The Multinational Monitor

OCTOBER 1983 - VOLUME 4 - NUMBER 10


C O M M E N T A R Y

The Pacific Basin

Japanese multinationals have been the main beneficiaries of the area's economic growth

by Tim Shorrock

Despite its status as a close U.S. ally, Japan projects a rather ambiguous image in the U.S. To many businessmen, labor leaders, and members of Congress, Japanese trade and industrial policies are responsible for the decline of U.S. basic industries. To the Pentagon, Japan's reluctance to become a military power weakens the U.S. global defense system. Many view Japanese computers and other high technology products as threats to national security. Yet at the same time, the Japanese model of labor relations is widely promoted as a solution to the ills of the American economy.

While all these conflicting attitudes contain some insight into the Japanese economy, they do not offer a satisfactory understanding of the particular manner in which Japan has developed into an economic power, or the peculiarities of the U.S.-Japan alliance.

The key to this understanding lies in the respective roles of Japan and the U.S. in the Pacific Basin economy - and in the postwar U.S. strategy of building Japan as a regional industrial power, which has severely weakened the manufacturing sector of the U.S. economy.

The Pacific Basin, encompassing the west coast of the U.S., North and Southeast Asia, Australia,. New Zealand, and, to a lesser extent, the Pacific Islands and the Pacific coasts of Latin and South America, -has been the fastest growing area of the world economy for the last half century. Last year, the $121 billion of U.S. trade across the Pacific surpassed trade across the Atlantic for the first time, making the Pacific countries the most important U.S. trading partners.

However, the patterns of economic developments and trade within the region have closely followed the stages of Japanese economic expansion, and have therefore been highly advantageous to Japanese industry.

Under the protective umbrella of the U.S.-Japan Security Treaty - which guarantees the use of Japan for American military bases and the defense of Japan by U.S. forces - Japanese multinational corporations and banks have extended their capital, technology, and trading skills to every country in Asia. This process has led to unprecedented economic growth in countries like South Korea and Singapore. And for Japan, it has created a mechanism allowing companies to transfer low-growth industries (such as shoes and chemicals) overseas, and move into high growth industries (steel, advanced electronics, ceramics, etc.) at home.

The integration and growth of the Pacific Basin economy has been a tremendous source of profits for U.S. corporations that supply oil, food, raw materials, engineering services, computers, and military technology, and for banks that supply capital and credits. But it has dealt a serious blow to manufacturing in the U.S., which has been left out of the cycle of growth. As Asian countries - supported by loans from mostly U.S. banks - have moved into steel, autos, rubber, shoes, garments, and electronics, these labor-intensive industries in the U.S. have either been abandoned or relocated to places like Mexico, leading to serious unemployment and economic dislocation in the U.S.

The catastrophic effect of this decline on American workers has sparked a national debate on industrial policy and reindustrialization and has caused serious rifts in U.S.-Japanese relations.

But in many ways, this conflict is of our own making. The postwar strategy of the U.S. in Asia centered around building Japan as an economic giant in order to create a capitalist, anti-communist region surrounding the Soviet Union and China. The strategy has worked - but the U.S. economy has been weakened by this development.

Pacific integration in the postwar period

In the initial stages of postwar economic growth in Japan, development was based primarily on providing goods for Japan's domestic market. As partners with the U.S., Japanese companies were guaranteed a safe climate for investment and expansion throughout Asia, import sources for raw materials, and outlets for surplus products in the U.S.

From the mid-1960s onward, Japanese capital began to expand into Asia, building an infrastructure that by the 1970s posed serious threat to U.S. economic interests. There were four important developments behind this expansion:

  • the growth of markets in Southeast Asia during and after the Vietnam War. The war itself opened up a large market for Japanese goods (such as motor vehicles and radios) in Southeast Asia, while the postwar consolidation of the Association of Southeast Asian Nations (ASEAN) spurred further increase in trade (see article, p. 11).

  • changes in economic policies in South Korea and Taiwan. In the early 1960s, these countries opened their economies to foreign capital by embarking on a program of export-led industrialization. Most of the initial capital investments came for Japanese companies seeking low-wage labor to produce such products as garments, toys, and electronics. By the end of the 1960s, Japan had replaced the U.S. as the leading investor in and trader with South Korea.

  • public outcry against pollution in Japan caused by the concentration of giant industrial complexes along the Japanese coast was a major influence in the export of Japanese capital. Starting in the early 1970s, Japanese companies began to export the dirtiest phase of industrialization to offshore locations. The two most favored spots were South Korea and the Philippines.

  • The oil crisis of 1973. Since Japan is almost completely dependent on Middle East oil for its energy needs, the OPEC oil embargo came as a shock - and led to massive increases in Japanese investments in Indonesia, Malaysia, the Philippines, and other Asian countries rich in energy resources. Another important factor in these decisions was the stranglehold major oil companies held on the Japanese economy: as late as 1976 over 70 percent of the country's oil was purchased from Exxon Corporation, Caltex, and five other foreign oil companies.

By the end of the 1960s, Japan had emerged as a major economic and political power in Asia. The growing importance of Japan was publicly recognized by the U.S. in 1969, when President Nixon and Prime Minister Sato signed a joint communiqué revising the U.S.-Japan Security Treaty to give Japan a much more direct role in defending the region. This communiqué marked an important shift in the power structure of Asia and is still the basis for U.S. and Japanese policies in the Pacific.

One clause returned the island of Okinawa - then, as now, a key U.S. military base - to Japan, making Japan an active ally in the U.S. military strategy in the Far East. A second clause stated that "the security of the Republic of Korea is essential to Japan's own security." This recognized South Korea, now closely integrated with Japan economically, as within the Japanese sphere of influence, and committed the U.S. to protect South Korea for the benefit of Japanese multinationals.

But as Japan and the U.S. were growing closer politically, the deepening Japanese economic penetration of Asia began to cause serious worries among American businessmen. A 1971 study by the Overseas Development Council, a Washington-based "think tank," for example, warned that Japan's "trade and aid in the [Pacific] Basin promise to increase five-fold in the 1970s, and its investment ten-fold. .. These trends, if permitted to continue unchecked, could lead to Japanese economic domination of the Asian-Pacific, to the long-run detriment of the Basin countries." That same year, acting under pressures from American textile and electronic interests, President Nixon took strong projectionist measures against Japanese imports.

But Nikon's measures did little to stem the flow of Japanese goods and investments. Gradually the U.S. trade deficit with Japan increased and the relative economic strength of the U.S. in Asia declined. By the late 1970s Japan was the preeminent economic power in Asia. While many of its labor-intensive industries had been transferred to South Korea or the Philippines, new industries like machine tools and electronics (whose primary markets were in these same countries) grew stronger. U.S. suppliers of these products, however, were left out, of the growth cycle, rendering many of them uncompetitive.

Then in 1979 and 1980 the full strength of the global recession hit. To compensate, many American corporations began to consolidate their operations by liquidating the least cost-effective sectors. Wave after wave of plant closures swept the country, driving unemployment up to record postwar levels. Meanwhile, Japanese exports continued to flow into the country, fueling criticisms of Japan.

The Pacific Basin; differing strategies

For corporate and government leaders in both countries, the growing trade conflicts mixed with continued turmoil in the Third World, have served as grounds for a reevaluation of the political and economic structure of the Pacific Basin.

Since the mid-1970s, Japanese officials and business groups have been pushing the idea of a "Pacific Basin Community (similar to the European Economic Community) that would alleviate economic tensions by creating a horizontal division of labor and a framework to integrate industrial production within the region.

Under this plan, the Japanese proposed a community that would espouse free trade and capital transfers. A government report stated that under a form of regional industrial policy, Asian-Pacific countries would "conduct periodic joint reviews of their changing industrial pattern to enable the richer nations - particularly the United States and Japan - to restructure their economics and to help the developing nations to modernize their economies." Thus Japan would be guaranteed supplies of food and raw materials, access to markets, and, through technology transfers to the Third World, would help alleviate conflict between the North and South.

The strong Japanese pitch for a Pacific community met equally strong resistance in some quarters in Asia, where the proposal was viewed as a warmed-over version of Japan's wartime colonial empire. But it sparked some enthusiasm in the U.S., where a number of bankers, businessmen, academics, and politicians-particularly those connected with David Rockefeller's Trilateral Commission-lobbied for the Pacific Basin community in Congress.

But the U.S. proposals for Pacific integration have differed with Japan in one major respect-they stress the relationship of the Pacific to U.S. global interests, as opposed to Japan, which sees Asia and the Pacific as the primary areas for Japanese economic activity.

In a 1980 congressional report, John Glenn-one of the strongest advocates of the Pacific community idea and a leading candidate for president in 1984-wrote that a Pacific community would be a "useful vehicle for the revitalization of the overall U.S. economic role in the region."

But with the election of the Reagan administration in Washington and the Nakasone government in Tokyo, the Trilateral Commission view of cooperation has been pushed aside in favor of completely integrating Japan into U.S. global strategic planning. For Reagan this has meant emphasizing strategic alliances, deemphasizing regional cooperation, and favoring policies that accelerate the economic shift in the U.S. away from manufacturing and towards services, military technology, and computers. The administration has avoided major clashes with Japan over its industrial policies, for example, turning down a request by Houdaille Industries, a Florida machine tool company, for protection against what Houdaille termed a "government-backed industry in Japan." It has also put the lid on critics of Japanese policies like Undersecretary of Commerce Lionel Olmer, the former vice president of Motorola.

In return, Nakasone has agreed to increase Japan's contributions to military and economic security in Asia (such as its $4 billion loan to South Korea earlier this year and a multibillion dollar five year military buildup) and is going along with U.S. demands for more access to Japanese markets in telecommunications and agricultural goods. For corporations in both countries, the alliance means close ties between U.S. and Japanese firms in a number of important sectors, including electronics, automobiles, oil, nuclear power, and weapons technology.

But just as Reaganomics has its mean side, the Reagan foreign policy towards Japan might be termed collaboration-with a vengeance. Reagan and his business supporters are willing to grant Japan an edge in manufacturing. But they have also let Japan know-in no uncertain terms-that the U.S. will not allow Japan to gain superiority in industries considered essential to national security, including computers, military production, and semiconductors.

Congress is now considering bills submitted by members of both parties that will waive anti-trust regulations so firms can team up in research and development. This is expected to especially benefit the computer industry, which is joining forces with the Pentagon to beat Japan in the race to build the next generation of computers. The administration has twice invoked a special national security law to ban Japanese participation in defense industries, the only times this law has ever been used. Protectionist measures have also been taken against imports of Japanese specialty steel and motorcycles, while discussions about industrial policy have been initiated by administration negotiators.

These moves have caused resentment in Tokyo. The Japanese government has refused to accept criticism of its industrial policies, arguing that U.S. military spending serves the same function as Japan's controversial "targeting." Trade negotiations have been contentious. Constant harping from American companies led top Japanese official Amaya to characterize American critics- Houdaille Industries and Motorola in this case- as "Stalinist in nature."

But the Japanese ruling circles also know that the U.S. is their biggest overseas market-and that their partner ship with the U.S. military in the region guarantees their continued prosperity. Until some drastic shift in world politics occurs, they will remain tied to U.S. interests.

For many people in Japan and the U.S., however, the advantages of the Pacific Basin economy are less clear. As detailed in previous issues of this magazine, the shift towards services and high technology in the U.S. economy has not and will not raise the level of employment. And while Japanese investments in the U.S. are providing some jobs, the introduction of Japanese management techniques is leading toward a weaker labor movement. For the Japanese, two decades of rapid economic growth have caused serious ecological damage, while worker cooperation has been enforced by company unions that put the profitability of the firm ahead of any other concerns.

But citizen and worker demands usually conflict with the need for corporate expansion. What Reagan, Nakasone, and their big business backers seem to have in mind is a high tech world, organized by a combination of Japanese management and U.S. and Japanese technology, under U.S. military leadership. "Together, the U.S. and Japan can make an enormous contribution to the economic dynamism and technological progress needed for economic growth and development throughout the world," President Reagan declared in a speech last February.

If the results in the Pacific Basin are any indication, such a combination can only mean disaster for workers in basic industries in the U.S., increased marginalization of workers in both the U.S. and Japan, continued impoverishment for the Third World, and an increasing drive towards militarization. Clearly the precepts behind Pacific integration and U.S.-Japan cooperation need to be challenged.


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