Japan's trade surplus matters
Critics of the U.S. position in the Framework talks with Japan question their central premise namely, that Japan's distinctive trading behavior harms its partners. Often such criticisms begin by pointing out that the bilateral trade imbalance between any two nations does not matter. But the bilateral imbalance between the U.S. and Japan is not what the talks seek to remedy. Rather, they are designed to address Japan's multilateral current-account surplus and structural barriers to Japan's markets, both of which matter very much to Japan's trading partners.</br></br>Japan is currently running a current-account surplus of about $130 billion, or 3% of its gross domestic product. This huge surplus depresses global demand and slows the pace of economic expansion and job creation in other nations. A reduction of $50 billion in Japan's multilateral trade surplus -- which would still leave Japan with a current-account surplus of $80 billion, or about 2% of its GDP -- would mean an additional $50 billion in demand for the goods and services of Japan's trading partners. America's share of this $50 billion might be in the $5 billion to $15 billion range, or about 100,000 to 300,000 jobs.</br></br>Can Japan do anything to reduce its current-account surplus? Luckily, yes. Increases in public spending and tax cuts can stimulate domestic demand, increase imports and reduce the trade imbalance without jeopardizing Japan's fiscal stability. Japan's own consumers and businesses, reeling from the effects of the worst economic slowdown since World War II, would be the major beneficiaries of more expansionary fiscal measures. But Japan's trading partners would share in the benefits. Fiscal expansion is a win-win strategy for Japan and the rest of the world -- and it was a major focus of the Framework talks.</br></br>Japan's current-account surplus is only one of the distinctive features of its international performance. Another is the comparatively small share of manufactured imports in total Japanese consumption. Over the past 20 years, the share of manufactured imports in total consumption has increased steadily and perceptibly in all of the advanced industrial countries, except one: Japan. Today this share is only about 6% in Japan, compared with more than 15% in the U.S. and Germany.</br></br>Japan also has a distinctively low level of intra-industry trade -- that is, trade in differentiated manufactures within a given industry. Japan does import -- but it tends not to import very much in industries in which it is a major exporter. Japan is a major exporter of automobiles, for example, but it imports very few of them. In contrast, the U.S. and the other advanced industrial countries that trade with one another tend to buy and sell in the same product lines, thereby reaping the benefits of enhanced product competition and lower prices for their consumers.