A Japanese viewpoint: we're balancing trade.

• Author: Honda, Keikichi
• Position: Special Global Report

As early as the 1970s, Japan's main business purposes were to expand sales activities in local markets and to achieve a relatively low unit-labor cost. Consequently, less transfer of technology took place and often the production process turned "screwdriver" in nature, resulting in a vertical division of labor.

But the Plaza Agreement, enacted in 1985, changed the whole picture. The impact of the Agreement's exchange-rate realignment penetrated almost every industry in Japan. Such an abrupt change in the exchange value-a 30-percent drop in just a year, compounded to 46 percent in three years-made it unrealistic for export manufacturers to hang on to mere domestic production and for domestic distributors to procure products from only domestic suppliers. The "Plaza shock" was strong enough to convince industries across the board to globalize their business strategies.

The rate of Japanese export as a proportion of total sales in the country's major industries began declining. In the automobile and automotive parts industries, for instance, the rate dropped from 49 percent in 1985 to 33 percent in 1989. In electric machinery manufacturing, it went from 38 percent to 29 percent. Steel dropped from 35 to 18 percent, and general machinery dropped from 32 to 22 percent. As a whole, the Japanese manufacturing sector experienced an export decline from 26 to 20 percent.

That lost portion of production capacity mostly moved abroad. We measure our horizontal division of labor by comparing the strength of exports against that of imports in any given sector of an industry. During the five years following the Plaza Agreement, Japan, relative to its trade partners in the western Pacific Rim region, has either reduced the level of or lost entirely the superiority of its exports over its imports in eight of 10 major industrial sectors.

In such areas as food stuffs, textiles, and non-metallic mineral products, Japan imports more than it exports. All other segments have more exports than imports but are moving toward a trade balance, with the exception of the auto industry.

The total value of the top six Japanese exports to the U.S.-motor vehicles and parts, electronics, precision instruments, visual and audio apparatus, and iron and steel-grew from $37 billion in 1985 to $47 billion in 1989, only a 25-percent increase in five years. The total value of the top five American exports to Japan-meat, machinery, chemical goods, wood, and grain-grew from $15 billion...