In an office building colored violently blue so that everyone could see it, I entered the inner chamber of the Japanese industrial revolution. This was during the baking summer in Kumamoto prefecture, on the flatlands between the Kyushu coast and the mountains. I had seen two factories that day, one spanking new and one quite old, but both looking from the outside like corrugated-metal warehouses, promising little within but rolls of baling wire and stacks of crates. In fact, the interiors were full of big computerized claws and robots and other machines used for building machines that would later build other machines. This was Hirata Industrial Machineries Company, whose employees numbered 1,100 and whose sales ran to more than ¥20 billion a year. You will find many robots at Hirata Machine but no MBAs, and indeed not many college graduates. Hirata, like many Japanese companies, prefers to grow its own and hires something like 70 percent of its workers from high school or trade school. They build high-tech automated manufacturing systems, which in turn make high-tech electronics equipment for consumers.
They founded the company in 1946, right after the war, Yasunari Hirata told me. We spoke inside his office, somewhere within the disturbingly blue building. The Americans brought Jeeps with them after the war, he said, and his father saw them and believed that conveyances, transportation systems for industry, would be important. Father and son—the son was young Yasunari—originally started out by making pushcarts and baby carriages. The initial capital investment was ¥3,000. Since the banks were unimpressed, the Hiratas raised capital by saving money and wearing old clothes. They started with old equipment that they refurbished. The engineers, including the founders, may not have had much technical education, but they were willing to learn and they loved doing new things, and whenever a new machine arrived all the workers wanted to get their hands on it. They tinkered with everything. Later on the company graduated to making conveyor-belt systems. We learned as we went along, he said, by trial and error and from books and traveling; we decided what to make and then figured out how to make it. Now we make industrial robots.
I see the company as an infinitely growing child, he said. I will die, but it continues to live, and my responsibility is to see to that. And I want to continue to build better and better robots. A better machine every year, that is what I want. You know, you don't have to have something to start something. This he said with evident satisfaction.
Of course the story of Hirata Machine is the classic tale of Yankee ingenuity, transplanted to Kumamoto. It is a chapter from the book by Henry Ford and the others of that era. You remember that book. It is the one titled, "Build a better mousetrap and the world will beat a path to your door."
Yet the world bangs on the door with as much anger as eagerness. From an economic point of view the Japanese economy must be counted among the miracles of our age and ought to be regarded as an international treasure. It is a fount of innovation and instruction such as appears only once or twice in a century. But from the point of view of international politics, this same economy has been little short of a disaster. I met a number of Japanese who would have you believe that this is because the world does not like Asians in general and Japanese in particular, so that whites' achievements are welcomed while the achievements of Japanese are resented. Perhaps that is a problem. Certainly it is a problem in some quarters. But it is not the problem, and those who look to racism for the source of Japan's international headaches, especially the headache with the United States, are kidding themselves.
The trouble has more to do with Japan's attempt to use the outside world as a kind of garbage can for what economists call adjustment costs: the costs of changing jobs, moving around, and breaking off relationships. A small country can protect its powerful stakeholders from troublesome adjustments without causing a great deal of fuss internationally. But the story is different for a large country, a country that is a great trading power. The combination of government protection and private clubs and cartels keeps many small farmers in business, but it also keeps foreign farmers out and so costs them money; and when the market at issue is very big and very rich instead of very small and very poor, the foreign farmers notice and they are resentful. Same with the securities industry; same with the small-shops protection; same with the whole web of cozy relationships.
Though I know people who would disagree, personally I do not think that the attempt to dump adjustment costs on the outside world is caused by any special aversion to foreigners. (Nor is it uniquely Japanese. Everybody tries to do it.) I believe it has simply to do with the fact that foreigners do not vote in Japanese elections and are not tied into Japanese relationships. They lack both political pull and bonds of loyalty, and so are not cut in on the deals. Moreover, I do not think that the Japanese City Hall tries especially to thwart foreigners. Rather it tries to thwart newcomers. Unfortunately for the good of international relations, in Japan most foreigners are newcomers, and most Japanese are not. Now, in Japan, once you have established your personal ties and gotten in on your cozy deal, you are inside practically for good, whether you are foreign or not. Outsiders who are persistent and ingenious, and who are willing to pay the high initiation costs, do indeed get in, as for instance IBM and Coca-Cola (and Sony, once an upstart) have done. Then they enjoy fat profits, cozy relationships, and all the other benefits of membership.
Not long ago Pepsi began making rapid gains in the Japanese market thanks to an especially popular TV ad—which was promptly dropped by Tokyo's major TV stations, under pressure from Pepsi's giant entrenched competitor. Pepsi understandably screeched and might, I suppose, have tried to list the issue among Japan's unfair trading practices, except that the entrenched competitor was Coca-Cola. The difference between them was not one of nationality but of position and thus power. Coca-Cola, however, is an exception. Inevitably most foreigners are still outside, and many of those have war stories to tell.
And so the outsiders get mad. Especially if they are Americans, who tend to get worked up about justice. The outsiders say, "Twenty and 30 and 40 years ago, when you were flat on your backs, you were newcomers in America. Granted, life was not easy for you; but the easy-in, easy-out American system is paradise compared to what we encounter in Japan. Our economic hospitality put you on the map. And now how is our hospitality returned? With cozy clubs and Byzantine relationships and 'Members Only' signs and lectures about 'not trying hard enough.' Well, screw you. We'll get even."
Hearing this, the insiders are aghast. The plaintiffs have no case. Surely they misunderstand. The insiders say, "We worked our tails off to establish ourselves in America, whose markets were no pushover for small yellow foreigners. We learned your language and studied your consumers and built distribution networks. We made a vast investment over many years. We played by your rules in your country, and we made the customer happy. And how is our effort repaid? You now demand to play by your rules in our country. Your automobile companies complain of 'closed' markets but do not send us right-hand-drive cars. Is that our fault? Your executives don't learn our language; your companies come into a country where trust and personal ties are the coin of the realm and then pull out after losing money for a couple of years. How dare you blame us for that? No. You must not demand special treatment. You must pay the same dues that all newcomers pay in Japan, and if you do you will enjoy the same benefits, and if you do not you have no right to complain."
The argument belongs in an ethics textbook. Within its own context each side is wholly justified and has a strong claim to justice. And there exists no neutral ground from which to adjudicate. One must simply choose. A heartbreaker.
Worse, I fear: a bonebreaker. As the anger grows, the temptation becomes overwhelming for the nations of North America and Europe to say, "Two can play your game." Indeed, the Americans and Europeans, especially the Europeans, have been playing the game of protectionism for many years. All they need is an excuse to redouble their efforts. If they do so, then the result is either a trade war or recourse to a political solution in which governments meet to allocate markets. ("We'll buy this many Sonys if you'll buy that many Fords. You give us 20 percent of your computer-chip market in exchange for 15 percent of our telecommunications market.")
Either result is a disaster for Japan, first and foremost among all the world's nations. Trade wars hurt most the countries that are most dependent on trade (read: Japan). And allocation of markets according to political clout, by its nature, favors the most politically powerful and hobbles the most economically competitive (read: Japan). This is why the Japanese are stupid and irresponsible to be anything other than the world's leading advocate of free trade, not merely following or complying but leading.
Moreover, Japan's practice of winking at cartels and harassing newcomers, however convenient for politicians and stakeholders, hurts no one as much as the average Japanese. As, indeed, many average Japanese are becoming aware. Traveling abroad in increasing millions, they have begun to see that coziness has its price: that by comparison with the United States or France they have two-thirds as many miles of roadway for every car, that only about two-thirds of their roads were paved by the late 1980s (90 percent in the United States, 100 percent in France and the United Kingdom), that apartment rents are twice as high in Tokyo as in New York City, that consumer prices are at least 30 percent higher than in the United States, that Americans and Europeans take for granted a number of household amenities—central hot water, a toilet inside the apartment rather than down the hall—that quite a few Japanese have been getting along without.
Therefore it is pretty clear in which direction the Japanese should move: toward liberalization, voluntarily and fast. Not because this is good for foreigners (although it is), but because it is vital for Japan.
There is not a great deal that the Americans can do directly to reform the Japanese system, nor does international diplomatic etiquette permit them to try. However, at the very least Americans should avoid making blunders. The biggest blunder, and one that most Americans actually commit, is to see the goal as reducing the U.S. trade deficit. The U.S. balance of trade has not much to do with Japanese economic practices and a great deal to do with macroeconomic forces in America—nor does it matter much anyway. Even people who try very hard have trouble finding any objective damage that trade deficits have caused to the American economy as a whole, and economic theory gives little reason to expect such damage. South Korea ran trade deficits chronically until 1986, and its industrial base was hardly falling apart. For the most part America's industrial base also is not falling apart; and if it were falling apart, getting rid of the trade deficit would of itself no more solve the problem than shooting out the alarm would extinguish a fire.
The tempting and dangerous trap is to seek commitments from the Japanese bureaucracy to manage away the trade deficit by playing macroeconomic games or, worse yet, by regulating imports and exports ("managed trade"). That kind of action would just re-empower the administrative state that blocks political and economic competition—precisely the wrong thing to do. Already the Japanese bureaucracy, like bureaucracies everywhere but less effectively opposed than most, tends to regulate everything that moves and keep secret everything that doesn't. (One day I read in the paper that the Construction Ministry had increased the permissible size of log cabins. Good news for Abe Lincoln.)
At a time when market forces are slowly eroding Japanese bureaucratic power, the ministries would like nothing better than a mandate from the American government to regulate Japanese trade. The United States must avoid doing favors for Japanese bureaucracies and cartels. At every turn it must encourage measures that open the system to newcomers, and so to selection by competitive trial and error. Getting rid of the laws that protect small stores, or exposing the Nokyo agripolitical machine to foreign competition, is just the right sort of idea; demanding that the Construction Ministry dispense untold trillions of yen on public-works projects to jigger down the trade deficit, or demanding percentage shares of Japanese semiconductor markets, is the wrong sort of idea. The way to keep this straight is to set the important goal first: not reducing the trade deficit to some arbitrary number, but unwinding the coils of Japanese technofeudalism.