More than twenty years ago, one of Madrid's weekly news magazines ran a story with a picture of President Bill Clinton in a bomber jacket and his menacing index finger as he was reportedly telling the Japanese Prime Minister Morihiro Hosokawa "if you don't buy, you won't sell."
Over a typical mid-afternoon Spanish lunch, the editor gave me a copy of his magazine, hot off the presses, a day after we talked at length about the economy, the Clinton-Hosokawa summit in September 1993 and America's intractable trade problems with its key Asian ally.
You don't have to believe in (Nietzsche's concept of) "eternal recurrence," but here we are: After 24 years, we are back with the same play as different actors feel compelled to tackle recurring rounds of American-Japanese trade imbalances.
There is one difference, though – and please give credit to our hard working, 24/7 president: He greeted warmly his Japanese guest instead of pointing at him Bill's trademark threatening finger. And never mind that suave gestures of bonhomie are at odds with the stiff Japanese etiquette.
In the run-up to the Trump-Abe summit, the clever Japanese were tirelessly repeating that America's trade deficit with Japan was much smaller now and less of policy issue than before.
I wonder what President Trump advisers told him about that. Did they tell him that we keep funding our chronic deficits with Japan with an avalanche of IOUs that got us to $8 trillion of net foreign liabilities? Did they also tell him that a $1.1 trillion of our official debt to Japan (at the end of November 2016) was part of that story?
And did they tell our CEO that the Japanese were served an average interest rate of 2 percent on their American debt instruments (assuming they held most of these $1.1 trillion in ten-year Treasury notes) over the last twelve months for a total yen-denominated return of 14 percent (the greenback soared 12 percent against the yen during that period)?
As Mr. Trump would say, that is a "fantastic deal" compared with an average 0.01 percent (sic) the Japanese got, over the same interval, on their own ten-year bonds they call JGBs.
In my previous incarnation as an international civil servant advising governments of industrialized countries, my Japanese colleagues would politely cut short these kinds of conversations by suggesting a lunch of sushi and sake in one of the Japanese restaurants around the Avenue de l'Opéra. Parisians called that marvelous piece of urban beauty Avenue de Tokyo because of the huge presence of Japanese owned and operated shops catering to Japanese visitors to the French capital.
My Japanese colleagues, all very competent economists from the prime minister's office, finance ministry and the central bank, were easily upset over trade arguments because they knew that their mercantilist policies could not go on. Europeans were trying to protect themselves.
Italians, for example, put up a very small quota for Japanese car imports. The French were furious that Japanese kept "testing" for years the public health hazards of French cheeses, wines and cognacs. The "testing" stopped only after the French abruptly banned imports of Japanese motorbikes. Overnight, the French delicacies were pronounced safe for Japanese palates.
But the Japanese kept getting away with things in Washington on, apparently, higher considerations of our national interests. Indeed, a prominent American statesman kept repeating that the U.S. and Japan represented "the most important bilateral relationship in the world, bar none." Sounds familiar?
At the time of that Spanish magazine story, the Japanese were afraid that Bill Clinton would change all that. They were very nervous about Clinton's campaign trail denunciations (in 1991) of American trade deficits with Japan. The Japanese feel the same way now about President Trump; they are eager to convince him that the trade problem has all but vanished.
Sure, Japan cut its U.S. trade surplus with surgical precision from $76.4 billion in 2012 to a strangely identical surplus of $68.9 billion in 2015 and 2016. But this is how that decline came about: During the period of 2012 to 2016, U.S. exports to Japan fell 4 percent, while Japanese exports to the U.S. increased by nearly 3 percent.
We lost again, Mr. President, and you keep telling us how much you hate the losers.
Here is what you could do for us — for starters.
First, Japan reported last week a $184 billion surplus on goods and services trade with abroad in 2016. That is the amount of money Tokyo will have to invest in foreign portfolio and real assets to balance its foreign accounts (i.e., the current account surplus has to equal the capital account deficit).
You may, therefore, wish to take up your friend Shinzo on his promise to step up Japanese investments in the U.S. I suggest that, as a minimum, our entire trade deficit with Japan -- $68.9 billion – comes back to the U.S. in the form of direct and portfolio investments.
We are very far from that now. The sum of Japanese direct investments in the U.S. during the first nine months of last year ($31.8 billion) and of Japanese investments in our Treasury securities in the first 11 months of 2016 ($13.8 billion) is a pitiful $18 billion.
Second, I suggest that you ask the Japanese to invest the equivalent of their trade surplus with the U.S. in our infrastructure projects. That would allow you to keep the budget deficit down so that the bond and equity markets can better fund our private sector. Please remember, you have to start running a multi-year primary budget surplus of 2-3 percent of GDP just to stop our $20 trillion public debt from rising. Short of a divine intervention, your promise to "wipe out" the public debt is impossible with the current primary budget deficit of about 1 percent of GDP.
Third, don't believe our financial wizards telling you that they can do the infrastructure. They can't. Just tell your friend Shinzo to put up the money – presto -- and get the JR (Japan Railway Company, east, west, central – we don't care) to build our bullet trains from sea to shining sea. Bridges and highways should also be part of the deal.
Fourth, do a trade agreement with Japan on the basis of strict, enforceable and results-oriented rules of reciprocity. If you do that, you won't have to listen to the nonsense that GM, Ford and Chrysler have steering wheels on the wrong side and no dealer networks in Japan. Ditto for agriculture, etc.
Fifth, hug your friend Shinzo again and tell him, within the earshot of NHK cameras, that you got his back totally and unconditionally. But do ask him to sort out his stuff with China and South Korea. He has to get that poison out of the way. If he does that, you can assure him that you will take care of Pyongyang's nukes and inter-Korean disputes with Beijing and Moscow.
Sixth, Japan should remain in a tight and unbreakable alliance with the U.S. But you cannot build credible regional, let alone global, security architecture with Japan. You have to do that with China and Russia. Japan can, and should, help that effort, though. Mr. Abe has developed a great rapport with Mr. Putin. They will be developing together the Russian South Kuril Islands that Japan claims as its own Northern Territories. Encourage and help Mr. Abe to do the same thing with Mr. Xi on Senkaku/Diaoyu Islands in East China Sea.
While our president and his Japanese guest were trading the swings on a manicured Florida golf course last weekend, government officials in Tokyo were getting ready to publish the numbers showing that Japan continued to live off its trade partners – big time. Exactly one half of Japan's last year growth came from its trade surplus. America took more than one-fifth of Japanese exports, beating China by a wide margin, and remaining the key dumping ground for its key Asian ally.
President Trump has a chance to stop the decades-old rot and corrosion in American-Japanese relations by setting the bilateral trade and investment business on a fair and sustainable path.
That would open the way for similar arrangements with China and other Asia-Pacific countries.
This is an historic opportunity to redesign trade and security in the largest and the most dynamic segment of the world economy, where the dollar would continue to serve as an unmatched transactions currency and a store of value.
The key to this project is a sound and confident Sino-American relationship. Such an environment would allow Washington to help Japan's reconciliation with its estranged Asian neighbors.
We shall soon know whether the "cordial" telephone conversations between the American and Chinese presidents can lead to these new possibilities of peace and prosperity.
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