Chapter IV: Examples of Current, Specific Industrial-Product Problems

At this point, it is worth reviewing some current areas of concern.

THE AUTO SITUATION

Clearly, the "hottest issue" in United States-Japan trade is in the auto sector. The following tables highlight the situation:

IMPORT AUTOMOBILE SALES BY COUNTRY OF ORIGIN AND TOTAL IMPORT SALES AS A PERCENTAGE OF TOTAL (IMPORT AND DOMESTIC) U.S. RETAIL SALES, 1970-801

1 Customs counts VW's produced at Pennsylvania FTZ as imports. They should be added to U.S. production figures.

In our visit to Japan, the Subcommittee members discussed the auto situation, at length, with ranking Japanese officials and auto company executives. We were particularly pleased to receive a late night tour of Nissan's Oppama plant south of Yokohama. The degree of automation in the plant impressively illustrated the productivity and quality of the Japanese industry.

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Congressmen Jones, Vanik, Fithian, and others inspecting robot assembly equipment at Nissan's Oppama plant, night of April 2, 1980.

On June 6, 1980, the Subcommittee on Trade issued a report entitled "Auto Situation: 1980." This 103-page report, drawing on the Members' trip to Japan, discusses the following at length:

1. The protectionist origin and growth of the postwar Japanese industry;

2. The problems confronting the U.S. auto industry from imports, particularly those from Japan;

3. The quality of U.S. autos versus Japanese vehicles;

4. The liberalization of the Japanese auto industry in recent years, including the May 15, 1980, announcement of further steps to open the Japanese market to U.S. and other foreign autos.

On June 12, 1980, the United Autoworkers (UAW) filed an escape clause/import relief petition under section 201 of the 1974 Trade Act. This 275-page petition asks the U.S. International Trade Commission

1 Subcommittee copies are exhausted. Document is available from U.S. Government Printing Office, Washington, D.C. 20402. Order number 052-070-05322-4, price $3.75.

(ITC) to find increased imports "to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing like or directly competitive articles."

To help remedy the situation, the UAW petitioned for 5 years of relief from imports, except those from Canada, by

1. Increasing the tariff on cars from 2.9 percent to 20 percent ad valorem;

2. Maintaining the recently proclaimed 25 percent tariff on trucks valued over $1,000;

3. Imposing quotas based on either the 1976 or 1975 import levels (1.71 to 1.34 million cars and 0.27 to 0.14 million trucks, respectively); and

4. Excluding from such relief imports of autos containing U.S. content (by value) of 50 percent (first year), 60 percent (second year), and 75 percent (third year and after).2

The ITC's decision and (if they find injury) relief recommendation was due December 12, 1980. On July 8, the President announced he was requesting the ITC to expedite their investigation in this case. The ITC responded by announcing an injury vote on November 10; if injury, a remedy vote on November 17, and transmittal of their report to the President on the 24th. In the event of a finding of injury, the President will have 60 calendar days 3 to decide to accept, modify, or reject the ITC's recommendation. If he modifies or rejects the modification, the Congress has 90 legislative days to veto or override his action and bring into force of law the original ITC recommendation. During the Venice economic summit, President Carter asked the Japanese delegation about troubling reports that the Japanese auto industry is planning further major capacity expansions to serve the U.S. market. On July 7, MITI issued the following response:

The Ministry of International Trade and Industry has been informed by the Japanese Auto Industry that the industry plans no significant capacity expansion over the next two or three years. Yen 643.9 billion in new investment will be made during FY 1980 but three quarters of this will be spent on retooling of existing plants to incorporate model and engineering changes, such as front wheel drive, and installation of labor-saving robots. The remaining quarter will be spent on capacity expansion of facilities for production of components, including engines, transaxles, etc. for exports under contract to the U.S. big three manufacturers.

We want to take this opportunity to stress again the enormous economic and political anguish which Japanese auto exports are creating in the United States. The unrelenting Japanese auto export drive has alienated large groups of previous supporters of an open trading system. We hope that the Japanese Government and industry understand the pressures which are building in the United States for some form of import restraint. We hope that the situation will not require formal quotas or higher tariffs, since often formal administrative or legislative quotas are unnecessarily harsh, prolonged, and inflexible. We urge the Japanese to understand the "critical mass" dangers created by the current auto trade imbalance and unemployment in the United States and to show voluntary restraint during this period of domestic restructuring.

The auto issue promises to continue to be the most visible, controversial, and "sorest" point in United States-Japan relations for at least the next half year to year.

In our report of January 1979, we clearly warned that unless Japan bought more from the United States, or placed job-producing invest

2 The Ford Motor Co. recently filed a supporting petition recommending a different form of relief. 3 If he requests additional data from the ITC, the process is extended 15 days.

ments in the United States, trade irritations and trade restraints would increase. Our comments on investment were aimed primarily at the auto industry. We deeply regret that our advice was not widely heeded. Only one company, Honda, has announced firm plans for an auto plant in the United States. Nissan is studying sites for a light truck assembly plant, and a specific plant announcement is expected soon. Several auto parts companies have announced plans for new U.S. investment. Toyota is "studying" the issue of U.S. investment. In general, the 18 months since our last report have been wasted; substantial investment by Toyota and Nissan has not occurred. The result has been an enormous loss of goodwill for Toyota and Nissan, and more seriously, a major deterioration in United States-Japan trade relations. We should note now that the Yen has appreciated, Japanese firms investing in parts and assembly operations in the United States will be in an excellent position vis-a-vis those which have not invested. Furthermore, the questions about U.S. workmanship have not been a problem for Honda and others.

In short, as friends of Japan and of trade, we regret that we have to say, "We told you so." We hope that our future recommendations and advice will be considered more seriously as advice from friends seeking to avoid conflicts.

GOVERNMENT PROCUREMENT

We estimate that the United States has several hundred million dollars worth of high technology equipment which it could sell annually to Japanese government agencies and government corporations. These sales, however, are blocked by restrictive procurement practices, and old-tie, "insider" relationships.

A classic example of the difficulty in selling to Japanese agencies is provided by Frank A. Weil and Norman D. Glick, two Department of Commerce officials who have worked extensively on TFC cases:

Railroads are a major form of transportation in Japan, and the JNR operates nearly 80 percent of the railway network. A major U.S. supplier of steel railroad wheels and axles informed the Commerce TFC staff of its inability to elicit from JNR any expression of interest in steel railroad wheels and axles manufactured to JNR specifications and offered at highly competitive prices. Based on research conducted in Japan, the U.S. firm determined that is products are priced at about half of what the JNR pays domestic suppliers. Furthermore, the U.S. manufacturer is willing to build to Japanese specifications. The firm claims, however, the JNR has not shown any interest in the company's proposal.

The company also commissioned a Japanese consulting firm to study the Japanese market. This study, based in part on interviews with officials at JNR (which accounts for 90 percent of the Japanese market for railroad equipment) confirmed that the supply of railroad wheels and axles (along with other equipment) has remained almost entirely a domestic trade since the development of Japanese sources many years ago. Sumitomo Metal Industries, which also sells wheels and axles to U.S. railroads, supplies approximately 90 percent of JNR's requirements. JNR does not employ a bidding system for its procurement; instead, it buys directly from domestic manufacturers. However, some minor purchases of imported products have been made through JNR's designated trading firms. According to one JNR source cited in the contracted study, JNR had not in the past purchased imported railroad wheels and axles and it was not likely that JNR would alter its purchasing pattern. This practice may be explained by JNR's stiff specifications for wheels and axles and the use of field inspections to ensure quality control. One JNR source concluded that it is very difficult to control from Japan the manufacturing activities of foreign manufacturers, and therefore that purchases of foreign-made wheels "[are] not likely to materialize in the near future."

Source: Weil & Glick, "Japan-Is the Market Open? A View of the Japanese Market Drawn From U.S. Corporate Experience.' Law and Policy In International Business, vol. 11, No. 3, 1979, pp. 888-889. Footnotes omitted.

NIPPON TELEPHONE AND TELEGRAPH

The most controversial government procurement case involves NTT-Japan's equivalent of A.T. & T. Unlike A.T. & T., however, NTT is a quasi-public corporation, whose budget is approved by the Diet and which is under the nominal control of the Ministry of Post and Telecommunications.

NTT purchases some $2.9 billion worth of telecommunications equipment annually, including many items in which the United States is a world leader and highly competitive. Rather than procuring such equipment from foreign sources, however, NTT insists on reinventing the wheel and designing and buying the equipment from a closed network of Japanese suppliers. NTT's procurement system is very closed.

There are major Japanese firms which are not members of the NTT "family" and therefore have never sold anything to the huge utility. In the case of its major suppliers, there appears to be something of an inter-locking directorate, since many directors of the supplying electronics firms were former officers of NTT.

By developing all of its own equipment in a closed market, NTT serves as a mechanism of advancing the technology and quality of Japans semiconductor, computer, and telecommunications companies. Growing under the "hothouse" protection of NTT procurement practices, these various companies are moving into the position of being major exporters of telecommunications equipment. For example, Japan is now shipping much more telecommunications equipment to the United States than we are exporting to her. This, despite the fact that in certain large ticket items, we should be exporting to Japan and should have a positive balance of trade. The following data from the U.S. ITC details this increasingly serious situation:

BALANCE OF TRADE WITH JAPAN

Telephone Terminal and Switching Equipment

SUMMARY

• The overall balance of trade with Japan for all apparatus used in the U.S. telephone system is estimated to be considerably worse than the balance of trade figure for just telephone terminal and switching equipment given below. The balance of trade with Japan for telephone terminal and switching equipment alone has been and is negative.

• The balance of trade with Japan is increasingly negative. In 1976 imports exceeded exports by $25.7 million. In 1979, the balance of trade was a negative $77 million.

Compared to the first half of 1979, the negative balance of trade with Japan in the first half of 1980 has increased (become more negative) by 60%.

• In the first half of 1980, the ratio of imports to exports (trade with Japan only) took a significant jump. In the first half of 1980, the ratio was 26.6 to 1. Between 1976 and 1979, imports divided by exports had ratios of from 14.8 to 1 to 19.4 to 1.

4 The data do not include the value of telephone transmission equipment such as radio lines, satellite antennas, etc.