The World at a Turning Point in Tokyo/Update on Russia Jude Wanniski and Criton Zoakos July 6, 1993

THE WORLD AT A TURNING POINT IN TOKYO 

President Clinton's crafty public relations remarks in San Francisco yesterday were meant to create the illusion that the Tokyo G-7 Summit, a deadlocked affair if ever there was one, may well turn out to be a foreign policy success for the President. The veneer of success that the President's men seek to simulate is based on a meaningless verbal concession that a desperate Prime Minister Kiichi Miyazawa offered during the weekend, a last-minute effort to salvage the fast-sinking trade talks among the G-7 countries.

Even though Japan is adamantly opposed to the Clinton team's demand for managed trade through mandatory surplus reduction targets, Japan might be willing to consider non-binding "illustrative figures." Reports from Tokyo suggest that this maneuver is meant only to emphasize Miyazawa's "cooperative" profile among Japanese voters and has nothing to do with the country's trade policy toward the U.S. As Australia's former Prime Minister Bob Hawke pointed out in Beijing this weekend, U.S. "market access" demands against Japan are unrealistic since Japan's per capita imports of U.S. goods are 170% higher than U.S. per capita imports of Japanese goods: The Japanese spend $580 on imports from the United States per capita and the Americans spend $343 on imports from Japan per capita.

Clinton's staged optimism to the contrary, the following potential dangers  for Clinton must be addressed in Tokyo by U.S. policymakers:

1. The pre-summit "market access" talks between the U.S., EC, Japan and Canada have failed to produce any results that might supply sorely needed momentum to the stalled Uruguay Round. GATT's outgoing director general Arthur Dunkel expressed fears that if these talks fail, the potential will emerge for the Uruguay Round's failure and for a "slide into protectionism and managed trade." Even if the U.S., EC and Japan were to agree on "market access," France is on record that it will oppose any agreement that does not include rescinding the U.S.-imposed punitive tariffs on steel imports. The trade policy portion of the Summit's communique is thus expected to be made up of pious wish lists phrased in ways that allow some grandstanding by Clinton.

2. Japan and Germany combined forces to kill a Clinton proposal to employ government-dictated fiscal and monetary economic stimulus. The sophomoric idea came straight out of the Harvard textbooks of Treasury Undersecretary Lawrence Summers, whose views will remain a burden to the administration's foreign economic policies. 

3. Japan's well-reasoned and firm "No" to the "Russia privatization fund" is further indication of the breakdown of consensus regarding the economic agenda. 

4. The Clinton's team's last-minute attempt to highlight a political agenda and issue a political communique at the Summit, which would have distracted from the lack of economic consensus, has fizzled due to European opposition to Washington's Bosnia agenda.

The important issues of interest to Japan are not even on the Summit's agenda. Yet these are the issues which drive economic and political developments in the Pacific Rim. Their absence makes the Summit itself less relevant and guarantees that these issues will be addressed outside of the G-7 framework, giving Japan and its Asia-Pacific partners greater freedom of action from their western patrons. It should be noted, however, that Japan made serious efforts to place these Asia-Pacific issues on the G-7 agenda. Specifically, Japan had proposed that the G-7 view the vibrant economies of China and of Asia's other "Dynamic Economies" as the potential "locomotive" that might lift the OECD economies out of their stagnation. Instead, the United States proposed that Japanese "fiscal stimulus" and German interest rate decreases should play the "locomotive" role. This formula is another from Treasury's Lawrence Summers.

In this context, there is growing evidence strongly suggesting that Japan's economic policy planners are executing a major shift toward China. Chinese sources report a spectacular increase in Japanese direct investments into China in the first two quarters of the year -- up to 350% above 1992 levels. A majority of these investments is aimed at establishing bridgeheads into the Chinese consumer markets and not at the more conventional target of Chinese "cheap labor."  The suspicion of some in Washington is that Japan may execute a massive turn toward anticipated Chinese consumer markets if the worst were to happen in U.S.-Japan trade relations. Such a shift probably represents Japan's fallback option in a worst-case scenario of world trade developments. In reality, matters will tend to gravitate toward a more balanced mix of gradually declining dependence on U.S. and European markets and a gradually growing dependence on Chinese and other Asia-Pacific markets.

This overall orientation conforms with the newly assertive Japanese attitude in world affairs. Two items are important in this respect: (1) At the initiative of Beijing, there are joint Sino-Japanese exploratory studies of the feasibility of military cooperation between the two countries. One of the topics discussed recently between the two was the possibility of the deployment of mixed Chinese-Japanese military units in future international peacekeeping duties; (2) Japan's Foreign Ministry is engaged in promoting a Japan-sponsored India-Pakistan "peace process" forum, intended to give Japan the same peace-maker status on the Indian subcontinent as the U.S. has enjoyed in the Middle East.

It is against this background of emerging diplomatic aspirations that the single most important G-7 pre-summit development must be viewed. When the U.S. negotiating team proposed indefinite extension of the treaty to limit proliferation of nuclear weapons, Japan nixed the idea, citing two reasons: the alarming developments in North Korea's nuclear program and the changing domestic political power combination within Japan. It is evident that Japan's negotiating team has signalled that the country's reforming political culture will be moving in the direction of greater self-assertion.

Criton Zoakos

UPDATE ON RUSSIA: The ruble has stabilized on the foreign exchange market at about 1000 per dollar as the central bank has curtailed issuance of credits, for the moment, in order to satisfy the demands of the International Monetary Fund. Once Moscow gets its hands on the $1.5 billion in aid that the IMF has now agreed to release, we can expect it to issue ruble credits once again, as it is otherwise impossible to maintain production with oil at R38,000 per metric ton. The price of coal quintupled July 1 in another gesture to the IMF bureaucrats and their economic textbooks. Oilfields and coalfields are shutting down across Russia as the population now cannot afford the stratospheric prices, and the output can no longer be exported as the few ports are clogged, booked 12 months in advance. Overland exports are also out as traditional purchasers of Russian oil and coal in the Ukraine and Baltic states cannot afford the prices. The Ukraine, which left the union to set up its own system and currency, is now unraveling faster than Russia, its currency in a freefall. Civil wars are popping up all over -- not only between Armenia and Azerbaijan. President Clinton still thinks everything is swell in Russia, which is what he reads in The New York Times. Western corporations are now selling goods for rubles, using them to buy up real estate at ridiculous cut rate prices, which contributes to the illusion of economic stability. Government tax collections are vanishing, though, with the central deficit amounting to about R16 trillion, or $16 billion at the current exchange rate. The IMF's $1.5 billion is a drop in the bucket, that will soon disappear into the black market. The government has to print money to pay all its bills, which suggests the current ruble stability cannot last the summer.

Jude Wanniski