Presentation by William C. Duncan, Ph.D.
General Director, Washington Office
Japan Automobile Manufacturers Association

To The Japan-America Society of Central Ohio Planning Committee, Columbus Council on World Affairs & The Institute for Japanese Studies at the Ohio State University

This week the headline in "Automotive News," reads "Imports Bite Japan." The article quotes Robert Eaton, Chairman of Chrysler, that imports are forcing price reductions in Japan and cutting into profits of Japan’s automobile manufacturers. Mr. Eaton told the newspaper that Chrysler’s objective is to cut into Japanese automakers’ ability to charge high prices in Japan and to thereby break what he calls a "sanctuary" market that finances expansion overseas. This is perhaps as good a place as any to start a discussion of the myths and realities of U.S.-Japan trade relations.

Putting aside for the moment this somewhat backhanded way finally to admit that the Japanese market is open, let’s look for a moment at the reality:

• There are eleven car and truck manufacturers in Japan which compete intensely with one another for a market less than half the size of the U.S. market. This is hardly a sanctuary. The suggestion that these eleven companies constitute a monopoly is a bit strange coming from one of the big three that together made 14 billion dollars in profits last year.
• Imports have played an increasingly important role in Japan as a result of significant investment in product, distribution and servicing by European makers over the last decade. In August imports took nearly 13 percent of Japan’s passenger car market and 32 percent of the large car market where the big three concentrate their sales. The Detroit companies have only recently indicated a serious interest in selling cars in Japan and still have a long way to go to match their European counterparts in product availability, market fit, and investment.
• The strength of the Japanese companies comes from intense competition both within Japan and globally, not from the lack of it. Their success overseas has come from a reputation for high quality in production methods, product and servicing that have set the benchmark for the industry for over two decades.
• The recession and the high value of the yen has undoubtedly taken its toll on profits. However, if anything this has stimulated cost cutting and increased efficiency within the industry. This is raising competitive standards even higher. In short the difficulty the big three may be having in Japan’s market may be precisely because it is not a sanctuary market that allows manufacturers to ignore customer needs for easy profits.

However let's look at the broader picture of the role automobiles play in U.S.-Japan economic diplomacy. I focus on automobiles for two reasons.

The first is that automobiles have been a focal point of significant tensions between the two countries. This last dispute was particularly contentious and came perilously close to shutting out 6 billion dollars of automotive trade from the U.S. market and seriously undermining the world's confidence in the U.S. commitment to multilateral trade. Unilateral retaliation in violation of international trade laws and agreements would have undoubtedly led to a destabilization of currencies and trade flows sending shock waves far beyond the automotive industry.

The second reason is that the myths that surround these negotiations are thicker than a Maine fog at night. There is plenty of material here although you may need a good deal of patience to navigate through it.

A question that I often hear is why not just explain the facts, get rid of the myths and solve the problems. Unfortunately, it’s not that simple. Many of the misconceptions do indeed come from a genuine lack of understanding or pre-conceived notions of Japan. However, the reality is that much of this is coming from efforts in Washington to justify a bi-lateral "managed," more recently called "results oriented," trade approach towards Japan and perhaps other countries as well. The automobile negotiations clearly tell this story.

Immediate Background
Let me first focus for a moment on the background of the recent auto negotiations. There are certain basic facts to keep in mind.

The first is that the auto agreement was negotiated under the "United States-Japan Framework for a New Economic Partnership." established in July 1993. The purpose was to determine initiatives to be taken by both the U.S. and Japan to reduce imbalances of trade in goods and services. There was nothing in the Framework, even in the reference to evaluation, the so-called "objective criteria," that would even suggest that it was to take a "results oriented" course towards reducing imbalances through establishing targets or other non-market mechanisms.

The second basic fact is that automotive products were included in the agreement on the basis of trade expansion, not because of identified unfair barriers to trade. Practices relating to Japan's auto industry had been intensively reviewed over the decade of the 1980s with no violations of law or international trade rules to be found.

The third basic fact is that the stated objective of the automotive sector discussions was and I quote as follows:

" achieving significantly expanded sales opportunities to result in a significant expansion of purchases of foreign parts by Japanese firms in Japan and through their transplants, as well as removing problems which affect market access, and encouraging imports of foreign autos and auto parts in Japan."

Meanwhile the U.S. Government would encourage "U.S. companies to pursue more actively market opportunities in Japan."

There is a vital distinction being made in this language. The task of the Framework was expanding opportunities and pursuing these opportunities be they through de-regulation, sales promotion measures, increased competitiveness, or other means.

Furthermore this focus on opportunities was not at all new. Industry on both sides of the Pacific had been focusing on opportunities for some time and quite successfully. The background here of U.S. Japan automobile diplomacy and private industry activity is vital to understanding the position of the Japanese vehicle industry.

The YASUKAWA/ASKEW Agreement
If we go back for a moment to 1980, the Japanese manufacturers sold 2.4 million cars and trucks in the U.S. market all of them imported. Japan’s market share which had been about 11 percent in 1978 had jumped to 22 percent largely as a result of the huge demand for high quality small cars and trucks resulting from the oil crisis of 1979. At that time the UAW, the Big Three and U.S. parts companies were demanding limitations on imports and that Japanese vehicle makers invest in the U.S. where their market is.

In response to this pressure the Carter Administration and the Japanese Government in May of 1980 signed an agreement, called the Yasukawa-Askew agreement after the names of the chief negotiators, that committed the Japanese government to encourage economically viable investment in the U.S. by Japan's auto and auto parts companies.

Clearly the intent of this agreement has been fulfilled. As of 1993 Japanese vehicle manufacturers had invested over 11 billion dollars in plant, equipment, R&D facilities and design centers in the U.S. Japanese name brand vehicles still take about 23 percent of the U.S. vehicle market; yet, import share has fallen below the 1978 level. Through September of this year import share of Japanese vehicles was about 9.5 percent, including those vehicles imported and sold by the Big Three. Import sales of Japanese vehicles in the first 9 months of this year are 16 percent below last year. In fact in the last three months exports of vehicles from Japan to the U.S. have plunged about 40 percent.

The 1986/87 MOSS Talks
As the scale of production in the transplants increased, U.S. parts companies showed greater interest in selling to Japanese manufacturers. Accordingly the next round of negotiations focused on sales of U.S. auto parts to Japanese vehicle manufacturers. This was called the Market Oriented Sector Specific or (MOSS) Talks, which began in 1986 and ended in August of 1987. The focus here was on the ownership relationships between Japanese manufacturers and their suppliers, particularly the so-called Keiretsu relationships. The MOSS report concluded that "there is no evidence given the severe competition among parts suppliers that "affiliated suppliers" are being accorded a special position over other suppliers by their parent automaker." This was later reaffirmed in a 1990 report published by the U.S. Motor & Equipment Manufacturers Association (MEMA) that represents the U.S. parts industry. Subsequent investigations by both the International Trade Commission and the Federal Trade Commission into the so-called Keiretsu relationships found no practices that represented unfair trade barriers to U.S. auto parts sales.

JAMA/MEMA Cooperation and the Market Oriented Cooperation Plan
Shortly after the conclusion of the MOSS talks JAMA and MEMA, at the suggestion of MEMA president Bill Raftery, established a liaison committee consisting of a small group of director level procurement executives from the JAMA member companies and CEOs of U.S. parts companies or their divisions. The sole focus of the group was on how to develop business. It was a voluntary group working on a cooperative basis absent the rhetoric and political posturing that often hardens positions and inhibits working relationships. The group developed purchasing manuals, published service catalogues, established and published purchasing contacts points within the JAMA companies, among other activities. The most ambitious project was the "One-on-One Conference," which brings together purchasing teams from the JAMA member companies with teams of executives from U.S. parts companies in a series of company to company meetings which are held over a period of two to three days. Meanwhile, the JAMA companies were developing their own supplier development and outreach programs with U.S. companies.

It was the success, not the failure, of these private sector initiatives that led the Bush Administration to reject trade action under section 301 of U.S. trade law and join with the Government of Japan in the Market Oriented Cooperation Plan. The objective was to encourage and build on this industry-to-industry and company-to-company interaction.

The result of all this is that purchasing by JAMA companies of U.S. auto parts increased dramatically from 2.5 billion dollars in 1986 to 10.5 billion dollars in 1991 and 19.8 billion dollars last year. The number of U.S. suppliers supplying Japanese manufacturers increased from below 300 to over 800 in 1991 and to over 1200 currently. This activity continued both before and throughout the two years of the Auto Framework discussions.

The Bush Visit and the 19 Billion Dollar Purchasing Plans
It was in this context of private sector initiatives that President Bush went to Japan in January 1992. At the time the U.S. trade deficit in auto parts had reached 10 billion dollars. The University of Michigan had forecast that the trade deficit with Japan on auto parts would reach 22 billion dollars by 1994.

Given the sensationalism surrounding the Michigan forecast, which incidentally has proven grossly off the mark, the Bush Administration sought an indication of where the industry-to-industry activity would lead by 1994. Accordingly, the JAMA members voluntarily and individually announced the dollar volume of parts which they believed would result from business decisions already made or soon to be made. The sum total came to 19 billion dollars. It was clear that these were not agreements or pledges and this was so stated by U.S. trade officials reporting to Congress at the time. Ambassador Hills testifying before the Senate Finance Committee had referred to these as "targets" and said that if the targets were met or exceeded it would indicate an opening of the market. As it turned out the fiscal 1994 combined purchasing amount reached 19.8 billion dollars.

Enter the Big Three
Following the Bush visit, Ford, General Motors, and Chrysler began to express a more serious interest in the Japanese market.

Throughout most of the 1980s the three Detroit companies had shown less interest in building and selling to the Japanese market than did their European counterparts who were establishing dealerships and a marketing base in Japan. European sales in Japan increased three fold during the decade. Big Three sales were actually lower at the end of the decade than in the beginning.

During the 1980s the Big Three trade related efforts focused primarily on limiting imports of vehicles from Japan to the U.S. market rather than promoting exports to Japan. By decade’s end the Detroit companies were focusing on the trade deficit with the famous "Poling proposal" named after Ford’s Chairman. The proposition was that it was solely Japan's responsibility to reduce the trade surplus with the U.S. and that this should be done within five years in equal annual amounts. This was the origin, at least in part, of the so-called "results oriented" approach that came to shape the policy of the Clinton Administration.

Meanwhile in May of 1992 under the concept of the Market Oriented Cooperation Plan the CEOs of Ford, GM and Chrysler met in Chicago with the CEOs of five of JAMA’s leading car companies and agreed to establish two working groups, one to discuss marketing in Japan and the other to discuss technical matters of interest. The working groups never met, hindered by the big three’s insistence that the focus of discussion be on reducing the trade deficit as versus more practical marketing issues. The big three notified JAMA in the summer of 1993 that they would abandon the working groups in favor of the Framework Talks.

Numerical Targets — A Case of Misinterpretation and Misdirected Focus
When the auto sector negotiations began under the framework, the confrontation over numbers and results oriented approaches was already firmly in place. Several months earlier the Clinton Administration had determined that the 1992 voluntary plans were "pledges" which they expected to be met. A letter sent by Ambassador Kantor to then MITI Minister Mori stated: "I expect that the auto parts pledges made by the Japanese in January of last year will be fully met.....I would appreciate hearing from you about the steps Japan intends to take to meet this pledge to expand U.S. auto parts sourcing." To this Minister Mori replied "In your letter you state that the numbers announced by the Japanese automobile manufacturers constitute a 'pledge.'....These figures are clearly not 'pledges.' I wish to reconfirm that there is no misunderstanding between our two countries on this point." U.S. persistence on future "results oriented" performance numbers both for dealerships and parts purchases, consistently proved to be the sticking point in the negotiations.

Throughout the negotiating process a pattern began to appear. The U.S. side would ask for numbers in some form. The Japanese side would reject them; the talks would break down; the U.S. would change the vocabulary and then the talks would resume again. Over the course of the two years the Clinton Administration used such terms as: specific expectations, numerical targets, measurable results, forward looking criteria , vision, voluntary plans, among others. In the end they all amounted to the same thing, some form of negotiated numerical forecast.

In March of 1993 several of the JAMA companies announced voluntary global purchasing plans covering the next couple of years. These were rejected as insufficient by the Clinton Administration only confirming that USTR’s objective was to negotiate procurement levels. This hardened positions even further.

In September last year while other Framework issues were being resolved the auto negotiations broke down again. This time USTR turned to section 301 of U.S. trade law and began the retaliation process. The grounds here were regulations relating to Japan’s vehicle safety inspection system. Actually at the time the Government of Japan had largely met U.S. demands in this area, but again the real sticking point was purchasing numbers. In private Ambassador Kantor had made it abundantly clear to the industry that purchasing numbers were the "sine qua non" of any agreement, in the absence of which the U.S. would shut out Japanese vehicles from the U.S. market.

The Auto Framework Agreement
On June 28th the Japanese manufacturers announced future business plans. However, these were not part of the agreement and did not include parts purchasing numbers. This is clearly stated both in the joint announcements and in the agreement itself. For example:

• The joint statement announced on June 28th states explicitly that the plans "are not commitments and are not subject to the trade remedy laws of either country. Rather they are business forecasts and intentions of the companies based on their study of market conditions and other factors. Both Ministers recognize and understand that changes in market conditions may affect the fulfillment of these plans."
• The agreement itself, signed on August 23rd, does not include plans or future purchasing numbers. In regard to objective criteria the agreement states. "These criteria do not constitute numerical targets, but rather are to be used for the purpose of evaluating progress achieved towards the goals of the Framework and the goals of these measures (under the framework)."
• The Clinton Administration unilaterally estimated that these investment plans would result in 6.75 billion dollars in increased U.S. parts and would meet the Big 3 expectations of 1000 dealerships in Japan by the year 2000, among other numbers. However, the Japanese Government clearly stated in the joint announcement that "the Government of Japan has had no involvement in this calculation because it is beyond the scope and responsibility of the government....USTR’s estimates are solely its own." Numerical targets could not have been rejected more firmly.

Yet despite all this USTR issued a fact sheet stating that JAMA companies had announced plans to purchase $6 billion of foreign parts by 1998 for production use in Japan.

The "Detroit News" in an interview shortly after the announcement asked Ambassador Kantor "What happens if they (the Japanese) don’t reach the goals that the Administration expects? Ambassador Kantor’s answer: "Then we’ll use our trade laws...."

Meanwhile the big three picked up on the Administration position writing in a letter to Toyota and I quote: "In reference to parts procurement by Japanese transplants USTR’s Fact Sheet on the U.S. Japan Auto Agreement specifically states that ‘the transplants plan to buy $6.75 billion more parts from U.S. suppliers by 1998...’ The purchase goal is specifically referred to in supporting documents to the agreement."

Clearly the USTR fact sheet is wrong and MITI was quick to point this out to USTR. Purchasing numbers were mentioned in the supporting documents only in that they were specifically denied or disavowed.

About one month ago the big three issued a press release charging that the Japanese vehicle manufacturers had "gotten off on the wrong foot" because they had not yet provided the respective company contact points indicated in the agreement. The big three complained that no new dealerships have been opened to them since the agreement was signed. The fact is that the JAMA companies had provided the contact points. Neither the big three or the Administration had made the effort to ask for them as provided in the agreement. As far as dealerships go, the whole point of the agreement is that it is up to the big three to develop their own dealership networks. The agreement was only signed on August 23rd, which is hardly enough time for the big three to make the necessary efforts. It is indeed truly unfortunate to find these companies undermining the agreement in this way and turning a blind eye to its opportunities before the ink is hardly dry.

The way this agreement, as well as previous agreements, have been distorted clearly justifies the concerns which the Japanese industry has had over providing estimates of future purchasing or other numerical targets.

The Japanese vehicle manufacturers currently purchase nearly 20 billion dollars of U.S. sourced auto parts. Where purchases go from here will depend on a wide range of factors which will come from economic forces and business decisions, from the bottom up rather than the top down. Unilateral assertions that markets are closed detract from an understanding of the dynamic that is taking place in the industry. Basing a "results oriented" policy on such assertions, particularly under threat of unilateral retaliation, is unwise and dangerous.

The Realities — Japan's Auto and Auto Parts Markets
The hope is that this futile pursuit of numbers can be set aside and companies can go about the business of expanding trade. There are opportunities in the Japanese market and with Japanese companies. Opportunities have been demonstrated by competitors already active in the market.

A dominant theme underlying these negotiations was the assertion that if U.S. companies sell in one market it is the fault of another market if they don’t sell there as well. Thus there was the attempt to make U.S. market share in Japan look as small as possible — below one percent — and as large as possible in other markets.

The Japanese market is comprised of three segments: regular, small and mini vehicles. Mini vehicles, with engine capacity of less than 660cc, are treated separately both for registration purposes and statistically. No importer has yet attempted to market these very small, low priced vehicles in Japan. In fact the big three don’t even build these vehicles. If you include mini vehicles as part of the total car market, import share was 4.2 percent in 1994. If you exclude them it was about 8.1 percent in 1994, about 8.9 percent so far this year and 12.8 percent in August.

If you look at the large car, over 2000 cc, segment where the Detroit makers concentrate their efforts at the moment, import share is over 28 percent and in August this year reached 32 percent. Import share in the highly competitive small car market is 3.8 percent so far this year and 5.1 percent in August. Overall import car sales have increased by 33 percent this year in a market which is up about 5 percent. In fact a certain portion of this increase is due to successful marketing of GM Opels and Fords out of Europe.

Clearly someone is doing something right. However, selling vehicles out of Europe rather than Detroit does little for the U.S.-Japan trade deficit or American jobs if indeed that is the objective of the Big Three.

The Japanese companies insist that their dealers are free to enter into agreements with competing companies. To dispel any notion to the contrary, in conjunction with the Auto Framework Agreement contact points were established in the government, in the companies and in the dealer association. It hardly need be said that persuading Japanese businessmen to make the necessary investment to carry products is clearly a function of the importers, not their competitors. The big three, like everybody else in the market, must provide the product in sufficient quantity with competitive quality and marketability. They must provide dealers the support, servicing, advertising, and all other factors that go into developing a dealer network. Clearly the success of the agreement depends on whether the big three seize the opportunity and make the necessary investment and marketing effort. Only this way can they obtain the results they seek.

Meanwhile the Japanese Government has agreed to facilitate these efforts by providing financial support for exhibitions and demonstration of foreign vehicles, financial incentives through the Japan Development Bank to provide low interest loans for construction facilities, import financing from the Export-Import Bank of Japan, and loans to facilitate sales from the Small Business Finance Corporation among others. These loans are going to companies that are not altogether small or strapped for cash. GM and Ford, for example, have already taken advantage of these loans.

I have (already) discussed both the efforts of the Japanese vehicle manufacturers and U.S. parts companies working together to create opportunities and develop business. I have also discussed how these have led to significant results. These efforts will continue.

The agreement gives particular attention to the market for aftermarket parts in Japan and outlines changes in the vehicle safety inspection system including removing some key aftermarket parts from the critical list of items for safety inspection.

This issue is too extensive to go into here. However, again as in the case of vehicles it is important to look at Japan’s aftermarket in terms of practices and demand patterns in the industry, not in terms of myths generated by macro market shares. One need only read the June 1995 document from the U.S. Auto Parts Advisory Committee to the Department of Commerce (APAC) which supported the 5.9 billion dollar retaliation number to see what I mean.

This document argues that the U.S. should have 20 percent of Japan’s aftermarket since the U.S. has 20 percent of the aftermarket of other OECD countries. How does APAC arrive at this figure? They estimate that U.S. exports have 77 percent of Canada’s auto parts sales. Given the dominance of the Big Three transplants in Canada this is not at all surprising. By averaging the 77 percent share in Canada with the 3.5 percent in Germany, the 1.8 percent in France, the 2.5 percent in Britain etc. APAC concluded not only that Japan should turn to the U.S. for 20 percent of its aftermarket supply but also that it is legitimate for the U.S. to unilaterally shut out an equivalent 6 billion dollars worth of Japanese luxury vehicles in retaliation if they don’t.

The analysis is obviously absurd both mathematically and in terms of practices in the industry. Aftermarket parts as a general rule follow the vehicles and OE parts sales. The trend generally is for OE purchases to be localized. It is worth noting, however, that excluding Canada and Mexico, where intra-big three trade dominates, Japan imports more U.S. auto parts and vehicles than any other country in the world.

Conclusion
In conclusion I would simply say that the Auto Agreement has been negotiated and signed and is what it says it is. Opportunities are clearly there and it's time now to move away from the rhetoric, the pre-judgement and unilateral results oriented demands. It's time to look through the myths that were generated in the course of the negotiations and to see the real trends in the industry both within and between markets. I believe that if this is done we will see on balance that the changes in Japan, in the U.S., and worldwide are positive for the automotive industry, the consumer and the environment.

Will manufacturers have problems with governments? Most likely. Problems constantly occur both within countries and between them, neither Japan or the U.S. being an exception. However, if we can keep these issues from being politicized and address them analytically and realistically in the context of an increasingly global automotive industry, I am sure we can avoid the kind of disaster both to the industry and the world trading system that was so narrowly avoided last June 28th.

Thank you very much for your attention and I will try to answer any questions you may have.