiwan, South Korea, Italy and West Germany.

Most analysts agree that, despite Canada’s $18-billion trade surplus with the United States, Ottawa would not likely be affected by the Gephardt amendment. But Gary Hufbauer, a professor of international finance at Georgetown University, said that while the amendment had served as a “lightning rod”—attracting most media and White House attention—other provisions had crept into the bill that could prove more harmful to Canada. Among

them: the reopening of international trade definitions of what constitutes a subsidy. The bill could provoke more disputes like the recent fight over Canadian softwood lumber imports. And it contains a “downstream dumping” provision—to combat the sale below cost of goods—which could hurt Canada’s sizable telecommunications exports to the

United States. Said Hufbauer: “There is a lot of potential for mischief three or four years down the road.”

But to many Canadian officials the most upsetting aspect of the bill and the Gephardt amendment was the worsening mood in Congress that it signalled. Even the current Senate trade bill contains provisions for discretionary retaliation steps that could hurt Canada. And they predicted the measures—if carried into a final bill—could sabotage the new round of multilateral trade talks now getting under way in Geneva.

Said one Canadian diplomat: “If the U.S. adopts a unilateral approach as to who the good guys and the bad guys are, what does it mean for the international trading system? It destroys it.”

Some analysts expressed concern that the vote could set off a spiral of reprisals, with Japanese investors

registering their displeaGephardt: calculated

sure by dumping their American holdings. Immediately following the Gephardt amendment vote, U.S. bond prices plunged temporarily. But the real test comes this week when the U.S. Treasury Department’s quarterly bond offering is due. And Nakasone pointedly declared that unless Japan and the United States could work out their frictions in mutual

co-operation, “the problems will overwhelm us.”

Nakasone attempted to show his goodwill by announcing that he had instructed the Bank of Japan to lower its short-term interest rates—already only 2.5 per cent. That move was designed to stimulate the appetite at home for spending more on consumer goods— preferably American imports. The same motivation lay behind Nakasone’s announcement of a $44-billion package designed to stimulate the domestic economy. To placate Washington, he also reiterated a promise that Japan would recycle $39 billion of its economic surpluses into untied loans to debtplagued developing countries, mainly in Latin America. But most analysts agreed those moves could not remove the fundamental trade frictions between Tokyo and Washington.

For his part, Reagan

promised to lift the import sanctions against a range of Japanese electronic goods, which Nakasone characterized as “a very sore thorn sticking in our small finger,” as soon as possible. And Reagan also said that unless the congressional trade bill were softened, he would use his veto power. But the President could not risk further exacerbating tensions with Congress by making a more specific commitment. Indeed, despite Reagan’s desire to strengthen Nakasone’s hand back home, the Prime Minister’s visit illustrates just how impotent both leaders now are to act in a crisis that has global implications. Both are seriously weakened domestically—their popularity low in the polls, their terms near an end and their hands tied by hostile congresses. A recent poll in the national daily, Asahi Shimbun, showed that only 24 per cent of those asked approved of Nakasone’s cabinet.

But the most serious blow to Nakasone’s political survival came in mid-April when overwhelming opposiS tion in his country forced § him into a humiliating re§ treat on his proposal for a G first-time Japanese sales £ tax—another move designed “ to please the United States, á With Nakasone’s extended term due to expire in November, his falling fortunes worry Washington not so much for the harm they pose to him as for his impaired ability to anoint his successor. Indeed, one White House official predicted that the United States could never again expect so pro-American a Japanese prime minister.

With polls in Japan now registering increased resentment against the United States, and Congress’ current grim mood, relations between the two countries are unlikely to improve soon. Despite the honeyed phrases exchanged by the two leaders at the White House, analysts predict no major improvement until after the next U.S. presidential elections in late 1988, when both countries will have leaders in a position strong enough to tackle fundamental problems. Said Hufbauer: “Things are going to get worse before they get better.” That forecast is bad news for Canada, too. Said one White House official after the trade vote: “It is a volatile situation. Nobody is in control anymore and the danger is, things could easily get out of hand.”

MARCI McDONALD in Washington with