to control a possible flood. And this human action to reverse the laws of nature is praised as a good policy.
Let’s transpose this analogy to the economy. Since the end of the 1980s, $50 or $60 billion worth of Japanese investment a year, the equivalent of Japan’s annual trade surplus, has flooded through the world, much of it buying up American land, buildings, companies, and even people (lobbyists). Should Americans stand idly by simply because an economic law is operating? Isn’t it necessary to build some sort of dam? When a policy runs counter to economic laws, however, far from being praised—as in the case of flood control—it is criticized as protectionism, regulation, or interference. Why? One reason is that natural phenomena can be readily observed, but economic phenomena are not easy to visualize. We can see the flow of water, but we cannot actually see the flow of investment around the globe. This is puzzling for economists and even more puzzling for ordinary people. But when the flow of investment does become visible, shouldn’t policymakers take bold steps, such as containment, even though that means temporarily acting contrary to economic laws?
In the late 1980s Japan’s “buying America” became clearly visible to the naked eye. There seemed no end to the land or the companies the Japanese acquired. Japan has argued that it is not the only country to have bought American property, that British holdings are even larger than Japan’s. But this argument inadvertently lets the cat out of the bag. The truth is that Japanese investment is rapidly catching up with the British, Dutch, and German investments that have been made over a long period of years. It has been a veritable torrent rather than a gently falling rain, and no one can claim that a torrential rainfall in the space of a few hours has the same effect as an equivalent amount of rain falling over a ten-day period.
This situation is most dramatically manifested in the growth of Japanese direct investment abroad. Valued at a mere $10.6 billion during the period 1975-79, direct investment for 1985-89 had risen to $118.8 billion, a more than tenfold increase in just ten years’ time. In the United States alone, Japanese direct investment went from $67.3 billion in 1989 to $83.5 billion in 1990.* Thus, more than half of these acquisitions were in the United States and quite visibly concentrated in Hawaii, California, and New York. This was not just a torrent but more like a flash flood.
The analogy can be taken only so far, however. In the natural world, no one benefits from a flood, but in the economic world, this flow of investment clearly was to the benefit of Japan, and inevitably it inflamed American chauvinism. Excessive growth, excessive gains in any area, are bound to produce a hostile reaction. According to an opinion poll of American chief executive officers conducted jointly by the Nihon Keizai Shimbun and the U.S. polling organization Booz Allen for the Wall Street Journal, only 54.8 percent welcomed Japanese investment in the United States. To give some idea of how low that figure is, the highest approval rate for investment by another country was 93.8 percent for Canada, with Britain, the Netherlands, and Germany falling between 76.8 and 87.7 percent. The number of respondents who said Japanese investment was not welcome was 22.6 percent.
Another reason why this concentrated investment in the United States was not welcome is that, despite the strong yen and the weak dollar, America’s trade deficit with Japan has not been reduced at all. The proposal by Fallows and other revisionists to adopt managed trade as a containment policy is a reflection of American irritation with this situation. The fact that the
* The slowdown in the Japanese economy has temporarily halted the growth of Japanese investment abroad, but as Japan’s trade surplus continues to grow, the excess will have to be invested somewhere, this time most likely in Asia.
United States, the standard bearer for free trade since World War II, has been tempted to adopt a managed trade policy gives some indication of the extent of American frustration. The very term managed trade creates a negative impression. It describes a human activity that interferes with the free working of the “invisible hand”—the golden rule of capitalism. The unspoken assumption behind the U.S.–Japan Structural Impediments Initiative talks was that America would desperately like to avoid resorting to such a course.
This is what happens when economic activity does not operate according to logic. Certainly, as Akio Morita, the chairman of Sony, has said, it is not the concentrated outpouring of Japanese exports, but the concentrated American absorption of these products, that is the problem. There is a certain logic, too, in his statement that if Columbia Pictures is a piece of America’s soul, then the problem lies not with those who bought it, but with those who were willing to sell it. In economics, however, some ideas cannot be put across simply by brandishing the correct argument, particularly when national pride is linked to economic interests.
America’s Sun Has Not Yet Set
The Supremacy of the Dollar. Structural Impediments Initiative talks or “containing Japan”—call it what you will—both are indicative of a desperate fight for the preeminence of the U.S. economy. Why has America, a country whose overwhelming postwar power and affluence led it to assume the roles of the world’s banker and policeman, seen its formidable lead in world economic affairs slowly slip away? The answer is inherent in the very nature of the postwar monetary system, the International Monetary Fund (IMF), which was advantageous to the United States in the short run, but not in the long run.
Because the American dollar is the key global currency, other countries have to export to earn foreign currency (dollars) and then use those dollars to buy (import) the things they need. After the war, for example, Japan wanted to import because it had no natural resources, but it needed dollars to do so. It launched an export drive to earn those dollars and, finally, at the end of the 1970s, around the time of the second oil crisis, it achieved a balance between imports and exports. Or, to put it another way, enough profits on sales had built up in the country’s coffers so that it could buy whatever it wanted.
On the other hand, because the dollar has been the key currency used by the free world throughout the postwar period and is accepted both at home and abroad, America alone can import whatever it wants without having to export first. With some exaggeration one might even say that as long as the United States prints dollars, it has the right to buy anything in the world. Even without the money readily at hand it can buy on credit. That is one of the advantages of controlling the key currency.
This situation will continue as long as America maintains its grip on world leadership. But when, as now, American competitiveness is declining, controlling the key currency becomes a disadvantage. What was beneficial in the short run becomes a handicap over the long run. The flip side to the short-term advantage of being able to buy anything you want without making any export effort is that two big bills eventually come due—a long-term deterioration of international competitiveness and an ingrained habit of import consumption.
Thus, lurking in the background of the debate about containing Japan are these systemic factors of short-term advantages and long-term disadvantages. This raises the question of whether it might be a good idea to change the system, but in point of fact there is no currency at present that is capable of replacing the dollar as the key currency. And even if there were, the United States would not accept such a course of action. Suppose, for example, that the yen grew even stronger and Japan invested huge sums of money in the IMF, thus eclipsing the U.S. contribution and winning a stronger say for itself. America would be upset. Even if the United States has declined in real strength, it is not likely to give up its prerogatives of world leadership. That is not the way superpowers behave.
If some worldwide upheaval or major cataclysm occurred, the situation would be different. The dollar replaced the pound as the key currency when world leadership shifted from Britain to the United States after two world wars. For leadership to be transferred during peacetime as the result of deliberations is inconceivable.
The Fragility of Economic Power. In July 1944, at the height of World War II, the foundations for today’s International Monetary Fund system were laid at an international conference held in the town of Bretton Woods, New Hampshire. This conference