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Michael Armacost, career diplomat, former Brookings Institution president and now Shorenstein Distinguished Fellow at Stanford’s Freeman Spogli Institute, served as United States ambassador to Japan from 1989 to 1993. He spoke to STANFORD Magazine about past and enduring concerns in Northeast Asia.

Time was when Japan, not China, ran up huge trade surpluses and posed the biggest threat to American jobs in industrial and consumer electronics, steel, automotive and other sectors. This wasn’t Outsourcing 1.0, a case of Japan grabbing contracts from cost-cutting multinationals. It was Japan leveraging its growing reputation for making quality products Americans increasingly wanted to buy—while using tariff and non-tariff, or structural, barriers to prevent U.S. exporters of products and services from making inroads in Japan.

When Japanese investors started gobbling up iconic assets like Rockefeller Center, Pebble Beach and big movie studios, it looked like the United States was losing its economic primacy. Hitching a ride on the rising wave of Japan-bashing, Michael Crichton published his best-selling Rising Sun, a potboiler that featured Japanese companies co-opting American university R&D talent to further their nefarious plans for world domination.

Less excitably, Ambassador Armacost focused on shaping harder-hitting strategies for gaining fair access to Japan’s markets. Regular trade reports, traditionally wrapped in diplo-speak, took on a sharper tone, laying out the numbers for what they were and documenting Japan’s structural barriers, such as bid rigging in the construction industry. (He also argued the case for Japan taking on a commensurate share of the regional and global security burden and later wrote about fraying U.S.-Japan relations in his book Friends or Rivals?)

Trade disputes outlived Armacost’s tour, but the dynamics of U.S.-Japan trade were changing in fundamental ways. By 1990 Japan’s huge asset bubble popped, ushering in a “lost decade” of recession that continued on and off into a second decade.

“I think whatever fears we had dissipated not only because of the troubles Japan had but because of the renaissance in the American high tech industry in the 1990s,” Armacost says, citing its lead in microprocessors. “The Japanese ended up dominating memory and hardware and we ended up dominating logic and software with much higher value-added than the sectors we once controlled.”

The China dragon, which puffed only smoke under communism, also started to breathe real fire in the 1990s after market reforms of the 1980s had been largely digested. “The trade deficits [with Japan] began to wane to the extent people worried about them,” Armacost remembers. Congress began to focus on China instead, despite the underlying subtleties: “A lot of Japanese companies relocated production into China for final assembly and the result was that many of their exports destined for the United States were racked up in China’s column in the trade statistics.”

Everyone, it seemed, started to pour into China looking for cheaper production options. “Chinese exports to the U.S. are not really supplanting American products, they’re replacing Taiwanese, Japanese and other exports to us,” he says. “We need to remember we have to run a trade balance with the world, not just with China. Unfortunately our balance with the world is very unfavorable and we do need to address that.”

Japan provides a lesson for anyone hoping a revalued Chinese yuan will make a dent in the whopping imbalance in the Sino-U.S. trade account. Tired of being at the wrong end of lopsided Japanese trade in the mid-1980s, the United States pushed for a revaluation of the yen. Japan ended up revaluing its currency by 50 percent while the United States stretched the difference even more by devaluing the dollar against the yen (and key European currencies in the Plaza Accord). But, as Armacost recalls, it was to no avail: “Our trade deficits with Japan continued to accumulate at an even more rapid rate after 1985 when the Plaza Accord was struck.” Japan responded to new cost pressures by ratcheting up efficiencies and relocating lower-end manufacturing to cheaper Southeast Asia—before China became a serious option—and by focusing domestic production on high-value products.

A priority security issue today is North Korea, and Armacost doesn’t expect the six-party talks (United States, Japan, South Korea, North Korea, China and Russia) will succeed in convincing the Stalinist state to drop its ambition to be a nuclear power.

“We share an interest with China. Both of us would prefer North Korea not have nuclear weapons. [But] we don’t share policy priorities,” Armacost says. “They give priority to avoiding a collapse, we give priority to depriving [North Korea] of nuclear weapons. That makes a huge difference in terms of the tactics.” For example, it makes China very disinclined to tamper with food and fuel supplies through sanctions.

“So in terms of resources and reluctance to meddle in internal affairs and their priority concern about stability across the border, they’re not prepared to do the kinds of things that we and the Japanese and the South Koreans would prefer to do—and the Russians are basically in their camp on that.”

Armacost guesses North Korea will stay on its nuclear track. “They’ve run the economy into the ground and deprived their own people of any welfare [and] they’ve lost ground relatively to the South, so the nuclear program has been a huge bonanza for Kim Jong Il internally. It’s the means by which [the leadership] keeps the military, their principal constituency, on board; it’s an equalizer of sorts with the South; and it’s a proven chip in bargaining with us. So why they’d give it up is difficult for me to see.”

From Stanford Magazine, January/February 2011

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Also on Stanford Knowledgebase:

  1. Stanford’s Professors Keep the World Informed of North Korea’s Nuclear March
  2. Making the World Safe for the Internet
  3. Cold Warriors Keep Battling Against Nuclear Weapons

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