Japan and the changing economic order

Abstract

What should be the role of Japan? In the aftermath of the Second World War the United States, then the paramount world power, worked almost single-handedly to bring peace and prosperity to the rest of the world. Under this Pax Americana one saw a gradual consolidation of a liberal world economic order based on the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (IBRD). Since the mid1960s, however, it has become increasingly difficult for the United States to perform its hegemonic role effectively as its relative position in the world economy has steadily declined. In 1955 the share of the United States gross domestic product (GDP) in the total world GDP was 40.3 per cent, but in 1980 it was reduced to 23.3 per cent. In 1957 the share of foreign reserves in United States hands constituted 40.1 per cent of the world's total, but in 1972 it was reduced to only 7.3 per cent. And in 1985 the country, which had long remained the world's largest creditor nation, became the world's largest debtor nation, with its foreign debt amounting to as much as $263.3 billion in 1986. In its stead, Japan became the world's largest creditor nation, with its foreign assets amounting to $180.4 billion in 1986. In the immediate postwar years the United States enjoyed international competitiveness in practically all domestic industries. But over the years it lost comparative advantage in an increasing number of them, such as textiles in the 1950s, steel in the 1960s, household electronics in the mid-1970s, automobiles in the late 1970s, and now even high-technology industries. Indeed, the United States global trade has registered a deficit ever since 1971 (except for two years), and the United States global trade deficit in 1986 amounted to an unprecedented $170 billion; its trade deficit with Japan was about $58 billion. Consequently, the United States government has become increasingly susceptible to protectionist demands from specific import-affected industries. Today, the American eagle is wounded both economically and spiritually, becoming less and less capable and willing to bear the cost of maintaining the liberal economic order from which Japan and other United States trading partners have greatly benefited. What should be the role of Japan, the world's second largest market economy, under these changing circumstances? Before focusing on this vital question, let us examine what might happen if the present trend were allowed to take its own course. Among other things, one can think of the following four future scenarios or images: the restoration of Pax Americana, the establishment of Pax Nipponica, the emergence of competing economic blocs, and the creation of a joint leadership system.