The latest proposal from the Ministry of International Trade & Industry to reduce Japan’s billowing trade surplus (CI No 1,337) will not succeed in its professed objective according to Martin Feldstein, professor of economics at Harvard. Writing in the Wall Street Journal, he suggests that the proposal to grant 5% tax rebates to companies that […]
The latest proposal from the Ministry of International Trade & Industry to reduce Japan’s billowing trade surplus (CI No 1,337) will not succeed in its professed objective according to Martin Feldstein, professor of economics at Harvard. Writing in the Wall Street Journal, he suggests that the proposal to grant 5% tax rebates to companies that increase their imports by 10% will actually stimulate Japan’s exports and leave its overall trade balance unchanged. He even suggests that Japan’s trade surplus with the US may increase. The difference between a country’s exports and imports is exactly equal to the difference between the value of its domestic savings and that of domestic investments, he asserts, declaring that Japan has a large trade surplus now because its high level of savings exceeds the level of investment in Japan, leaving excess products that can be exported. Feldstein believes that with the new import-expansion programme Japanese importers will sell yen to buy the foreign currencies to pay for the increased imports, this will tend to depress the yen’s value, making Japanese exports even more attractive for foreign buyers. Even though the yen’s value would fall by only a few percentage points it would be enough to assure an increase in Japanese exports to balance the rise in imports. As well as the growth of Japanese imports from the European Community and the newly industrialising countries of Asia, a major, and fast growing source of Japanese imported manufactured products are from Japanese subsidiaries abroad. An increase in subsidised imports may well come disproportionately from these overseas Japanese firms rather than from American or other foreign-owned firms. Subsidising these imported parts, typically components and subassemblies used in the manufacture of Japanese cars, electronic equipment and other products that are eventually exported from Japan, would automatically lower the cost of their production and up the competitiveness of those Japanese exports on world markets.
Wring its hands
The announcement that Japan will reduce its budget deficit for the following year may be good domestic policy but the higher tax revenue and restricted government outlays will mean less spending at home and therefore more product available for export to the rest of the world. The US accounts for some 22% of Japanese imports whereas 34% of Japanese exports go to the US, and even if Japan focusses the import credits in a way favourable to American firms, the US trade deficit with Japan would probably rise, he believes. If this occurs, Professor Feldstein predicts an increase in protectionism and the so-called managed trade that puts the future of trade in the hands of bureaucrats and politicians. But is there any reason to believe that Japanese economists are any less astute than Professor Feldstein? Shouldn’t we all be just a tiny bit suspicious that MITI has sat down and done exactly the same analysis, and feels confident enough that the vast majority of politicians are economic illiterates that it will be able to wring its hands in a couple of years when the trade surplus is even higher and say hey fellahs, don’t blame us – look at how hard we’re trying to encourage imports?