Japan's Challenge

These Articles are Abridged versions of Papers to be Delivered Today and Tomorrow at the Conference on U.S. Competitiveness, Jointly Sponsored by the New York Stock Exchange, the U.S. Senate Subcommittee on International Trade and Harvard University.

As an academic observing developments in East Asia for the past two decades, I have gradually come to a disturbing conclusion: The United States is in the process of being surpassed by Japan as a modern industrial power, and this creates serious consequences America is not confronting.

We are more or less aware of Japanese success in many products. We know that compared to a few years ago, we now buy Japanese hi-fi equipment instead of American, Japanese cameras instead of German, Japanese television sets instead of American, Japanese watches instead of Swiss. The four largest motorcycle manufacturers in the United States are Honda, Yamaha, Kawasaki, and Suzuki. Twenty years ago the Japanese produced less than 100,000 automobiles, last year 100 times as many--10,000,000--about the same as the U.S. produced. Since it does not involve consumer goods, fewer Americans know that Japan produces about as much steel as the United States, only in more modern facilities and that in shipbuilding, facilities unrivaled in the world, it produces as much shipping tonnage as all of Europe and the United States combined. By 1978, Japan's GNP was about half of America's or about the same as ours per capita. However, by then Japan was already producing about three-fourths as much value in manufactured goods as the United States, or about one and one-half times as much per capita. Total Japanese land area is about the size of Montana.

Japanese manufactured goods are already much more competitive than ours on world markets. The United States trade balance worsened in the last decade, even while the dollar has dropped in value by about one-third compared to the yen. Meanwhile, the Japanese trade balance became more favorable, and the trend is most striking in manufactured goods. In 1978 Americans for the first time in many years imported 5 billion dollars more of manufactured goods than we exported. Japan exported 76 billion dollars more of manufactured goods than it imported.

The Japanese economy is currently growing at about two to three times the American rate, and most economists expect these trends to continue. Japanese labor costs are now about as high as those in the United States, but according to Professors Jorgenson and Nishimizu, the modernity of their average productive facilities already edged past the United States by 1973. In 1978, the absolute amount of investment in new plant and equipment in Japan was already approximately the same as in the United States, and it may be expected to surpass American investment in absolute terms shortly. This is not surprising given the fact that the Japanese savings rate, which had been averaging about 20 per cent a year, has been well above that the last several years while the American savings rate, which had been averaging about six per cent a year, has now fallen to below four per cent. Japanese productivity continues to increase while American productivity has stagnated.

In a complex world it is natural and even desirable for Japan or some other country to be ahead of America on any number of measures. But when America's economy is falling behind, when we have no long-range game plan to support industries in which we could have a comparative advantage, when we lack read-justment programs to provide retraining and future employment for those working in declining industries, we are in deep trouble. A weak economy leads all segments of America to fight for their share of a declining pie to the detriment of civic morality, optimism and benevolence in which Americans once took pride. America did not profit from England's decline, and Japan will not profit from America's decline. It is in the interests of Japan and other allies to have a healthy foresighted American partner whose behavior is not distorted by hasty responses to internal economic crisis.

It is not my purpose to suggest that we imitate Japan. We must find our own ways consistent with our tradition. I do not, however, see how we can respond appropriately without much greater public awareness of the seriousness of the problem. We cannot continue to rely on anti-trust laws and political pressure from the losers to determine our nation's industrial policy. We must find ways both to reduce the cost and intervention of government but at the same time to increase its planning and coordinating capacities. Government and only government can make certain strategic decisions. To do so wise, however, requires drawing on the competence which only businessmen and labor can bring. A new mission for trade unions is essential. For, with bitter relations, we all lose. Redirecting our efforts will at best require many years, but certain trends may be irreversible if we do not act quickly, and this election year may provide a good opportunity to begin.