How was Japan in the 1980s

Is history repeating itself?

Protectionist measures often turn out to be a shot in the leg. The US could learn lessons from its own mistakes with Japan in the 1980s.

Japan's businesses are concerned. The direct attack of the future American President Donald Trump on Toyota Motor's new investments in Mexico is causing unrest on the executive floors. The rude tone is reminiscent of the verbal attacks that Japan heard from the USA in the 1980s under the catchphrase unfair trade or "the yellow danger".

At that time, the Americans reacted to the large trade deficit with Japan with trade restrictions. In their protectionist threats against China, for example, Trump and his advisors explicitly refer to these measures, which America adopted under the essentially market-friendly President Ronald Reagan. The protective wall against Japan sometimes had unexpected consequences, but ultimately strengthened the position of Japanese exporters.

Unexpected consequences

Of the multitude of import restrictions that America imposed on Japan in the 1980s, some stand out in particular: In 1981 the USA forced Japan to "voluntarily" restrict its car exports. Japan pledged to export only 1.68 million vehicles to America, about 7% fewer than in the previous year. The rate rose a little in the following years. The curtailment of imports was supposed to give America's carmakers some breathing space, since after the oil shock and the recession they no longer made it to customers with their large cars and quality defects. In fact, the export restriction helped the Japanese to gain new strength in the American market.

The reduced supply of Japanese cars caused their prices to rise by around $ 1000, which in turn increased the manufacturers' profits. Under the quota, they introduced increasingly larger and sportier vehicles that promised an even higher profit margin. In addition to the economical small cars, they made America's carmakers more and more competitive in other market segments. They also accelerated their investment plans in the US. Honda began building cars in America in 1982, Nissan in 1983 with pick-ups and 1985 with cars. Toyota followed with the first independent plant in 1986, in which the first car rolled off the assembly line in 1988. Of course, Toyota had already had the substructure for trucks manufactured in America in 1972.

The Americans wanted the import quota to fall in 1985. But Tokyo liked the self-restraint so much that it kept the quota until 1993. The powerful Ministry of Commerce and Industry (Miti) determined the market shares of companies in exports to America, and the automakers enjoyed the high profits - at the expense of American consumers. In other industries, too, the Americans unconsciously promoted trade and industrial policy in Japan with enforced self-restraint agreements.

Another trade harassment hit the headlines in 1983 when the Americans tried to protect a single company by increasing the import duty tenfold from 4.4% to 49.4%: the then only American motorcycle manufacturer, Harley-Davidson Motor Company. Customs aimed specifically at heavy motorcycles with a displacement of more than 700 cm3. Comparatively generous quotas for German, British and Italian motorcycles showed that the government deliberately discriminated against the Japanese manufacturers Honda, Kawasaki, Suzuki and Yamaha.

Defend yourself who can

But the protective tariff had limited success. Ultimately, Harley-Davidson pulled itself out of the swamp through its own efforts. There were several reasons for this: Honda and Kawasaki expanded their existing motorcycle production in America and bypassed the import duty. And the Japanese began to build motorcycles with a displacement of just under 700 cc. For large parts of their American customers, this was a better option than the much heavier Harley-Davidsons. The prices for motorcycles rose in general. But only with the devaluation of the dollar in 1985 Harley-Davidson gained a price advantage over the Japanese imported models.

Protectionism against Japan reached a climax in the dispute over the import of computer memory chips. Japanese companies had gained ground in the market segment, while American manufacturers increasingly turned to more profitable semiconductors and neglected memory chips. Still, there were complaints that the Japanese were allegedly selling their memory chips below production costs. America's government threatened anti-dumping duties and in 1986 obtained a minimum price from Japan for sales in America and in third markets - with the exception of Japan. At the same time, the Tokyo government gave in to pressure from Washington and promised to work to ensure that American semiconductors in Japan achieved a market share of more than 20% within five years.

When Japan failed to deliver, Reagan imposed a 100% penalty on Japanese products in 1987, from tools to televisions to computers valued at $ 300 million. The Miti in Tokyo is said not to have been entirely unhappy because the punitive tariffs imposed strict discipline on the companies. Because in order to enforce the required minimum price, Tokyo once again imposed an export restriction that drove up the prices for memory chips abroad. The shortage gains mainly benefited Japanese manufacturers, who dominated the market segment, and thus strengthened their financial innovative strength. In contrast, American computer manufacturers lost ground to their Japanese competitors because they had to use the artificially expensive memory chips. No American manufacturer that had already given up memory chip production took it up again under the protective tariff. The higher market prices, however, accelerated the market entry of South Korean companies and thus allowed new competition to develop.

Dangerous twin deficit

Under pressure from American computer manufacturers, the price floor fell in 1991. Almost half of the 100% punitive tariffs on Japanese electronic goods were lifted in 1987, the rest ceased in 1991. However, the protectionist trade policy did not help the Americans to reduce the rising trade deficit. The expansionary fiscal policy and the increasing national debt under Reagan as well as the economic upswing attracted foreign, including Japanese capital to America and strengthened the dollar. The external balance was mirrored in the trade deficit. The US twin deficit at the time is perhaps the most striking parallel to Trump's expected economic policies, and Japan has suffered particularly as a result and will continue to do so.

In 1985 America agreed in the Plaza Agreement on a devaluation of the dollar with the partners of the then five-member group (USA, Germany, France, Great Britain and Japan) in order to control trade flows. In 1987 the Louvre Accord signed an agreement with Canada not to weaken the dollar any further. Under American pressure, Japan once again promised to revive the domestic economy in order to reduce the trade surplus and lowered the key interest rate. The alignment of Japanese monetary policy with the exchange rate and foreign trade flows contributed to the overheating and bubble economy in the late 1980s. In 1990 the slump in share prices and real estate prices followed, causing Japan to fall into stagnation and ushering in the "lost decade". That, too, is indirectly a consequence of American protectionism in the 1980s.