Chapter 7. International Foreign Policy and Relations International Competitiveness I. Foreign Policy--Introduction Today foreign policy can raise or lower the cost of your home mortgage, create a new job or cause you to lose the one you’ve got.--------- Carnegie Foundation Report 1992 The country's honor must be upheld at home and abroad. — Theodore Roosevelt For the most part of America’s two hundred plus years, the United States had a two ocean policy of isolationism, that is the great width of both the Atlantic and Pacific protected us from the dangers of an inflamed Europe or Asia. The two great wars of the twentieth century have proven beyond a doubt that such isolationism is both infeasible and dangerous. The United States is not only the largest economic power on the globe, the strongest military power, but also the world’s political and cultural leader. With foreign trade increasing twenty fold since 1970 to over $5 trillion dollars in 1994, the global economy is being more and more interwoven. The world is shrinking in all ways. The Gulf War was the first ‘live’ war, televised as it was by CNN. Communications is almost simultaneous throughout the world. One can be half way across the world, at virtually any part of the world, within one day, two days at the outside. The United States has no choice but to be an integral member of the world community. Our foreign policy and diplomatic endeavors must reflect this. II. Foreign Policy--Problem Every time Europe looks across the Atlantic to see the American Eagle, it observes only the rear end of an ostrich. — H. G. Wells Why is it, whenever a group of internationalists get together, they always decide that Uncle Sam must be the goat? — Bertrand H. Snell The U.S. must not retreat into isolationism or protectionism. Continued US leadership in the world is vital, both for world peace and to protect American interests. Washington must be willing to mobilize other nations for collective action. Few great goals can be reached without America, but American can no longer reach many of them alone. The notion of an altruistic UN acting for the good of humanity is romantic, it is an unwieldy bureaucracy and many of its member nations do not share U.S. values. However, the U.S. cannot and should not shoulder the burden of promoting peace and mediating disputes alone but should be able to act multilaterally. The UN cannot get involved in every internal conflict or human disaster. The U.S. must insist on respect for national sovereignty, or risk unwanted interference in its own internal affairs. III. Foreign Policy--Recommendations The purpose of foreign policy is not to provide an outlet for our own sentiments of hope or indignation; it is to shape real events in a real world. — John Fitzgerald Kennedy I would rather see the United States respected than loved by other nations. — Henry Cabot Lodge The role of the United States should be to lead the world. Our country has the wisdom, the political will, the military capability, and the economic strength to perform that role better than any other. ---------Senator Dick Lugar of Indiana The basis of our Foreign Policy should be to: •Reward and Protect our Friends while Punishing our enemies. •Offer incentives to create changes of behavior. •Protection, maintenance, and encouragement of democracy and the capitalist system around the world; Spread Gospel of democracy and capitalism. •Use Economic incentives and power to punish and reward. •Guarantee sovereignty of Nations. •Greater controls of dollars and resources transferred. •Greater foreign bases (military and commercial). • Reciprocal trade agreements. •Guarantees the freedom of a nation’s populace to decide on its own form of government and to run it in the way it seems fit. •Territorial Integrity. •Inviolability of diplomatic missions •Non first use of nuclear, chemical, and biological weapons •Immunity of civilian aircraft and ships •An international obligation to help refugees •Unacceptability of officially sanctioned racial discrimination •Menu of human rights as described in the Universal Declaration of 1948 reinforced in the Helsinki Act of 1975. •The U.S. will not tolerate external interference by anyone in any nation’s internal affairs (including the U.S.) and will use any means necessary (including military force) to prohibit and remove such interferences. •The U.S. will use its immense economic, agricultural, and technological abilities to pursue its policies towards the global scene. •The U.S. guarantees international waterways and transport points and will act to keep such key points open at all such times. •The U.S. will actively seek joint solutions to common problems of hunger, health, energy, pollution, etc. •The U.S. reserves the right to resort to either or both Covert and overt aid when the situation merits. • The U.S. openly disavows and condemns terrorism. The only way to reduce terrorism is to indicate that the goals of terrorists will in no way be yielded. Every citizen must be prepared to risk himself in the upholding of such policy.The U.S. must be respected by all potential adversaries. Respected and trusted by all nations. Not necessarily liked by all, but respected by all nations. Our recommendations on Human Rights Policy are as follows: •International Law and Treaty Obligations should be wholly supportive of human rights initiatives •Human rights must be a political component of American foreign policy, not a humanitarian program •Human rights has nothing to do with our innocence or guilt as a civilization--it has all to do with our survival. •New nations must be made to understand that our commitment to them depends on their ceasing to be agents of the totalitarian attack on democracy. IV. International Competitiveness Free trade is beneficial but to be fair it must be practiced by all trading partners. The U.S. must accept that other countries are not playing by the rules and that US companies and workers are paying the price. The U.S. must be more aggressive about opening closed foreign markets. The U.S. should not be afraid to take actions on its own without other multilateral partners. If foreign governments do not allow U.S. products into their domestic markets then these same products from foreign countries should not be allowed into the U.S. The price of doing nothing is just too much: U.S. exports now generate one in six U.S. jobs, up from one in eight as recently as 986. In just ten years 1970-1980, trade as a percentage of GNP doubled with increases every year since. Government must help U.S. business become more competitive internationally by promoting R&D, retaliating against unfair traders and improving the training of workers. It must actively develop infrastructure necessary to remain competitive in international trade. The Council of Competitiveness in conjunction with Harvard Business School examined declining U.S. competitiveness. The key recommendations were: government should: •allow institutions to hold equity and debt as well as big stakes. •modify rules so that earnings reports reflect true performance. •expand public disclosure, remove restrictions on board membership •provide stable macroeconomic policy. corporations should: •seek long-term investors and give them a voice in governance. •avoid anti-takeover devices that insulate management. •name shareholders, suppliers, and other outsiders as directors. •link incentive compensation to competitive position. •avoid unrelated diversification. •better evaluate investment in intangibles, such as training. investors should: •take longer and larger stakes in fewer companies. •learn more about holdings. •seek active, constructive discussions with management. •push for changes in corporate policies, such as accounting rules. We heartily concur and believe these changes are an essential first step in resurrecting American worldwide competitiveness. Export controls need to be eliminated. Fully 40 percent of America’s exports--from chemicals to computer software-- are still subject to these relics of the Cold War, which regulate and restrict any products or processes that could conceivably confer military advantage. All except classified items for national defense should be removed from export controls. These costs U.S. businesses an estimated $24 billion annually and close to a million jobs. We would encourage that NAFTA be extended throughout the entire Western Hemisphere, from the Arctic to the Antarctic. Free movement of labor, goods, and capital all throughout the hemisphere, uniting our hemisphere into the world’s largest free market. In addition, a Pacific Rim ‘NAFTA’ should be encouraged, incorporating the Asian nations into a transpacific free trade zone. How to construct a fair playing field, an example: the U.S. versus Japan The aim of U.S. efforts to reform Japanese industrial policy is to achieve free trade flows, equal market access, and equal national treatment for competitive American firms in Japan in high tech industries. The problem with the U.S. policy approach is that it is generally free trade oriented in a world that is not. The Japanese have often manipulated the rules of international trade to their advantage so as to extract one-sided, long-term benefits for itself. It has, for example, consistently stopped foreign companies with new technologies from attempting to gain market entry and a sizable market share in Japan until Japanese companies have had time to develop competitive products. By contrast, the U.S. mostly lets the market shape trade with Japan. The lack of internationalization of the Japanese economy cannot be attributed to national character, cultural traits or to laziness of the American worker (Taiwan, Hong Kong, and South Korea, not exactly known for their lazy workers, have failed to successfully penetrate the Japanese market and all three have a sizable trade deficit with Japan as well), but to government policy, a policy of import substitution and export-led growth that is appropriate for a third world country but not for the world’s second largest economy. Over the past fifteen years, Japan has made many trade promises to the United States on opening up its market; during that same period U.S. trade deficit with Japan has risen from $7.6 billion to the its current record levels; Japanese surface pronouncements do not materialize. Japan believes in the erection of both direct and indirect barriers to protect the less efficient or ‘infant’ segments of their industries from foreign competition, while at the same time inundating foreign markets with products where free trade prevails. When called upon to change, they have managed for the most part to deflect these changes. Carefully designed and targeted trade agreements, like the Section 301, should be used to pry open markets. Western nations must become more aggressive in correcting the inequities in the rules by which the Japanese operate internationally. We must force Japan to play the game not according to their rules but according to the rules followed by other players, world trade rules. In 1984, U.S. semiconductor firms enjoyed a 55% share of Europe’s market while the Japanese had less than 11%; meanwhile in Japan these same internationally competitive and proficient firms could not garner more than a 12% share; the same picture holds true today (although by 1993 the 20% targeted market share is approaching reality). Private firms cannot compete against public or quasi-public firms (governments). Heavily subsidized industries should be subject to countervailing duties equivalent to cost plus normal profits plus transportation fees. Goods should not be sold in the U.S. for less than what they are sold for in the home market. To counter that adversarial trade policy (to be fair other nations and not merely the Japanese maintain such a policy), polite begging will not gain much. Use of the Super 301 Clause was a good start, accomplished considerable opening of many other countries’ trade during 1989-1992; the resurrection of that weapon in 1994 is a good start. Much of the needed fair trade weaponry is already in place. However, a more aggressive trade policy needs to be addressed, starting with the concept of reciprocity of trade treatment. Such heavy bargaining, though, should be used to pry open markets for U.S. industries and to curb unfair competition, not to protect U.S. producers at home. The following are our ideas on how to better enforce free trade and equal access in a global economy: 1. Imports should be restricted not through quotas but through tariffs which would keep open consumer choices, generate revenues for the federal government, and undercut any foreign government subsidies or cross-subsidization efforts. This is the tactic currently proposed by the U.S. and Europe in regards to the removal of agricultural subsidies. 2. Reciprocity should be used whenever possible. The U.S. should adopt similar measures to that of the Japanese. For example if the Japanese require every car imported to Japan to be inspected at a final cost of $1500 and months of waiting, then every Japanese car, before it can enter the U.S., must be inspected thoroughly with equal rigor and timeliness, like the French did at Poitiers with Japanese VCRs. Either customs can work the rules rigorously, or fewer customs agents would be available. If the Japanese insist that all American cigarettes should be sold through the state tobacco monopoly and that any advertising must be in English, then the U.S. could reciprocate by requiring Japanese automobile advertising in the U.S. to be only in Japanese and the marketing of such vehicles through a cumbersome bureaucratic process. The United States would duplicate any policies put in place in the rest of the world: Any subsidy to Airbus will be matched by an equivalent subsidy to American airframe manufacturing industry or appropriate countervailing duties. Any delays in permitting American devices used abroad, such as Motorola experienced in Japan with its cellular telephones, will be matched with equivalent delays for Japanese high-tech equipment in the U.S. This would affect the Japanese most adversely and bring home to them the need for comparable treatment. This is policy the Japanese understand and will react to (as noted by their retreats and agreements at Poitiers with the French in VCRs and in England/Europe with Automobiles). 3. Encourage plants to be built in the U.S. or in a U.S. associated free trade area. Value added of these plants must approach a significant North American value added amount (the higher the NAFTA value added, the higher the amount of exports can be shipped)(NAFTA agreements are currently at 60%; a much higher value added such as 75% or even higher would encourage local production to a greater extent). Management should be local (American citizens or residents) and would count towards that value added figure. Transplant auto assembly plants should be encouraged to utilize American based, owned, and managed suppliers. 4. Stop co-production of defense items in Japan. When the Japanese buy planes and ships from the U.S., it costs them about a third or less of what it would cost them if they built their own. Aviation and space technology should also be purchased from the United States; no licensing of defense technology should be transferred. For an example, take the FSX fighter from Mitsubishi. This project was originally projected to cost 1.2 billion dollars, it has already doubled and could approach 5 billion, at a price tag of nearly $70 million apiece, nearly three times what could buy them for from the U.S, two years behind schedule for 1999 if even then. Japanese get 60%, American manufacturers 40%. The Japanese lack an appropriate technology base. National prestige is riding on its success. Requiring defense items to be produced in the U.S. would lower the trade deficit, lessen technology transfer fears, and reduce uncertainties in East Asia regarding resurgent Japanese militarism. In addition, Japan should continue to subsidize American forces stationed in Japan and East Asia by paying their way; this in a fashion would help towards overcoming the Japanese defense ‘free-rider’ position whereupon the U.S. is paying between 4 and 5% of its GNP in defense spending while the Japanese is expensing only 1%. Japanese defensive spending (beyond its payments to the U.S.) should not significantly exceed the 1% figure. By Japan directly paying for U.S. military expenses in Japan and East Asia, they will impact both trade and budget deficits as well as beginning to pay more of its true share of defense spending without increasing Japanese military strength and troubling its neighbors. 5. Approximately 200 Japanese work at the United States’ National Institute of Health compared to no Americans at Japan’s equivalent. The United States should balance these figures by allowing only as many Japanese here as there are Americans abroad, that is implementing a reciprocal personnel policy. 6. Get tough and stay tough. Toughness is the only factor the Japanese understand. Renew SII talks with special effort on non-tariff barriers. Prices of Japanese products sold in the U.S. are generally quite close to their retail prices at home while the majority of U.S. products sold in Japan carry price tags with a premium, on average, of nearly 65%. Rand researcher Loren Yager found Japanese VCRs retail for $424 in Japan and $430 in the U.S.; Japanese tires retail for $66 in both countries while a U.S. tire cost 40% more in Japan than in the U.S. ($67 versus $47). A $170 U.S. calculator cost Japanese consumers 67% more and a $449 U.S. laster printer was priced at $825 in Japan (Business Week February 17, 1992 page 28). The clear implication, notes Yager, is that non-tariff barriers exert strong upward pressure on the Japanese prices of foreign products, severely limiting the ability of imports to penetrate Japanese markets. One possible tactic is to inhibit such price differences through selective reciprocity practices. If an U.S. tire in Japan has a 40% premium at the retail level, countervailing duties should be imposed to make a Japanese-made tire in the U.S. sell at a likewise 40% premium above the regular retail level. In general the rule would be Japanese made products can only sell in the U.S. at whatever premium a like U.S. product sells in Japan. This would be the lever to reduce such price differentials and non-tariff barriers. 7. Be especially tough on Intellectual Property Rights overseas (especially in Japan). Use the Super 301 Clause to force additional protection for U.S. firms overseas. In 1960, Texas Instruments applied for a patent on its integrated circuit, in 1989 the Japanese patent was finally granted. The Japanese patent office protects its domestic industry by delaying foreign patent applications or by making it easy for domestic firms to copy the idea. Firm after firm in the U.S. has had similar horror stories to tell about Japanese patent practices, or lack of it. Reciprocity on Japanese patent applications in the U.S. should clarify this problem. 8. Technology Transfer must be a two way street. Currently, technology transfer from the U.S. to Japan is on the order of 4:1. Technology in the U.S. is readily available through universities, government research labs, and non-profit institutions. It is in the truest sense a public good. Technology in Japan is largely corporate based and secretive. If technology transfer cannot be equalized then the ultimate step would be to forbid any more technology to be purchased or licensed from the U.S. to Japan unless equal, easy access is afforded U.S. firms. Japan must voluntarily (and as soon as possible) indicate the following steps will be taken and then proceed without hesitation to do so. Otherwise, Japan will be in danger of initiating a full scale world trade world by her refusal to accord equal access to her markets and her refusal to engage in fair trade practices. It is not only the U.S. whose patience is wearing thin, Europe and many East Asian countries also have tired of constantly being told to work harder, be more patient, need more time, in order to penetrate the Japanese market. If Japan wants to be a world leader, have a seat on the Permanent Council in the United Nations, and be seen as an international leader of more than merely economic in dimension, she must accept the responsibilities that go with that role. 1) Discontinue the cartelization of industries which creates a handful of large organizations able to overwhelm foreign competition by pricing predation. Create true anti-monopoly legislation with teeth; provide true enforcement powers to the Japanese Fair Trade Commission and allow it to enforce existing statutes on the books. In Japan, the typical practice is that when the market is saturated, cartels are formed (as in textiles, steel and shipbuilding) to work out acceptable formulas for reducing overall production. Government often subsidizes the destruction of a certain percentage of a company’s facilities so that only the most modern and competitive facilities will remain. Consequently serious dislocations are avoided. 2) End all subsidies from Japanese government, including disguised government allowances in the form of virtually interest free loans paid back only when a company shows a profit. 3) Japan must discontinue targeting. Targeting refers to coordinated government actions that direct productive resources to give domestic producers in selected industries a competitive advantage (U.S. International Trade Commission 1983, page 4). Targeting support is implicitly biased against imports or towards exports in the favored industry; favored industries benefit; those not favored are hurt (Patrick 1989). Targeting results in a quasi-governmental unit attacking with all the staying power and resources that a sovereign state has. Competition within Japan may be very fierce; it takes place within the framework of the government and sectoral associations which define the scope and nature of activity and permit and even encourage some cooperation between firms in R&D, setting standards, market segmentation, etc. Managed competition brings benefits for the entire sector but at the expense of the consumer, who must pay higher than ordinary prices. 4)Prosecute domestic firms illegally appropriating foreign technology. This includes any violation of licensing agreements, lifting of foreign patents, outright theft of technology from foreign firms, and immense patent changes within Japan itself. At the present time, the Japanese government winks at, even encourages, such unethical behavior. 5) Stop dumping. Prices sold abroad cannot be lower than that found in Japan (cross subsidization effect). The Japanese Fair Trade Commission should be armed with sufficient legal sanctions and power to enforce such mandates. Dumping violations or theft of trade secrets must be made a criminal offense, punishable with fines of millions of dollars, and the prohibition of a firm from doing business in the U.S. for a specified period of time (1-5 years). Tough talk won’t do it. Tough action will get the message through clearly and quickly. 6). Make sharing of proprietary technology by Japanese firms illegal or at least share this technology with all companies in the free trade world. The flow of information and technology coming from the support of research in the U.S. is not nearly matched by a reverse flow from Japan. At present it is not likely to be since most of the R&D comes from companies, not universities or public grants. 7) Ban agricultural subsidies and tariffs on raw materials, including beef, pork, dairy products, wheat, rice, potatoes, sugar, and fruit, which have been estimated to cost consumers $16 billion extra at the retail level. In other words, get away from the “everything must be made in Japan” kick. Instead of buying processed foods or products, the Japanese insist on buying raw materials and doing the processing in Japan: logs were purchased from Sumatra or Alaska instead of lumber products; oil, not gasoline, was bought from Singapore and Brunei; instead of buying processed beef or agricultural products, the Japanese bought cattle ranches in the U.S. and imported the carcasses to Japan to have the processing done there. This must stop. 8) Internationalize capital markets. Allow outside financial institutions to establish branches and have equal access to capital markets and opportunities. At same time consumers should have access to better rates. U.S. firms can easily become take over candidates (or acquired by Japanese firms) but the acquisition of Japanese companies is difficult, if not impossible, due to business practices, interlocking ownership, and resistance to sell. Unless a reciprocal arrangement can be found, this one-sided deal must stop. 9) Repeal the large-store retail law totally. This law has long been a barrier to the establishment of large retailers. It regulates store hours, product mix, and general retail operations, requires companies to obtain the consent of local retailers before opening a store of more than 1500 square meters, and allows small neighborhood retailers the right to refuse entry of large department stores or supermarkets into established neighborhoods. 10) Become more consumer oriented, i.e. allowing consumers the freedom to choose the “best deal”. In Japan the consumer takes a back seat to economic nationalism, kuni no tame (for the country) and kaisha no tame (for the company). Japanese bureaucrats have long guided the masses, intervened in the marketplace to regulate economic activity, by setting standards, quotas, and prices. The Ministry of Finance looked the other way as brokerage houses sacrificed millions of small investors to reimburse large corporations for billions of dollars worth of stock losses (but not surprisingly non-Japanese companies were not reimbursed). The Japanese version of capitalism keeps stockholders out of the picture as much as possible--at a Japanese stockholder’s meeting if a stockholder gets up to challenge management, he is impolitely tossed out of the meeting by authorized bouncers. Will Japan endorse freedom of choice for its own people and play by the same rules as other industrial democracies? 11) Encourage Foreign Direct Investment and Wholly owned and operated foreign subsidiaries in Japan. Every state in the U.S. has sent a contingent to Japan asking for plants to be built and investments to be made in that state. When was the last time Japan sent a contingent requesting Foreign Direct Investment and external investment from any company in any country. If she wants to be international, she must accept international presence throughout her country. Conclusions and Implications An analysis by MITI of U.S.-Japanese trade indicated that if all trade stopped between the two countries, the U.S. economy would shrink by 0.5% while Japan’s would take a far greater 5% decrease. This clearly shows Japan’s weakness and vulnerability in its trade relationship with the U.S. Major industries which would be affected are automobiles (28% foreign market dependency ratio), 23% for appliances, 18% for electronic parts, 17% for machinery and equipment and 15% for electronics and communications. The only U.S. area which exceeded 10% was agriculture at 31% (Lodge and Vogel 1987). In addition, the Japanese savings are falling by 0.5% each year as the GNP as a welfare system begins to provide sickness, unemployment, and old age benefits. Japanese motivations are cooperative versus American adversarial. While the U.S. creates laws based on the strength, determination, and wherewithal of an interest group, in Japan it is accepted wisdom that all are working for the common good. Japan’s goal is to achieve the collectively accepted goal. Once the goal is agreed upon, only a major threat of retaliation will change the course of the participants. To gain more credibility internationally, the Japanese must operate more in line with Western standards. But Japan will continue to operate on the principle that if you can get away with it, if it does not bring embarrassment or disturb the group’s harmony, it is permissible. The Japanese have no intention of throwing the market open, except on a piecemeal basis, since a closed market and careful management of the growth of Japan’s economy has been the key to its success. The Japanese may require such threats to motivate them to change, to become truly international citizens. This set of suggestions is meant to increase American global competitiveness so as maintain and improve its premier position in the World Economy. Many of these points are controversial. Many are complex and need considerable debate on their final form. However, our effort in this paper is one of initializing discussion and debate on this issue and to frame it in a holistic sense. That is, to note that the trade picture has not one but three levels and all three levels badly need current attention. Any discussion must examine all three levels simultaneously before constructing any final policy. Optimism exists. The 1994 World Competitiveness Report, put out by the International Institute for Management and Development in Lausanne and the World Economic Forum in Geneva, put the United States as the most competitive economy for the first time since 1985, replacing Japan. The report was not witho Home Page Preface & Introduction Chapter 1: Responsibility Chapter 2: Leadership Chapter 3: Government Chapter 4: Congress Chapter 5: Regulations and Bureaucracy Chapter 6: Defense Chapter 7: International Affairs Chapter 8: Crime and Justice Chapter 9: Civil rights Chapter 10: Economic Chapter 11: Education Chapter 12: Health Chapter 13: Planning and National Goals Conclusions