The can kicks back (Noah Smith)

In my earlier post, I stated that Japan's current-account surplus can vanish in one of two ways: either Japan can consume more (which it won't because of debt and demographics), or it can (over)produce less. That is true. But when the adjustment happens is not set in stone.

A casual observer might think that Nakagawa Shoichi's speech condemning protectionism might sound a little hypocritical, coming as it does on the same day that he threatened to intervene in currency markets to weaken the yen. But from the perspective of very-short-term Japanese national interests, the policies are complementary: the only way to stave off the day of reckoning I described earlier is to pump up exports. Naturally, that will only make the adjustment more painful when it happens, but given current electoral politics one could understand why the LDP isn't exactly planning for the long term. Instead of letting Japan take its lumps now and planning for a brighter future, it seems fairly certain that the LDP will fall back on the old "developing-country" export-promotion, and kick the can a few feet down the road.

But kicking the can carries another, little-mentioned risk. So far, American and British economists and executives have been holding the line against a rising protectionist tide, evoking the memory of "Smoot-Hawley" like a mantra. So far the line has held, as America's Democratic politicians have been too afraid to reach for the bazooka. But the consensus is badly fraying, with Paul Krugman saying he can see the case for "Buy American" provisions in America's stimulus bill. The monster is straining the bars of its cage. And if America's ire is ever roused against Japanese currency manipulation, the US will be far quicker to act than it has been against China; after all, US multinationals do not have their factories in Japan.

No one knows how much a modern-day round of "Japan bashing" would hurt Japan's economic model, but I suspect it would be more severe than nearly anyone can imagine. Japan's much-discussed "dual economy" relies on a compact in which the bureaucracy distributes the rents from world-beating export industries to a host of less efficient domestic industries and small businesses. In the 70s and 80s those rents came from the superior operational efficiency of Japan's auto, electronics, and machine-tool champions; in the mid-2000s they came from the costs saved when those champions moved their operations to China. If America closes its doors to Japanese imports, those rents will vanish and the compact will be broken.

So a best-case scenario for the LDP's kick-the-can strategy is a delayed, more-painful adjustment in maybe three or five years. A worst-case scenario is that American protecionism rises from the dead and smashes Japan's economic model like the hammer of a vengeful god.

In choosing to run the dreadful risk of delaying Japan's day of reckoning, the LDP has proven what many of us always knew — that it represents only a subset of the Japanese people, all its claims to the contrary.

- Noah Smith

Is the Bush administration thinking about the China relationship?

With the Bush administration's recent move to press a suit against Chinese violations of intellectual property in the WTO sparking fears of a full-blown Sino-American trade war, I must ask the same questionI asked when the US Commerce Department announced tariffs on Chinese glossy paper: is this administration pursuing a coherent strategy in Asia, or is it just making things up as it goes along? Does the US really expect that friction on trade will not have consequences for Sino-American cooperation in other areas, most notably in the six-party talks?

The US, of course, should not hesitate to press China on matters of concern, but it must choose its battles wisely; with Congress breathing down the administration's neck on the economic relationship with China, I fear that prudence is becoming an altogether rare quality in US China policy. Moreover, I do not think the administration has made an effort to counter the public scapegoating of China and explain to the American public the substantial benefits of the relationship. That is a point made by the authors of a new Council on Foreign Relations study on the relationship with China. As co-author Carla Hills said at a press conference announcing the report, "We recommended that the president describe to the American public the various benefits that we derive from that relationship and that we state that our interests are furthered by a responsible and cooperative China that adheres to international norms, a prosperous and peaceful China that fuels global growth, and an equitable China that is accountable and cares about issues like the environment."

Whether this will happen is any one's guess, but I doubt that President Bush is particularly eager to defend China publicly.

Maintaining the US-China relationship requires work, and it requires vision. Neither country can afford to wait until January 2009 for either.