INVEST IN JAPAN. TRADE WILL FOLLOW
Debasing one's national currency has a long, sad history. Rome filed the silver off the edges of its coins. Britain devalued its sterling after World War II. Russia is now cheapening the ruble. Despite public denials, it appears that the Clinton Administration is following in this ancient tradition by pushing down the dollar against the yen in an attempt to reduce America's trade deficit with Japan.
We think that policy is wrongheaded--not because we are hard-money, goldbug ideologues. The superdollar of the early 1980s clearly hurt U.S. exports around the world. The Plaza Accord of 1985 returned the dollar to a reasonable level, and since then, the 50% depreciation of the dollar against the German mark and other European currencies has helped turn a $20 billion trade deficit with Europe into a surplus.
Even the drop in value of the dollar against the yen has shown some benefits. At home, Detroit's Big Three are reconquering domestic market share lost in previous years, not only because their cars are much better in quality but also because they charge about $2,000 less than Japanese competitors, who must raise prices to compensate for their higher yen. And in Latin America and other Third World markets, U.S. exporters are doing much better, partly because they can price their power generators and construction equipment below the Japanese.
But pushing the dollar to a 40-year low against the yen is not reducing the deficit with Japan--and never will. The dollar has gone from 263 in 1985 to 107 today. The deficit, by contrast, hangs in at $45 billion to $50 billion every year. The reason is that Japan's mercantilist economy is not structured to suck in imports, even when they become as cheap as the low dollar has made U.S. goods and services today.
The truth is, the U.S. has a trade deficit with Japan because, in large part, it has an investment deficit with Japan (page 26). Exports tend to follow foreign investment around the world, and Japan has the smallest amount of foreign investment of any major trading nation. Recent figures, published by the House Wednesday Group, a Republican congressional caucus, show that foreign investment in stores, factories, and other assets come to only $97 per capita in Japan, compared with about $1,600 in both the U.S. and Europe. Foreigners control less than 1% of all corporate assets in Japan, against 20% in the U.S. So when Japan makes it hard for U.S. companies to invest there, it hurts trade.
The lesson? Boosting U.S. investment in Japan will increase exports and reduce the trade deficit. But the current policy of devaluing the dollar works against increasing investment because it dramatically raises the cost of doing business in Japan. Instead of cheapening the dollar, it would be better for the Clinton Administration, which is currently formulating its economic policy toward Japan, to focus on helping U.S. companies break into Japan Inc., which discourages all foreigners--Koreans, Chinese, Europeans, and Americans alike.