The mythology that informs both popular opinion and congressional deliberation depicts America and Japan competing on a clearly delineated economic playing field. On the one side are Japanese corporations, aided by their government. On the other, American corporations, handicapped by theirs. The National Chamber of Commerce and other boosters of American business typically complain that the playing field is tilted, to Japan’s advantage. The Mob at the Gates does not play the game fairly. To even things up, it is argued, their government must stop subsidizing and protect them. And ours must relax the antitrust laws, corporate taxes, and regulatory burdens that shackle American companies. In the mid-1980s American politicians of all stripes were threatening to close off the American market to Japanese goods unless Japan stopped “cheating.” The Reagan administration, meanwhile, was busily dismantling the supposed impediments to American business.
This view is misleading in two central respects. First, as already suggested, America is by no means an exemplar of laissez faire. The United States government has been, if anything, rather more involved in technological development than has the Japanese government, although from the perspective of commercial competitiveness this involvement, by and large, has been perverse in recent years. Nor has the sin of protectionism been solely or even primarily a Japanese failing. The Japanese have deliberately limited imports of tobacco, beef, and baseball bats; cumbersome procedures have limited some other imports. But in several major areas of trade—automobiles, steel, textiles, services, and high technologies—American import barriers have been considerably higher than Japan’s. Thus while the economic playing field is far from flat and open, this is not simply because “they” have been cheating.
The metaphor of America’s corporate champions sallying forth to heroic (if rigged) battle is flawed in a more fundamental way, however. It rests on the presumption that the economic prospects of the United States are so tightly linked to the prospects of American-based firms as to amount to the same thing. Perhaps this premise was once tenable; it no longer is. By the mid-1980s, in the most competitive fields of endeavor, there were ever-fewer companies that could be considered uniquely “American” in resources, orientation, or loyalties. Trade competition across the Pacific was on the way to being dominated by one type of player. Sometimes it went by a Japanese name, sometimes by an American. It took several forms. Occasionally American firms linked up with their former rivals in joint ventures and purchase agreements. Or Japanese companies bought up American companies, or built new plants in the United States, employing American workers. Or American companies built plants in Japan, hiring Japanese. Regardless of form, the result was approximately the same—a transpacific entity, neither solely Japanese nor solely American, but something in between: a Japanese-American corporation.
If increasing global economic integration is both desirable and inevitable, one would think this is a welcome trend, and it is, to the extent that the rise of the Japanese-American corporation reduces the propensity of either America or Japan to seek advantage at the direct expense of the other (an effort that I have already suggested is likely to render both sides worse off). But the trend is less desirable if, as has been the case, it simultaneously reduces the willingness of Americans to develop our own skills and capacities.
The emerging Japanese-American corporation is problematic in this regard, for although it invests diligently in the skills of Japanese workers, it tends to shortchange American workers. As we shall observe, this is not because of any nefarious motive on the part of the Japanese; it is rather a function of the different ethical and economic premises they bring to corporate activity. The Japanese part of the Japanese-American corporation is dedicated to enhancing the wealth and influence of everyone associated with the firm; the American part, to enhancing the wealth of its shareholders (and top executives). The Japanese-American corporation will provide Americans with jobs, to be sure, but not with the training they need to keep pace with the new world economy. The image of trade competition as mostly a matter of rivalry between Japanese and American companies blinds us to this fundamental dilemma and the question it raises—who will attend to the long-term development of the American work force?
The case of Houdaille Industries offers an illustration.1 This Florida-based manufacturer of computer-controlled machine tools set out in 1982 to block imports of competing Japanese tools. The company followed the prescribed route, guided by a prominent Washington law firm. It first petitioned the U.S. government for protection, accusing the Japanese machine toolmakers of dumping their wares here at prices below their production costs, with government subsidies making up the difference. That strategy failed for lack of evidence, despite the efforts of a Houdaille agent who prowled around Japanese machine tool factories with a video camera seeking signs of unfair government assistance. Next, Houdaille tried to persuade the Reagan administration to deny to American buyers of Japanese machine tools the 10 percent investment tax credit on equipment. After a bitter split in the administration over what to do, Japanese Prime Minister Yasuhiro Nakasone personally sought President Reagan’s assurance that the company’s request would be denied. Undaunted, Houdaille then made the rounds of the Defense Department and Congress, arguing that its own continued profitability was critical to national security.
When this last ploy failed, Houdaille abruptly changed course. In the spring of 1984 it announced that it would seek a joint venture with Japan’s Okuma Machinery Works. Okuma would supply Houdaille with ready-made machine tools, which Houdaille would then market and distribute in the United States under its own trademark. “If we can’t beat them,” a company spokesman told The New York Times, “we’ll joint venture with them.” The new strategy might boost Houdaille’s lagging profits, at least in the short term. It might even preserve some American jobs. But it brought to a halt one stream of domestic economic endeavor. American workers would no longer be developing this set of skills; competence in designing and making machine tools would be permanently surrendered.
By 1986 almost every American industry with a history of bitter conflict with Japan was showing sudden signs of born-again cooperation. Trade names were becoming irrelevant for distinguishing Japanese from American products. General Motors was buying diesel engines and subcompacts from Isuzu, and making cars in California jointly with Toyota; most of the robots and computerized machine tools it used to assemble its cars also came from Japan. Chrysler was getting many of its transaxles, engines, and subcompacts from Mitsubishi; Ford bought key parts from Mazda. Kodak’s copiers were made by Canon; Kodak’s 8-millimeter video cameras, by Matsushita, which was also supplying General Electric with televisions, disk players, and air conditioners. Honeywell’s computers were manufactured by NEC, and the list goes on.2
Meanwhile, Japanese factories were beginning to dot the American landscape. Honda was making cars in Ohio; Mazda, in Michigan; Mitsubishi Motors, in Illinois; Nissan, trucks in Tennessee. (All told, Japanese automakers expected to build more than 1 million vehicles in the United States by 1990.) Hitachi was producing large-scale disk drives in Oklahoma and semiconductors in Dallas. Hundreds of Japanese high-tech companies were setting up shop in Oregon and California, assembling everything from personal computers to cellular mobile telephones. The locations of corporate headquarters said little about national orientation. IBM’s top executives inhabited offices in Armonk, New York. But 10 percent of IBM’s employees were Japanese, living in Japan, and a growing percentage of their officers and directors were non-American. And IBM was producing most of the computers exported out of Japan.3
Ownership was becoming blurred as well. In 1986 Ford owned one quarter of Mazda; Chrysler, almost one quarter of Mitsubishi. Kodak, 10 percent of Chinon. Nippon Kokan, Japan’s second biggest steel maker, had a controlling interest in National Steel, and a 40 percent stake in Martin Marietta’s California metals operations. As securities markets around the world became more closely integrated, private investors worldwide bought stocks based on profit expectations rather than nationality. Between 1980 and 1985, U.S. institutional investors increased their holdings of foreign stocks more than fivefold, from $3 billion to $16 billion.4
That Japan and the United States have been engaged in a heated contest over trade there can be no doubt. But by the close of the 1980s it was becoming ever more difficult to say which companies were representing which side. Company names, affixed to final products or displayed over factory gates and headquarters, or even engraved on stock certificates, revealed less and less about which nation’s work force was actually doing what. Studies purporting to show relative market shares of Japanese and American companies in a given industry were equally beside the point. But of this there could be little question: no longer was the “American” corporation doing business across the Pacific the obvious custodian of America’s long-term economic well-being.
The rise of the Japanese-American corporation could be explained, in part, by the new requirements of global competition. In years past, large corporations in one nation often maintained subsidiaries in other nations. These subsidiaries were largely independent of their parent. They typically designed, manufactured and marketed their goods exclusively within their adopted country. They were like any other national company, except that a portion of their profits periodically were shipped back to their foreign parent. In the 1960s the Ford Motor Company had subsidiaries in Latin America, Australia, and all over Europe. In general, each produced a different line of cars; English Fords resembled American Fords in name only.
These subsidiaries prided themselves on being good corporate citizens of their adopted nations. They were run by citizens of the host country; they employed local workers; they sought to appeal to local tastes. Most people who consumed their products had little idea that these companies were answerable to foreign managers; when they were aware, they probably did not much care. There was no reason to.5
This changed when the trends we have already examined converged in the 1970s. First, the costs of sending goods and information around the globe dropped dramatically. This made it possible for the production of an item to be fragmented and parceled out to wherever each function could be undertaken most cheaply, and then routed to central locations for assembly. Second, the technologies of making things improved to such an extent that vast economies of scale became possible: The greater the number of identical units that could be produced at any particular location, the lower the cost of making each one. Third, the tastes of consumers around the world began to grow more alike.
Taken together, these trends meant that self-contained subsidiaries no longer made economic sense. For many industries, it was far more efficient to integrate the entire production process globally, with each subsidiary specializing in producing whichever part or service it could provide most easily. Many of the services associated with marketing and distributing would still, of necessity, be undertaken wherever the goods were to be sold. But even here there might be opportunities for global specialization and economies of scale, as in the provision of shipping containers, global warehousing, advertising, and insurance.
This phenomenon was not unique to the relationship between Japan and the United States, of course. Regardless of whose nameplates graced their exteriors, the trend was for automobiles, heavy equipment, computers, robots, esoteric electronic gadgets, not to mention the services associated with them (design, fabrication, sales, marketing, distribution, maintenance, and so on) to become multinational creations. By 1986 Ford was manufacturing a Mazda-designed car in Mexico, for sale around the world; AT&T was making its semiconductors in Spain, to be used in communications equipment assembled in Brazil for worldwide distribution. Consider the extent of this trend: As exports from America became a decreasing share of global trade, exports shipped by corporations based in America actually increased their share. Quite apart from the rise of the Japanese-American corporation, it was reasonable to suppose that by the close of the century neither General Motors cars nor IBM computers nor AT&T communications equipment would bear any special relationship to the United States. One would no longer be able to speak with pride, or concern, or any meaningful emotion at all, about “American” products.
In addition to this worldwide tendency, the special nature of the Japanese-American company has been shaped by certain unique concerns. Foremost has been Japan’s desire to forestall U.S. trade barriers. If the Reagan administration succumbed so readily to protectionism, what about a future administration less ideologically committed to free trade?
How, then, to forestall American protectionism? By doing an end run around the borders. The strategy had two aspects. First, it was necessary to enter into supply contracts with American companies; second, to build new factories in the United States. In both respects, American workers would get jobs assembling Japanese components and then selling the finished goods to their fellow countrymen. Americans would become partners in Japanese enterprise. As a result, it was thought, the two nations would become a single, integrated, transpacific production system. There would be less demand for trade protection, because there would be less to protect.
By the mid-1980s the strategy was already bearing fruit. Corporations that were technically “American,” but which had developed close relationships with Japanese suppliers and joint venturers, were steadfastly opposing tariffs and quotas on Japanese imports. Such devices would drive up the costs of their supplies. General Motors, IBM, GE, Kodak, and even Houdaille Industries could be counted on to support free trade. Also on the side of unrestricted trade were certain congressional districts in Ohio, Tennessee, North Carolina, California, and Oregon, where Japanese firms had set up manufacturing operations. Even the United Auto Workers were enthusiastic about the General Motors-Toyota joint venture in California, because it preserved American jobs.
The strategy had a second advantage for the Japanese. In supplying American companies with key components or entire products, to which the Americans thereafter affixed their trademarks and distributed as their own, the Japanese created a captive market for their wares. And they gained an inexpensive method of distributing them. This meant that the Japanese could negotiate large contracts, wholesale. The costs and vagaries of retailing could be avoided. Risks, accordingly, could be reduced.
From the viewpoint of the Japanese, these advantages were worth paying for. American corporations that have linked up with the Japanese have thus received attractive terms. American towns that have welcomed Japanese manufacturers have gained good corporate citizens. By the late 1980s the new Japanese-American corporation seemed to be serving both nations well. Or was it?
The Japanese strategy has benefited Japan in a third but more important way. It is here that Americans might appropriately be concerned, because these benefits have not been entirely reciprocal.
Look closely at these new joint ventures and transnational investments. There has been a pattern to them. Basic research leading to initial product design continues to be carried out in the United States. Then the specific design and production of the most complex parts and sophisticated assemblies has occurred in Japan. Back in America workers have put the final pieces together. And a different group of American workers has distributed, marketed, and sold the products to other Americans. In other words, Americans have taken charge of the two ends of the production process—the major research innovations and the final assembly and sales. The Japanese have concentrated on the complex production in between, where large numbers of workers gain technological and organizational competence.
Consider: Through the mid-1980s breakthroughs in chip design continued to occur in the United States. University-based researchers and Pentagon contractors devised ways of cramming ever more memory, logic, or speed into ever smaller spaces. But the Japanese were better at producing the chips cheaply and reliably. So the Japanese licensed the designs and made them there. American computer manufacturers (Honeywell, Sperry, Amdahl) began linking up with Japanese semiconductor makers to get the advanced chips they needed for their computers. At the same time, American chip makers began setting up production facilities in Japan, to be managed and staffed by Japanese. The semiconductors that the Japanese started to fabricate in the United States represented only the most standardized segment of that market, for which all the jobs were relatively routine.6
It has been the same in automobiles. The new Japanese-American auto company (regardless of whether its name is General Motors or Honda) has been making its engines, transaxles, and complex electronic parts in Japan, along with most of the robots and computer-controlled machines for putting the parts together, and then assembling and selling the results in the United States. The trend was particularly apparent in the production of the smallest cars, which must be designed and manufactured especially carefully in order to minimize costs and maximize comfort. As the Japanese have learned in producing everything from televisions to semiconductors, innovations in products and manufacturing processes often occur at the most compact end of a product line, where the engineering challenges are the greatest. For the same reason, development expenses often are highest at the compact end. But as part of a strategy for gaining experience in applying new technologies, the Japanese gladly bear these costs; the investment will pay off in a work force better able to innovate in the future.
It has been the same in telecommunications. The breakthroughs have continued to occur in the United States—particularly within universities and defense annexes. But the complex applications occurred in Japan. Regardless of whose nameplates appeared on the new private-branch exchanges, cellular telephones, and optic-fiber cables sold in America, a large proportion of their sophisticated innards were Japanese. It has been the same in consumer electronic products like videocassette recorders, compact disks, and audio disk players; the same for facsimile equipment, large-scale integrated circuits, and sensing devices. Even the steel mills that the Japanese have built or modernized in the United States got their advanced steel-making machinery from Japan.
Comparative advantage is among the most venerated of economic precepts. It boils down to the dictum that nations should stick to what they do best. To entrust the Japanese with turning our big discoveries into complicated components would by this view be eminently sensible. Japanese workers have been willing, on average, to work harder and for somewhat lower pay than their American counterparts. And Japanese production has been more efficient than the American, particularly with regard to the design, fabrication, and manufacture of complex equipment.7 Americans have made money from transferring our Big Ideas to them. They have made money by selling them back to us encased within terrific products and parts.
What is left out of this calculation is the value of experience. As has been noted, the accumulation of experience in designing and making new things is critical for improving upon them. The emerging Japanese-American corporation allocates to the Japanese the most important asset for the future—experience in making complex products cheaply and well. They learn how to organize themselves for production—integrating design, fabrication, and manufacturing; using computers to enhance their skills; developing new flexibility; creating new blends of advanced goods and services. They learn how to make the kinds of small, incremental improvements in production processes and products that can make all the difference in price, quality, and marketability. In short, they develop the collective capacity to transform raw ideas quickly into world-class products.
Such experience in making things is crucial for generating social wealth—in some ways more important even than the activities at either end of the production process, like invention or marketing and sales. Production experience tends to give large numbers of workers skills that have value in global markets. These skills can be applied generally, across all kinds of goods and services—not just the latest inventions. An entire nation benefits from having a large pool of workers who understand emerging technologies and can improve upon them.
By contrast, the activities at the two ends of the production process either involve relatively few workers, or else entail skills that have little value in trade. Only a comparatively few people gain experience inventing the new technologies to begin with. Basic inventions do not raise the overall level of skills in a society, nor do they generate broad experience. They do not lead to the kind of day-to-day improvements in a host of products and processes, across an entire economy, that can only come from a work force broadly engaged with the latest technologies. Basic inventions do of course yield improvements, but these are easily disseminated in blueprints, codes, and instructions—reaching Seoul almost as soon as they reach St. Louis. The jobs at the other end of the production process—routine assembly, marketing, and sales—may involve many workers, but most of these jobs do not teach skills that contribute much to a global economy. Many low-skilled assembly operations will be automated in years to come, or else done by workers in less developed nations at a fraction of the cost. Jobs in marketing and selling to one’s fellow citizens are largely sheltered from international trade. (Knowledge about the tastes and needs of one’s compatriots has worldwide value only to the extent that these compatriots are wealthy enough to purchase things from the rest of the world.)
The Japanese well understand this dynamic. That is why they place priority upon production experience rather than basic invention or final assembly and sales. Their overriding goal is to raise the competence of their work force in complex production. Complex products relying on advanced microelectronics, lightweight synthetic materials, sophisticated aerodynamics, or bio-molecular manipulation are launchpads for gaining skill and experience in the world’s newest technologies. Attaining immediate profits from these products (and related services) is less important to Japan than becoming a large and experienced world practitioner of the advanced methods that lie behind them.
There is a temptation to depict this as a plot through which the Japanese intend to emerge in a decade or so with the world’s most skilled work force, and the highest potential standard of living. But there is nothing particularly sinister about all this. As has been suggested, this sort of race for adding value can be entirely benign—and would be, but for the skewed distribution of production skills that has been the particular consequence of the Japanese-American corporation. Production experience does not come in a fixed quantity, to be divided between Japanese and American workers. Both societies would be better off if both work forces learned how to devise higher-quality products at ever lower costs. For then each nation would have more to offer the other, with the result that both would enjoy even larger gains.
For us to blame the Japanese misplaces the responsibility. The problem lies not with them, but with us. American-based companies (or the American parts of Japanese-American corporations) could invest in more sophisticated production in the United States, developing in our work force the same base of technological competence and organizational experience that Japan is creating among Japanese workers. To do so would require broad sacrifices and commitments of the sort we are not accustomed to make or to demand of one another. I will discuss this point further in a later chapter.
Nor can the responsibility rest solely with American corporate executives. They have been performing exactly as they are meant to perform. We can safely assume that the vast majority of our executives are patriotic and care about the future of their country. Their primary responsibility, however, is to enhance the wealth of their shareholders—not to enhance the technological competence of the American work force. When these two goals conflict—because, for example, it is cheaper to buy advanced components ready-made from the Japanese than to build them here—our executives must opt for the shareholders. This is their legal duty. If they failed to do so, they could be sued, or taken over. These are the incentives we build into our capitalist system.
Telling our mythic tale of trade competition with Japan as if it depended on the relative prowess of Japanese and American corporations, with the help or hindrance of their respective governments, has distracted us from looking at the prowess of the American work force—and its capacity to add value to an increasingly international system of production. Once again, in focusing on a putative Mob at our Gates, we have neglected to address questions concerning reciprocal obligations and mutual benefits underlying our political economy. In this case, what is the responsibility of corporations doing business here—and of their various constituents—for investing in the future competence of Americans? How can American capitalism elicit this investment from them? Until we ask, we are unlikely to find satisfactory answers.