OCTOBER 1983 - VOLUME 4 - NUMBER 10
Captains of Global Trade
by John Roberts
When Japan opened its doors to the Western world in the 1860s, after centuries of isolation, its leaders were painfully aware that they knew almost nothing about a modern economy. In finance, trading, and manufacturing they were utterly outclassed, and they knew that unless they learned these things quickly they were doomed to the same fate as other Asian nations: capitulation to Western imperialism.
More and more young Japanese traveled abroad to study the contemporary world, and in the 1870s some of them were able to set up small offices handling foreign trade and exchange transactions. The most viable shops, regarded suspiciously by the old-fashioned merchants, became the trading agents and then trading departments of governmentsponsored business groups that grew rapidly into powerful conglomerates, the zaibatsu. While many factors contributed to Japan's modernization, the trading firms were at the core of the nation's phenomenal development as a world-class economic power.
After Japan's defeat in 1945, the zaibatsu concerns were partially dissolved, and the two largest trading firms were fragmented. However, Japanese industry had come to depend upon professional traders, not only for commerce but for all the intermediate services that link producers with consumers. Thus, the zaibatsu trading companies quickly regrouped into units of their former size and diversity. They are now best known as sogo shosha, general trading firms, and several others grew to similar scale.
There are more than ten thousand trading companies in Japan, but only nine are big enough to qualify as sogo shosha. The turnover of these major firms last year was about $400 billion. The largest five alone took in $270 billion, more than the national budget. The two largest are Mitsui & Co., first, and Mitsubishi & Co., second, (both of zaibatsu descent) although during several preceding years the order was reversed. Others among the first five are C. Itoh and Marubeni, descended from Osaka textile houses, and Sumitomo Corp., of zaibatsu lineage. Completing the big nine are Nissho-Iwai, Toyo Menka, Kanematsu Gosho, and Nichimen Trading, all former textile houses that got a chance at the big time when their larger rivals were temporarily shattered after the war.
The Mitsui, Mitsubishi, Marubeni, and Sumitomo sogo shosha are commercial arms of the four largest zaibatsu-line industrial groups. These groups are not "companies" in the formal sense but are more or less closely knit, each one having an annual turnover exceeding that of any other capitalist business organization in the world. Considering the solid patronage of the zaibutsu, it is not difficult to understand why these sogo shosha outperform all foreign competitors, and appear unperturbed by the storms and squalls of world business. Handling about half of Japan's imports and 60 percent of its exports, the nine firms maintain more than 1,000 offices overseas and a staff of 75,000 employees worldwide.
More than a middleman
Mitsui & Co. alone has 400 subsidiaries and affiliates worldwide, linked by a comunications network using 400,000 miles of cable plus satellites and other advanced communications media which enable them to react immediately to business opportunities or threats. It was reported in 1980 that Mitsui USA ranked fourth among exporters of American goods, after General Electric. But if the total had included American grain exported by two Mitsui affiliates, Mitsui & Co. as a whole would have been second only to Boeing's $5.5 billion in American exports that year.
In 1981, the Wall Street Journal estimated that Japanese trading firms accounted for 10 percent of all U.S. exports - not all of which is exported to Japan. The president of Mitsui & Co, takes pride in the fact that over 20 percent of the company's total turnover is "third-country" trade in which Japan is not involved. But while the common image of the sogo shosha is that of a foreign trader, the average shosha's volume of domestic trade exceeds import/export by far. Major firms are also diversified in their products, handling up to 20,000 varieties.
The sogo shosha also engage in dozens of side businesses, though these are usually supportive of commerce, their main source of income. Mitsubishi Corp. reports that 60 percent of its sales and half its profits come from steel, chemicals, and energy, a mix that is not unusual. Because trade in basic materials fluctuates with the economy, sogo shosha frequently explore non-trading lines of business such as finance securities, computer software, telecommunications, and other hightechnology fields.
One source of strength is the fact that each of the industrial groups is affiliated with a major commercial bank, which usually serves as the main bank of the group's sogo shosha. The relationship is enhanced by the fact that the sogo shosha collaborates with the banks in tradefinancing and direct investment. The credit lines of sogo shosha are so liberal that a firm's borrowings may exceed its capital fifty-fold.
In the 1920s and 30s, the early days of Japan's expansion overseas, the general trading companies were the front line of the new conquistadores, making major investments in Japanese colonies, especially Korea, China, and Formosa. And in Japan's wartime Asian empire, the Greater East Asia Coprosperity Sphere, the traders dominated the conquered areas economically. Having learned their lessons well, the trading companies were quick to reestablish their position wherever possible after the disruptions of World War II, especially in Southeast Asia.
However, in recent years, the U.S. has become the largest field for Japan's overseas direct investment. The rapid influx of capital, which has made Japan the fifth largest foreign investor in the U.S. is motivated by a desire to avoid trade friction and to alleviate Japan's huge and growing surplus in trade with the U.S. Meanwhile, indirect short-term investments have ballooned in reaction to U.S. interest-rates, which are much higher than those of Japan. Both these trends strengthen the dollar, weaken the yen, and help promote Japanese exports while blighting U.S. exports. Many Americans-corporate leaders, government officials, and union members alike-interpret this unmanageable situation as a kind of bloodless aggression by Japan on the U.S.
Why Can't We Have Sogo Shosha, Too?
Japan's sogo shosha are objects of awe, envy, and sometimes emulation not only by developing countries but also by the United States, which until recently enjoyed a trade surplus every year since 1893. During the 1950s, the U.S. exported 30 percent of the world's total manufactured exports, notes Arthur E. Klauser, senior vice president of Mitsui & Co. (USA). Since 1971, however, the trade balance has been in the red almost every year, and by 1982 the American share had dropped to less than 18 percent, below West Germany. For the past six years the U.S. recorded a merchandise trade deficit of more than $154 billion, while Japan has enjoyed a surplus of $76 billion, Klauser said.
At any rate, the American policymakers are increasingly worried. On October 1, 1982 the 97th Congress passed the "Export Trading Company Act of 1982." According to Secretary of Commerce Malcolm Baldridge, the Act established the principle that "exporting is now and for the future an integral part of our national economic policy."
Behind the decision was the fact that foreign trading companies had easier access to capital and credit, and that they were not hampered by domestic regulations that would limit their competitiveness. It was established that U.S. banks, through their holding companies, could invest in the new export trading companies, which were also permitted to enter into cooperative arrangements in exports without threat of antitrust action or retroactive suits.
The Americans were slow on the draw. Several developing countries, notably Brazil, Korea, and Taiwan, began in the nearly 1970s to set up their own trading companies to promote economic growth through exports. Malaysia and Singapore likewise have attempted to organize sogo shosha, but so far the results are negligible.
The genuine sogo shosha resulted from unique historical circumstances that enabled Japan to escape encroaching colonialism, and to seize control of its own foreign trade and finances. This was an achievement unique in Asia until South Korea adopted the zaibatsu pattern, under a military dictatorship. Whether the same or a similar transplant can take root from the enactment of laws or resolutions in a free-enterprise economy remains to be seen.
John G. Roberts is a freelance journalist and editor who has been based in Tokyo for more than twenty years. His articles have appeared in Time, Newsweek, The Far Eastern Economic Review, and The Nation. He is the author of several books on Japan and the Far East, including Mitsui: Three Centuries of Japanese Business.