In the early 1980s, the economy of Japan recovered from WWII and its exports underwent substantial growth as well. In comparison, the economy of US was in the status of downturn. The overall current account balance of the United States has turned into deficit since 1978 and it increased rapidly to a great extent to $ 145 billion in 1985. On one hand, the increase of interest rates implemented by the Federal Reserve for the purpose of countering double-digit inflation widened up the gap. Moreover, the US also suffered from strong dollar, enabling their domestic exports to be less competitive. On the other hand, the U.S. began to pay less attention to the development of Japan. As a consequence, the US deficit with Japan increased to $58 billion in 1986, which accounted for about one-third of the total the U.S. overall deficit (Flath, 1998). It was the booming exports that imposed a severe threat to the development and labour employment in the United States.
The United States has taken the initiative to change its trade policy with Japan gradually, redirecting the “free trade” policy, which was originally loose, in the direction of restricted trade. Moreover, the administration led by Ronald Regan imposed a wide range of trade restrictions in the 1980s. In the meanwhile, there was no WTO restriction which could constrain the unilateral move and as a result, the US, which was known as Japan’s major oversea trade partner, could exert great pressure on Japan (The Economist, 2017). The US took a series of measures including voluntary export restrictions (VER) and sanctions under “Super 301 Investigation”, which accordingly induced a large-scale transition in the auto industry of Japan to the United States, as well as the liberalisation of Japan import.
Furthermore, the Japanese Yen also went through a massive revaluation under the ‘Plaza Accord’ which blunted Japan’s competitiveness. By looking back at that time, it could be clearly observed that the policy maker failed to perceive the trade deficits as an inherent issue, but supposed that the gap could be closed by the adoption of policy to certain extent. Unfortunately, it did not achieve success at last. The Voluntary Export Restraints (VER) enabled the Japanese government to make the promise to curb its exports in cars and auto sectors with the aim of squashing the trade deficit and protecting the US workers with the intention of maintaining employment opportunities. However, the VER made great contribution to the increase existing in the employment in the U.S., but it failed to reduce the trade deficit (Urata, 2019). Hufbauer et al. came to the conclusion that the prices of imported and domestic auto increased by 11% and 4.4%, respectively. On the whole, the producers obtained a profit of about $2.6 billion, while the consumers lost approximately an amount of $5.8 billion. Despite the fact that the VER induced around 55,000 jobs in the U.S., it still imposed a substantial cost on the U.S. economy. It was acknowledged that the trade deficit with Japan still remained stubbornly high during that period (1986). Japan kept running current-account surpluses, but these were more connected with macroeconomic imbalances in comparison with trade practises. ⠀
The end of the conflict resulted from the mutual agreement established between US and Japan, which was mainly due to the compromises made by Japan, and bilateral trade cooperation have been calm since then. Essentially, with regard to the future frictions, the accommodation must take place, and both the two nations must create and follow a series of agreements–a mechanism which can control trade and expenditure efficiently. For the purpose of achieving the ideal outcome, a more fractious process could be experienced, considering the level of accountability and flexibility on both sides. It is indicated by the lessons learned from Japan that the limitation over the access of exports fails to narrow the trade deficit, and it fails to address the underlying economic problems contributing to the imbalance.
Source: Trading Economics (2020)
References/ Further Reading:
The Economist: Back to the 1980s Donald Trump’s review of trade deficits is a blast from the past. (2017).[online] Available at: https://www.economist.com/finance-and-economics/2017/04/06/donald-trumps-review-of-trade-deficits-is-a-blast-from-the-past.
Flath, D. (1998). A perspective on Japanese trade policy and Japan-US trade friction.
Urata, S. (2019). US–Japan Trade Frictions: The Past, the Present, and Implications for the US–China Trade War. Asian Economic Policy Review, 15(1), pp.141–159. doi:10.1111/aepr.12279.