JAMA Forum Volume 9 Number 4 - ANALYTICAL REVIEW

Understanding Differences - Why Western Models Can 't Comprehend Japan

Gregory Clark

Noted scholar Gregory Clark offers some startling insights into the underlying causes of trade frictions. While he believes cultural differences make economic partnership difficult, he thinks the West should stop blaming Japan and that Japan should try harder to explain itself to the rest of the world.

If I were a Japanese I would be angry. I would be angry about the flood of anti-Japan material now being popularized in the West, much of it produced by the so-called "revisionist" critics of Japan, people who have allegedly had the wisdom to "revise" the view that allegedly used to say that Japan shared Western values and therefore could be trusted as a partner. I would want to know how and why this material came to be so fashionable in the West. Much of it is produced by people with obvious bias against Japan. Many of them lack even basic knowledge about Japan. I would be asking myself if Western peoples would remain as meek as Japan has in the face of such a hostile barrage.

At the same time I would also be asking myself another question: namely, that if Japan's economic future was being threatened by manufactured imports in the same way as many Western nations are being threatened by the influx of goods from Japan, would Japan keep its markets open? Or would It, as in the past, use every means to protect its domestic producers? To ask the question is to give the answer: Japan would certainly, and quite rightly, take steps to prevent any major damage to its manufacturing sector. If these steps involved quite heavy protection, Japan would be willing to pay that price.

In short, the question that needs first to be asked is not how or why Japan is being criticized, but how and why the Western nations that today criticize Japan, in the past adopted such recklessly laissez faire attitudes when it was clear that Japanese imports were threatening large areas of their manufacturing sector. Answer that question and much else becomes clear.

Outdated Doctrines

What we are seeing in the trade frictions between Japan and the US/Europe is the inevitable result of 19th century doctrines being forced on a 20th century world. Few seem to realize this, but the free trade model embraced so warmly in the West today is in fact based on the quite outdated concept of increasing unit costs with increasing scale. This concept says that the more Company A or Nation A produces, say, steel, the higher will be the production cost for each unit of steel. In the 19th century production technologies were simple. The optimum scale for most manufacturing facilities was quite small. To produce more of a product meant having at great expense to expand the size of those facilities. It meant having to look further afield for fuel and raw materials. It meant higher transport costs. As a result, the cost of producing each unit of a product was supposed to rise. Hence the concept of increasing costs.

With this concept it is very easy to prove the merits of free trade. Nation A expands steel production, but as it does so its unit costs increase. Eventually those costs exceed the costs of other producers. At this point Nation A then imports from lower cost producers whatever is needed to meet surplus demand. No single nation can hope to dominate all steel manufacturing. Free trade guarantees a natural equilibrium advantageous to all.

This, I repeat, is what is supposed to happen. But it requires the assumption of increasing unit costs. When we move to the 20th century and a decreasing unit cost world, the entire theory collapses

Take semiconductors for example. As we all know, in today's world, economies gained as a result of large volume production - i.e. scale economies - can allow unit costs to fall by as much as 90 percent. So the more Company A or Nation A makes and exports semiconductors, the lower its unit costs. The lower its unit costs, the more it can export. In all logic one country, and maybe even one company, should end up dominating all world production.

True, certain factors can intervene to interrupt this process. There may, as in steel production even today, be an optimum production level beyond which unit costs cease to fall. In that case more than one company or nation can get to share the action. But the dangerous tendency toward concentration remains. Would-be rivals have to keep Company A and Nation A at bay for the time they need to reach optimum production (South Korea's ruthless exclusion of foreign steel while it set up its own steel industry is a good example). Failing that, rival companies have to be alert 24 hours a day to make sure that competitors do not steal a march on them, as we see in semiconductors. Anyone who gains the slightest technological or market advantage over others can expand production and wipe out all rivals.

But the most alarming aspect of the decreasing cost situation is the ease with which a nation can get to dominate all world production even if it does not have an initial competitive advantage. For example, let us assume that Nation A has a natural advantage in making semiconductors and Nation B has a natural advantage in making cars. On this basis some sort of trade balance, albeit a rough balance, could be expected, even under decreasing costs. So A would make all the semiconductors and B all the cars, and somehow they would find a price mechanism to create balance.

But what happens if Nation B decides that it does not want to have to buy its semiconductors from A, that it wants to become an efficient producer in its own right? We have assumed that B lacks a natural advantage, i.e. that its initial costs are higher than A's, - say 100 per unit as opposed to 80 in A. But by protecting its own domestic market and encouraging its producers to move aggressively into A's market, we could quickly have a situation where B's unit costs fall to say 70, thanks to volume production, while A's costs remain at 80. From that moment on B has no trouble dominating all of A's market, and any other markets that remain unprotected. Under conditions of free trade, all production would end up in nation B, even though B did not have any natural advantage to begin with.

Free Trade Failings

This is not an unrealistic model. It is very likely that the U.S. has had the initial advantage in the production of a range of high-tech goods. But the slowness of US. producers in getting new goods into production, their lack of aggressiveness in trying to penetrate difficult foreign markets, and the much greater aggressiveness of Japanese firms in penetrating the U.S. market have combined to guarantee that Japan ends up as the major producer of these goods. Free trade has proved to be highly disequilibriating.

To date the free trade theorists have had two answers to this gaping hole in their theories. Answer One says that even under decreasing costs no one firm can dominate production because as firms get bigger and bigger they become bureaucratic and inefficient. These inefficiencies cancel out the advantages of scale production, and the proof is the ease with which small specialist computer firms emerge in the U.S. to do lively battle with large firms like IBM.

Now this theory may or may not be true in the West. But in Japan any truth in the theory is heavily diluted, for two reasons. One is the groupist nature of Japanese management culture, with its ability to inspire strong loyalties even to large organizations and to make units within those organizations act as separate, sub-group foci of loyalty and commitment. Excessive bureaucratization can therefore be avoided. The second reason is the enormous financial and asset wealth of the typical Japanese large firm. Smaller firms have little chance to compete. Indeed we are already seeing the same phenomenon in the U.S. Small, new technology firms may sprout like mushrooms in Silicon Valley, but within a few years most are bought out by the bigger firms, often by Japanese firms. Small firms lack resources to break into established markets or to withstand prolonged industry recessions.

In short, the bureaucratization argument is not convincing. The same applies to Answer Two. This says that while the theory of increasing unit costs may no longer work at the micro level, it does work at the macro level. Firms, and even entire industries, may enjoy economies of scale. But the same is not true for whole economies. The more one economy tries to monopolize the production of everything, the greater the demand on its resources of labor and capital and the more the cost of these resources will rise. In our previous example of a two-industry world - cars and semiconductors - Nation B can try to monopolize production of semiconductors. But this will draw needed resources - labor and capital - from its car industry. Costs rise in its car industry, making it uncompetitive. Nation A has the chance to stage a comeback, this time in cars.

The real world is not so simple. Today the basic determinants of competitiveness are not items such as labor and capital. Instead they are items like information, supplier networks, technology, skills, interconnected markets, linkages between industries - the elements that go to make up that nebulous thing called the industrial base. Labor and capital come well down on the list (even if they did seem important in the 19th century). Labor can be imported, or drawn from other sectors of the economy. It can be economized through labor-saving investment. Capital can be borrowed.

In short, the more Nation B develops its semiconductor industry the stronger its industrial base becomes, and the more competitive its car industry becomes. The car industry can take advantage of the skills, products and extra demand created by the semiconductor industry. Conversely, the stronger the car industry is the stronger the semiconductor industry is, thanks again to the improved industrial base. And the car industry provides a market for semiconductors as well.

Indeed, given the importance of the industrial base, we can even devise a model where all manufacturing of tradable goods gravitates to the nation which is best able to steal a march on its competitors. In this scenario, otherwise inefficient manufacturing survives. Even other sectors - the service and primary sectors - gain efficiency from the industrial base. Nor in the case of Japan is this entirely theoretical. Advances in manufacturing automation in Japan have allowed some large segments of the once inefficient textile industry and even of the farm industry to survive in Japan. Contrary to predictions, the Japanese electrical goods industry has been able to hold off stiff price competition from the NIEs, thanks to the higher quality allowed through automation.

True, under a flexible exchange rate regime there is one inevitable obstacle to complete industrial hegemony. That is the fact that the more Nation B tries to dominate everything, the more its trade surplus expands and the more its currency appreciates. Eventually its less efficient manufacturing industries are driven into extinction and it is forced to import. The laws of free trade equilibrium finally have their day.

But this is an extraordinarily jerky and cumbersome way of doing things. In effect, most firms manufacturing tradable goods in Nation A have to go bankrupt first. After they have gone bankrupt, B's balance of payments surplus will increase enormously. This forces the currency appreciation needed to force B's exports to become so expensive as to allow some of A's manufacturing sector to revive even without the benefit of a proper industrial base. Everyone goes from boom to bust to boom in never-ending cycles. Is this really the ideal way to organize world industry?

Climbing the Ladder?

The Western view of the free trade world economy has been far too mechanistic. In effect we have argued that allowing weaker, more labor-intensive industries like electrical goods, transport machinery or steel to go to the wall would benefit our economies, since, to the extent these industries were eliminated we would be able to concentrate our productive efforts in high-tech industries like computers, space and aircraft. To the extent other economies concentrated on making TVs and cars, their entry into high-tech industry would be delayed. Only now, when it is much too late, are we beginning to realize that our skills in computers, space, etc. are almost useless once we allow our industrial base to erode. Meanwhile Japan, because it has kept that base intact, is now well placed to dominate not just TVs and cars, but computers, space and aircraft as well.

Western free trade theory had a neat "ladder" approach to global industry adjustment. It allowed for the possibility that other, non-Western economies would gradually improve their technology and industry levels. But that was not supposed to happen at a faster pace than our own improvements. So the advanced Western economies producing cars would move into computers.

People who produced textiles would gradually advance into cars, people who produced nothing would move into textiles. We all moved up the ladder together.

In effect the West set the pace. After all, it was we Westerners who had discovered the Industrial Revolution. Others could copy and follow us, but never beat us. Not just in product technology, but in production skills and work diligence we were the natural leaders.

What we see today is the forced demise of this cultural arrogance. It is clear that in many areas of production, Japan, and to some extent the other East Asian economies, have factory skills and a work ethic superior to us Westerners. But in this situation, what happens to the ladder view of development? Instead of moving up rungs, do we Westerners have to start moving down? In other words Japan makes the computers and we make the cars? But already the East Asians, with much cheaper labor than ourselves, are moving into cars. Do we lower our labor costs to their level? And what happens if even this fails, thanks to a weakened industrial base. Do we lower labor costs even further and try to compete with say, India, in textiles? Where does our deindustrialization stop? The threat is real. Yet there would be hardly a single economist in the West even prepared to consider it, so contrary does it run to our conventional wisdom.

Laying the Blame

In this situation who should we blame, ourselves or Japan, if things seem to be going wrong with our theories? Once again, to pose the question is to give the answer. But with typical Western self-righteousness we are not willing to blame ourselves. Instead, we devise reasons to prove that it is Japan that is to blame. For long we were told that if U.S. products did not sell in Japan, that was because Japan was trying deliberately to exclude them. Then we saw the explosive growth of some European goods, cars especially, in Japan. Reluctantly some are beginning to admit that if U.S. goods do not sell, maybe it has something to do with the sales efforts of U.S. producers.

We are told by U.S. trade negotiators that if U.S. construction firms cannot make it in Japan, that is because they too are being deliberately excluded. Maybe. But in that case, why doesn't the U.S. government invite U.S. firms to handle its construction projects in Japan? Maybe the U.S. officials who arrange the building of U.S. military and embassy facilities in Japan know something that U.S. trade negotiators do not know.

And so the list goes on. U.S. negotiators in the SlI (Structural Impediments Initiative) talks criticized dango, the practice of collusive bidding. They saw it as yet another obstacle to the entrance of U.S. firms into Japan, and insisted that Japan stick to competitive bidding for all contracts. While the SlI talks were in progress the Japanese press noted how Fujitsu, the computer firm, had won a contract for computerizing the Hiroshima city water distribution system with a one yen bid. Clearly this was highly competitive bidding. But the U.S. side in the Sil talks criticized this as yet another example of illicit Japanese corporate behavior designed to shut out competition. No one seemed to realize the glaring contradiction with the earlier criticisms of dango.

Someone should take the U.S. negotiators aside and tell them politely that Japan happens to have a culture very different from that of the U.S. In Japan the enterprise is a dynamic entity committed to long term survival for itself and its employees (who are in fact the enterprise). To survive, the enterprise emphasizes market share rather than immediate profits. However, this in turn leads to the chronic over-competition found in Japan, and the propensity for one-yen bids. In this situation it is inevitable that someone, either govern-

ment or the firms themselves, will have to intervene to create some order in the market, whether in the form of cartels, administrative guidance or even dango. None of this may be very desirable, but the alternative is even less desirable.

In the West, we have a more mechanistic, profit-oriented attitude to the enterprise, so it is easier to avoid overcompetition (or kato kyoso, as it is called in Japan). Western firms do not bid unless they can see a profit. Open, competitive bidding tends to weed out the inefficient. But what is good for us is not necessarily good for Japan. We should be more careful before we try to impose our values and systems on the Japanese, particularly when we use threats and retaliations such as the Super 301 provisions to back up those impositions.

Unfortunately most of the so-called revisionist critics of Japan do not even begin to realize these problems. Believing firmly in the universality of Western culture and values they take aim at all and every Japanese departure from what we consider the norm. One of them, Karel van Wolferen (author of The Engima of Japanese Power), refuses even to believe that culture is involved. He says there is something called "The System" which plots and plans the various schemes by which Japan tries to take over the world economy. (He also argues that the Japanese "System" lacks clear lines of decision and responsibility, which seems something of a contradiction to the "plots and plans" view of things.) Incidentally, it is worth noting that many of the revisionist critics who claim long involvement with Japan and who try to tell us in such detail how Japan operates and quote extensively from Japanese texts in the process, are themselves unable to read or speak Japanese properly.

Steps for Japan

There are areas where Japan should improve both its society and its business practices if it wants to be a proper member of global economic society. But there are large areas where we Westerners also need to do some "revision" on ourselves if we want to stay in the business of competing with and in Japan. Again, while Japan can and should rebut the more inaccurate of the critics, it should also take much more account of the views of those such as Clyde Prestowitz, the former U.S. trade negotiator who in his book Trading Places sets out very fairly just how and why Japan was able to take advantage of U.S. laissez faire foolishness. Japan should appreciate the natural concern of people like Prestowitz for the future of the Western economies. This time Japan should not, as it has done so often in the past, dismiss all the criticisms and arguments simply because some of the critics are clearly biased emotionally against Japan. Japan needs to take some concrete steps.

One step, for example, would be for other Japanese industries to follow the example of the Japanese automobile industry, and voluntarily restrain exports to the U.S. and Western Europe. There should be much greater emphasis on local production in the markets currently supplied from Japan. In effect, Japan should recognize a difference between competitive trade and cooperative trade. In the U.S. and Western Europe, every Japan-produced car or TV sold means one less car or TV produced locally. If that meant an extra U.S/West European computer was being sold in Japan all would be fine. But as I have already suggested, it probably means that eventually one extra Japanese computer will be sold in U.S/West Europe. However, the same Japanese car or TV sold in the Third World or East Europe would probably benefit everyone, especially if Japan uses the income to purchase labor or resource intensive exports from those areas.

Ultimately, Japan and the rest of us are going to have to admit the logic of large trading blocs, even if this does cause some harm to world trade freedom. Protectionist blocs can foster inefficiency. But provided the blocs are large enough - the American continents, East and West Europe - local large-scale producers will emerge in sufficient numbers to provide genuine competition and incentives to efficiency. Japanese firms could then tie up with some of these producers to provide technology. Or they could build their own plants, providing even greater competition and efficiency. For Japan at this moment simply to sit on the sidelines repeating platitudes about free competition - platitudes that we know Japan itself would not accept if any of its own major industries were seriously threatened by the decreasing unit cost style of competition from abroad that I outlined earlier - is simply to invite even more hysterical "revisionist" style criticisms in the future.

At the same time Japan might also try to improve the quality of its efforts to explain its own culture and values. Twenty years ago, when Japan was just beginning to make its presence felt internationally, the bureaucracy (mainly the Foreign Ministry) and scholars close to official attitudes went out of their way to point out the differences between Japanese and Western culture. At one stage the Foreign Ministry even distributed to foreigners copies of Japanese Society, the important book by Tokyo University professor Chie Nakane which sets out and explains in detail Japan's groupist value system. Now, when some of the "revisionists" are finally discovering that there are cultural differences between Japan and the West, and that these make Japan a difficult economic partner for the West, official Japan goes into a panic and tries to deny all and any suggestion there is any difference between Japanese and Western values.

It is time Japan made a serious attempt to explain itself to the rest of the world. Sending Kabuki dancers abroad is not enough. A serious intellectual effort is needed to identify the nature of Japanese values and the areas where they match or do not match Western values. Failure to do this will leave the field open forever to the revisionist critics.

Revisionist arguments say Japan has nothing to offer the rest of the world because its culture, or its "system", is too different. Nothing could be further from the truth. What we see in Japan is really little more than a refined version of the same work and industrial ethic that we used to have in the West, particularly in northern Europe and North America. And it existed in those areas for exactly the same reason it exists in Japan - a long history of village and feudal society during which important qualities such as dilligence, loyalty to work place, craftsmanship, etc. were cultivated. The other qualities needed for progress - rationalistic thinking, systems of law, economy, science, etc.- were, as with Japan, imported from outside. It is this combination that explained the explosive growth in northern Europe/America in the past, and now in Japan. The paternalistic management of enterprises in Europe in the past, and the strong company spirit of U.S. enterprises only a generation ago, are both very similar to what we find in Japan today.

Japan is important to us both culturally and industrially because it can, in effect, remind us of where we were and what we have lost. Indeed, it can even help us regain what we have lost. It is no accident that Japanese manufacturing investment has been so successful in Wales and the northern areas of the UK, and in the southern states of the U.S. In the rural areas of our Anglo-Saxon societies, the village values of the past are well preserved. Japanese-style management adapts easily to those values. Others too could learn much from what Japan has to offer, if they could only free themselves from the anti-Japan impulses currently gaining popularity in the West.

Gregory Clark has been a professor in the department of comparative culture at Sophia University in Tokyo since 1976. Fluent in Japanese, Chinese and Russian, he has served in key Australian government posts and was Tokyo bureau chief for The Australian during 1969-74. In 1990 he received the Tokyo metropolitan government's Culture Award, only the third foreigner to be so honored, and was also appointed head of the Institute of Developing Economies Advanced School, a MIT/-sponsored postgraduate school of development studies.