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International perspectives: market-opening policies and global companies.

TRATEGIC TRADE THEORY is based on the assumption that national firms can be meaningfully identified (see Krugman, 1986). However, the unprecedented increase in foreign direct investment that has taken place in the past few years makes the implementation of strategic policies more difficult and less likely to succeed. As explained in more detail in Nicolaides (1991b), the expanding presence of foreign companies in the markets of other countries increases the linkages between national economies and makes the impact of strategic measures correspondingly harder to estimate. This also implies that measures designed to benefit domestic firms are more likely to benefit foreign companies operating in domestic markets or cooperating with domestic firms.

There is another reason why foreign direct investment reduces the efficacy of strategic policies. Recently American and European politicians have called for retaliatory measures against Japan, which is believed to discriminate systematically against foreign products (e.g. Prestowitz, 1988). In particular, Dornbusch (1990) has proposed that unless Japan increases its imports by 15 percent per year the United States should impose punitive duties on Japanese products. Dornbusch's rationale is that Japan has never played by the rules of the liberal trade order. Because rule-oriented policies have failed to curb Japanese protectionism, he advocates results-oriented policies.

The purpose of this short note is to suggest that such results-oriented policies are unlikely to make Japanese markets genuinely more open to foreign products and firms. I do not examine in this note whether Japan indeed discriminates against imports. I only intend to explain why it would be possible for Japan to meet crude import targets without abandoning any of its policies. The implication of this conclusion is that GATT's rulesoriented principles are indispensable to those who want to induce Japanese policies and business practices to become more liberal.


A large literature examines the degree of openness of Japanese markets (for a survey see Lincoln, 1990). The prevailing view appears to be that Japan imports less than other industrial countries, even though in recent years its imports have been steadily increasing. There are differences of opinion, however, on whether Japan's low import propensity can be explained by structural factors such as scarcity of raw materials (see Saxonhouse, 1989 and Bhagwati, 1987, 1991), or whether it reflects a policy-induced anti-import bias (see Tyson, 1990).

Another relevant peculiarity of Japan is the proportion of trade that is handled by the so-called sogo shosha, or trading companies. These companies have spearheaded Japan's successful export drive by providing market intelligence to manufacturing firms and by distributing their products in foreign markets. Trading companies are estimated to be responsible for between 70 and 90 percent of Japan's total imports (MITI, 1989).

There is also a domestic counterpart to the sogo shosha. Many, if not all, large Japanese companies belong to groups that maintain close relationships between capital providers (banks), manufacturers, component suppliers and distributors. Some of these company groupings or keiretsu are direct descendants of old family-controlled industries (e.g., Mitsubishi, Sumitomo), others are more recent (e.g., Sanwa), while still others concentrate in particular industries (e.g., Toyota, Matsushita). Given the diversity of the activities of keiretsu members, statistics on their collective output are sketchy. An indication of their size is given by a recent study, which has estimated that keiretsu firms account for 43 percent of domestic sales in electronics and 64 percent in transport equipment (1985) (cited in Lawrence, 1991, p. 14).

In addition to its relatively low import propensity and high export propensity, Japan has tended to invest relatively more than other countries. In particular, foreign direct investment by Japanese companies has grown so rapidly that over the span of just a few years Japan has become the largest investor in the world, in terms of annual flows. In 1989 the total outflow of direct investment amounted to $68 billion (see Nicolaides, 1991a, for a more extensive analysis of Japanese outward direct investment). Because its investment is of recent vintage, Japan still ranks third behind the United States and Britain in terms of stocks. It is estimated that Japan owns about 11 percent of the world stock of foreign capital (JETRO, 1990).


The predominance of the sogo shosha and keiretsu may indeed be thought to provide both proof of the closed nature of the Japanese market and justification for imposing an import target on Japan. Therefore, the question that arises is whether an increase in Japanese imports would correspond to a greater degree of openness. It is quite possible that greater imports of luxury, specialty and other niche market products would not be effective in reducing the market power of Japanese firms. However, what I want to suggest in this note is that it is also possible for Japan's imports to grow without foreign products being able to raise their market share. The key to this possibility is the increasing globalization of Japanese companies.

One thing that the Japanese trade authorities can do (assuming they have the power that Japan bashers claim they wield over industry) is to ask Japanese companies to send part of the output of their foreign affiliates back to Japan. Affiliates in Asia would play a prominent role in this hypothetical situation. The appreciation of the yen since the Plaza agreement in 1985 has led many Japanese manufacturers to establish production and assembly operations in the low-wage countries of Southeast Asia. According to the latest survey of Japanese multinationals conducted by the Export-Import Bank in November 1990, 36 percent of the production of their affiliates in Asia was exported and 16 percent of total production was exported back to Japan. Asia is host to 15 percent of Japan's stock of overseas investment.

Consider, for example, what these statistics imply for the electronics industry in which the Japanese government is accused of being particularly interventionist. A survey carried out by the Electronic Industries Association of Japan in June 1990 showed that 58 percent of all overseas manufacturing facilities for electronic products and components were in Asia (mainly Taiwan, Malaysia, South Korea, Singapore, Thailand, China and Hong Kong). The share for components factories was even higher at 67 percent. In 1990 Japan's total imports of electronic products (consumer electronic equipment, industrial electronic equipment and electronic components and devices) were valued at Y2,039 billion. Of that total, Y650 billion (32 percent) worth of imports originated in Asia. Lawrence (1991, p. 14) cites evidence that in electronics and transportation equipment industries virtually all Japanese imports from Asian countries are purchases by Japanese firms from their foreign affiliates. If we assume that only 75 percent of electronics imports from Asia were manufactured by Japanese affiliates, their value would be Y488 billion (Y650 billion x 75 percent), which was equivalent to 16 percent of their total production. If the general findings of the Exim Bank's survey are representative of the electronics industry, the total exports of Asia-based Japanese affiliates in electronics was Y1098 billion (36 percent x 488/16 percent). This implies that potentially Y610 billion of exports could be redirected towards the Japanese market. This would have amounted to an increase of 2 percent in Japan's total imports in 1990 (Y31,280 billion) or a decrease of 12 percent in its current account surplus.

In the case of the bilateral trade between the United States and Japan, surveys by the U.S. Department of Commerce (cited in Lawrence, 1991, p. 17) indicate that in 1988 intrafirm sales by U.S.based affiliates of Japanese companies accounted for 37 percent of all U.S. exports to Japan (their share was 58 percent in 1986). By contrast U.S. affiliates in Japan imported from their parent companies only 17 percent of all Japanese imports from the United States (their share was 13 percent in 1986). These statistics further indicate that it would not be too difficult for Japanese foreign affiliates to redirect their sales to raise Japanese imports.

Such increases in imports could be achieved solely by sending back to Japan part of the current output of existing affiliates. But Japanese companies are steadily adding to their production capacity abroad. As more factories become operational the output and potential sales of Japanese affiliates will correspondingly increase.

In 1988 the world sales of Japanese affiliates were Y237,175 billion. Slightly more than 7 percent of that amount was sales back to Japan (Matsumoto, 1991). According to another MITI survey (cited in Matsumoto, 1991) Japanese firms were undertaking investments intended to expand their capacity and sales by 8 to 16 percent per annum. If their sales increase by 10 percent and if they continue to export back to Japan the current proportion of their output (7 percent), total Japanese imports will increase by 5 percent. If their sales increase by 15 percent, total Japanese imports will increase by 8 percent.

We also need to consider that as Japanese investment matures production operations in other countries will progressively do less assembling and more integrated manufacturing. Indeed, Japanese companies are expanding the R&D functions performed by their overseas affiliates. This raises the scope of production specialization on a global scale, whereby each affiliate becomes responsible for the manufacturing and marketing of particular models. It is not unrealistic to surmise that their sales back to Japan could easily reach the current level of the Asia-based Japanese factories (i.e., 16 percent). Hence, a 15 percent increase in their capacity coupled with an increase of 16 percent in sales to Japan would result in an 18 percent increase of total Japanese imports from a 1990 base. This represents 20 percent more than the import target advocated by Dom busch.


It is not necessary to deny that Japan is only slowly opening its markets in order to suggest that crude import targets will not be effective in speeding up the progress of liberalization. The increasing globalization of Japanese companies will make it easier for them to meet any import targets without conceding any substantial market share to foreign products. This does not mean that other countries should do nothing. It only means that they should put more emphasis in removing Japan's trade impediments and in making its policies more transparent and liberal.


Bhagwati, Jagdish and D. Irwin (1987), "The Return of the Reciprotarians," World Economy, vol. 10 (2), pp. 109-130.

Bhagwati, Jagdish (1991), The World Trading System at Risk, (Princeton: Princeton University Press).

Dom busch, Rudiger (1990), "The Case for Bilateralism," in Lawrence and Schultze (1990).

Japan External Trade Organization (1990), White Paper on Foreign Direct Investment.

Krugman, Paul, ed. (1986), Strategic Trade Policy and

New International Economics, (Cambridge, MA: MIT Press).

Lawrence, Robert (1991), "Efficient or Exclusionist?:

The Import Behaviour of Japanese Corporate Groups," Brookings Papers on Economic Activity, forthcoming, 1991.

Lawrence, Robert and Charles Schultze, eds (1990), An American Trade Strategy, (Washington, DC: The Brookings Institution).

Lincoln, Edward (1990), Japans Unequal Trade, (Washington, DC: The Brookings Institution).

Matsumoto, Kazuyuki (1991), "The Impact of FDI on Japan's Trade Balance with the EC ," in Sumitomo Life Research Institute, Japanese Direct Investment in Europe, (Aldershot: Avebury Press).

MITI (1989), Third Basic Survey of Business Activity Abroad.

Nicolaides, Phedon (1991a), "The Globalization of Japanese Corporations," Business Economics, vol. XXVI (3), pp. 38-44.

Nicolaides, Phedon (1991b), "Investment Policies in an Integrated World," The World Economy, vol. 14 (2), pp. 121-137.

Prestowitz, Clyde (1988), Trading Places, (New York: Basic Books).

Saxonhouse, Gary (1989), "Differentiated Products, Economies of Scale and Access to the Japanese Market," in Robert Feenstra (ed), Trade Policies for International Competitiveness, (Chicago: National Bureau of Economic Research).

Tyson, Laura D'Andrea (1990), "Managed Trade," in Lawrence and Schultze (1990).

* Phedon Nicolaides is Senior Lecturer, European Institute of Public Administration, Maastricht, The Netherlands.

1 See references at end of text.

Using crude import targets to speed liberalization of Japanese trade practices will not be effective because the increased globalization of Japanese companies will enable them to meet import targets without sacriricing market share. Emphasis instead should be on removing Japanese trade impediments and making its policies more transparent and liberal.
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Author:Nicolaides, Phedon
Publication:Business Economics
Date:Apr 1, 1992
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