JPRI Working Paper No. 37: September 1997
Positive and Negative Aspects of U.S.-Asian Economic Relations
by Clyde V. Prestowitz, Jr.

Within the very favorable environment created by U.S. postwar policy, the macroeconomic and industrial policies of the East Asian countries operated in tandem with the tremendous energy and stakeholder-focused strategy of the private sector to produce the greatest burst of economic development in world history. The statistics are familiar and yet still astounding. In 1952, Japan's GNP was $17.5 billion, or about five percent of U.S. GNP, with a total trade of $3.4 billion and a per capita annual income of only $202. By 1967, Japan's GNP had surpassed that of Great Britain, and today at almost $5 trillion is second only to that of the United States. Indeed, in nominal terms, Japan's per capita income of $37,000 per annum is nearly fifty percent higher than the U.S. figure of $26,000.

The story is similar for the rest of Asia. From seemingly nowhere, South Korea has risen to become the world's eleventh largest economy, while the per capita income levels of Hong Kong and Singapore have grown to match or surpass those of many Western European countries and the United States. With the ASEAN countries and China now running on the high-growth track, income levels in these countries are rising rapidly and Asia now accounts for thirty percent of world GDP and twenty-six percent of world trade.

For the United States, the Asian miracle has also delivered major economic gains. Most obvious is the growth in U.S. exports to Asia, which over the past forty-five years have risen in real terms from $10 billion to $163 billion. The Asian region is now the largest market outside of NAFTA for American goods and services, and these exports support nearly four million U.S.-based jobs.

A second positive impact on the United States has been the gains in manufacturing productivity achieved by American industry in response to competition from Asia. For instance, between 1980 and 1989, the U.S. steel industry reduced the man hours required to produce a ton of steel from 10.3 (compared to Japan's 9) to 5.7 (compared to Japan's 6), for a productivity gain of nearly fifty percent. The experiences of the semiconductor, machine-tool, and other industries have been similar.

Measuring the direct impact on U.S. productivity of Asian competition is difficult because there are both positive and negative effects. Manufacturing productivity has grown about .5 percent faster annually during the past twenty years than it did during the previous two decades. But not all of this gain can be attributed to Asian competition. At least half of these gains have resulted from advances in technology that would have occurred anyway.

Second, even though steel and some other industries have experienced strong productivity growth, the impact on manufacturing as a whole has been muted because Asians are not strong competitors in every manufacturing sector.

Third, many firms have improved efficiency by outsourcing. Though outsourcing may improve productivity of an individual firm dramatically, the overall impact is only the difference between the efficiency of the outsourcing firm and its subcontractor.

Fourth, many companies halted or dramatically reduced their output of goods that Asian competition made unprofitable. A given industry can improve productivity by producing more with less, but if output falls, and the decrease in output is larger than the increase in efficiency, the net productivity impact will be negative. The U.S. consumer electronics industry is a perfect example of this effect. From 1966 to 1976, its productivity doubled, increasing almost twice as fast as overall manufacturing productivity. However, output in the industry increased only twenty percent during the period, about eight percentage points slower than the total increase of U.S. industrial output. Hence, consumer electronics was a drag on manufacturing productivity even though its productivity increases during the period were spectacular.

Nonetheless, the bottom line is that Asian competition has had a small but significant positive impact on U.S. manufacturing productivity. If we assume half of the gain in manufacturing productivity was a response to Asian competition, the net impact is about .25 percent per year in added efficiency. Since manufacturing accounts for about twenty percent of U.S. output, the direct impact of Asian competition on overall U.S. productivity has been about .05 percent per year (.25% x 20%) over the past fifteen to twenty years.

As with productivity, U.S. industry has also improved the quality of its output in response to Asian competition. In the auto industry, for example, the average number of defects per one hundred Big Three vehicles has declined from nearly one hundred to about thirty over the past fifteen years. In the semiconductor industry, U.S. producers who had more than twice the number of rejected chips as their Asian competitors fifteen years ago are now at about the same level of rejects. The picture is similar in steel, machine-tools, and a broad range of other industries. While difficult to quantify, it is clear that this rise in quality has improved the American standard of living.

A fourth positive Asian contribution to the U.S. economy has been the region's supply of inexpensive goods. The exact impact of Asian products on U.S. prices is difficult to measure because appropriate price indexes covering a long period of time simply do not exist. Moreover, the secular decline in the value of the dollar may have counteracted the price dampening effect of Asian-made goods on U.S. inflation by raising their prices in dollar terms. Nonetheless, it is possible to make a rough estimate, using conservative assumptions, of the impact on U.S. prices of Asian imports, which now account for about ten percent of goods consumed in the U.S. Over the past fifteen years, the overall impact of Asian imports has been to lower average U.S. price levels by about two to three percent, which amounts to about a .1 to .2 percent reduction in annual inflation during the period.

Finally, the Asian economies have made a positive contribution to the American economy by helping to fund the massive U.S. government budget deficits of the past fifteen years. Asian investors, and central bankers from countries with high savings rates have been big buyers of U.S. bonds, thereby filling the U.S. savings gap and keeping interest rates lower and investment rates higher than they otherwise would have been. As of the end of 1995, Japanese private and official holdings of U.S. Treasury securities totaled $223 billion. Holdings of other Asian countries are substantial as well. Negative Impacts

Unfortunately, the story is not entirely positive, and in addition to their contributions, the Asian economies have also imposed costs on the U.S. economy.

In the first place, the United States has for a very long time effectively subsidized the Asian economies in a number of ways. The initial postwar exchange rate of the yen was set at «360=$1, somewhat undervaluing it even then. More important than the initial rate, however, was what happened during the ensuing twenty years. Although Japanese productivity rose more than 300 percent, against a 44 percent increase for the United States, the nominal exchange rate remained fixed at «360=$1. Because price levels in Japan rose 2.5 times more than U.S. price levels during the period, the yen did appreciate in real terms, but not by enough to offset Japan's rising productivity.

The yen's sudden appreciation after the Nixon shock in 1971 was indicative of its undervaluation, but even this did not fully reflect Japan's productivity gains. There was another spike in the yen's value in 1978, but the dollar soon reversed course, soaring during the early 1980s even as Japan's productivity continued outpacing that of the United States. Thus, for most of the past forty-five years the dollar has been chronically overvalued versus the yen. From 1960-1985, this overvaluation amounted to an effective subsidy of slightly more than $300 billion (if one adds the annual import subsidy and the foregone American exports into the Japanese market). (See Table 1)

The same story has been repeated in other Asian economies. According to the World Bank, real GNP per capita (a proxy for productivity) in East Asia grew more than five percent per year from 1965 to 1990, compared to growth in the United States of two percent per year. Yet, as Table 2 shows, despite these productivity differentials and large trade surpluses with the United States, there has been relatively little adjustment in the inflation-adjusted exchange rates of most Asian currencies and the U.S. dollar. In fact, some currencies have actually depreciated vis-ö-vis the U.S.'s (indicated by positive signs in the table). Thus, altogether the implicit U.S. subsidy to Asian trade over the past thirty- six years has been in the range of $400 to $500 billion.

A second subsidy has been provided through the generalized system of preference (GSP) under which the United States has provided special tariff reductions on goods imported from developing countries. Added to this must be military procurement and coproduction and offset arrangements amounting to hundreds of billions of dollars that have been directed toward Asia.

Finally, by unilaterally providing security to Japan, South Korea, and much of the Western Pacific, the United States has provided large indirect subsidies. The most obvious is in the form of direct military expense. The cost to the United States of providing the security guarantee is about $40 billion annually. At the same time, the value of this to the Asian economies is much greater. Without the U.S. subsidy, Japan's annual defense budget would be closer to $100 billion, or $60 billion above its present $40 billion level. Most of the other Asian countries would increase their military budgets by the same order of magnitude of one to two percent of GNP.

The U.S. security role carries with it another more indirect but potentially very large cost. In response to Chinese missile firings near Taiwan in March, 1966, the United States dispatched two aircraft carrier task forces. China retaliated by switching procurement contracts from U.S. to other Asian and European suppliers. It is impossible to quantify the full impact of this phenomenon, but anecdotal evidence suggests it is quite large.

The United States has also subsidized Asia through its acquiescence in Asian trade- related investment measures (TRIMS) and in policies aimed at forcing technology transfer. Beginning with Japan in the 1950s, and continuing to the present, nearly all the Asian governments have intervened in private industry negotiations to make technology transfer and local production a condition of entering their markets. Beyond this, the Asian governments have often further intervened to adjust the conditions of privately negotiated licensing and joint venture agreements. Moreover, these government policies have often been complemented by collusive activity on the part of Asian companies that have banded together to insist on local production and technology transfer by foreign business partners.

The effect, with regard to technology transfer, has been estimated for the case of Japan by James Abegglen (Abegglen and George Stalk, Jr., Kaisha, The Japanese Corporation, Basic Books, pp. 126-28). He pointed out that over a period of thirty years Japan entered into 42,000 licensing agreements for a total in fees and royalties of about $17 billion, or roughly seventeen percent of one year's worth of the annual U.S. R&D budget of $100 billion. These licensees have supported at least twenty percent of Japan's manufacturing sales, although the share has probably declined in recent years. By comparison, a royalty of only three percent on these sales, even after accounting for Japan's rising level of technological self-sufficiency, would have yielded, on average, $2.7 billion per year. Thus the R&D subsidy over the past thirty years has been on the order of $65 billion.

A recent example illustrates what has been happening for a long time with regard to U.S. investment in Asia. A few months ago, the top management of one of America's leading companies met to discuss its investment strategy. For some time, it had been planning a large investment for new production facilities in the United States. The discussion at the meeting, however, concerned whether or not to alter the plan and put the facility in China instead. In the course of the discussion, it became clear that the amount of investment required for China would be higher than for the United States. It was also explained that the cost of production would be higher, while anticipated quality levels would be lower. On top of that, most of the product would be exported from China back to the United States and elsewhere. In the face of all this, why was the company even considering putting a plant in China? The reason was that the Chinese government was applying enormous pressure to invest and produce in China as a condition of being allowed to sell in the Chinese market. And, in fact, the decision was eventually made to put the plant in China. It is impossible accurately to estimate the magnitude of this phenomenon over the past forty-five years, but at a guess ten to twenty percent of the total U.S. investment of $126 billion in Asia falls into this category. Structural Barriers

Another negative influence on the U.S. economy arises out of the structure and nature of the trading relationship between the United States and Asia. Nearly all Asian markets have been and remain opaque and relatively closed in comparison to the transparent and relatively open U.S. market. While debate has raged over the causes of the massive U.S. trade deficit with Asia, no one disputes that it is easier to sell in the U.S. market than in most Asian markets, and most experts agree that many Asian countries import less than would be expected under free market conditions. Over the years, several analysts such as Robert Lawrence and Peter Petri have attempted to estimate the extent of the inhibition in the case of Japan and its impact on the United States. Their view is that Japan under- imports globally by $100-200 billion per annum.1 The proportional U.S. share of this is $20-55 billion.

According to estimates by DRI/McGraw Hill, an additional $55 billion of U.S. exports to Japan would raise the U.S. GNP by $115 billion, add 1.5 million jobs, cut the federal budget deficit by $25 billion, raise national savings by nearly a full percentage point, and raise investment by $20 billion. If one were to add in the rest of Asia, these numbers should be increased by about thirty percent. Thus the current impact of lost exports to Asia on the U.S. economy amounts to as much as $150 billion of GNP and about 1.9 million jobs, an extra $45 billion in the budget deficit, a loss of about $26 billion of investment, and a reduction of a bit over one percent in the national savings rate.

In addition to these quantifiable costs, there is the less easily quantifiable, but certainly largely negative impact on R&D efforts. When companies know that major markets are likely to be locked to them and that they will not be able to achieve adequate economies of scale as a result, they tend not to make the R&D effort necessary to enter certain lines of business. For example, the flat panel display industry is growing rapidly as the demand for these displays in computers, aircraft, autos, and other products explodes. Although the technology was invented and developed in the United States, there is little domestic production and virtually no R&D in the area today because the Japanese producers, who dominate this market, live in a sanctuary from which they can make preemptive strikes against competitors in other markets.

While imports may operate to hold down U.S. inflation in some instances, dumped imports have also had far-reaching negative impacts. For example, documents of Japan's Fair Trade Commission confirm that from 1955 until at least 1974, the Japanese electronics industry acted collusively through the Tenth Day Group, the Palace Group, and The Okura Group to drive U.S. producers out of business by selling at very low prices in the U.S. market while keeping prices high in Japan.2 Eventually, the Japanese FTC issued a cease- and-desist order, but not before most of the U.S. industry had been wiped out. Nor was this an isolated case. In fact, the story has been repeated in industry after industry (e.g., semi-conductors, CB radios, ceramic chip packages, large forgings, machine-tools) over the years.

Even more significant than the immediate costs stemming from this kind of trade situation has been the impact on long-term productivity and industrial development. Products dumped in the U.S. market have the effect of shortening the production runs of U.S. producers, thereby reducing their economies of scale and productivity. Moreover, sectors such as the consumer electronics and semiconductor industries have been characterized by rapidly falling costs and rising productivity. If all or parts of these sectors are eliminated from the U.S. economy due to predatory trade activity, the basis for overall productivity gains is restricted to less dynamic parts of the economy, particularly to the service sectors, which typically have lower rates of productivity growth.

Again, it is difficult accurately to determine the full impact of these phenomena, but Robert Blecker, in his Beyond Twin Deficits: A Trade Strategy for the 1990s (M.E. Sharpe, 1992), has indicated some orders of magnitude. First, he points out that by 1990, the real value of the dollar had returned to about its 1980 level, making U.S. products no less competitive in price terms than they had been ten years earlier. In addition, over the decade as a whole, foreign incomes grew as or more rapidly than U.S. incomes. But the U.S. trade deficit in 1990 was $100 billion higher (in current dollars) than it had been in 1980, representing a decline of about two percent of GNP.

Blecker argues that the United States has a structural trade deficit that requires continual dollar devaluation just to avoid further deterioration. When the U.S. national income rises by ten percent, U.S. imports rise by about twenty-five percent. But when foreign incomes rise by ten percent, demand for U.S. exports rises only fifteen percent. Thus, the United States cannot grow as fast as its trading partners without risking a perpetually widening trade deficit. It is in this context that the growth in U.S. productivity has fallen from its former rate of about 2.3 percent per annum to about .8 percent per annum during the past twenty years. At least a portion of this is due to the nature of U.S.- Asia trade and the adverse effects noted above. Especially troublesome is the implication that the United States can only move toward trade balance by lowering wages and/or devaluing the dollar, both of which it has been doing over the past twenty years.

The slowdown in U.S. economic growth, increasing economic interaction with Asia, and the decline in U.S. productivity growth are not separate problems. Although lower productivity gains are often cited as the main reason for America's relatively poor economic performance during the past two decades, the reality is that productivity is also sensitive to economic growth. Lower income growth ultimately leads to lower productivity by reducing levels of saving and efficiency-enhancing investment. This income effect explains the link between Asian competition and America's declining productivity.

The nature of U.S.-Asia trade thus also acts as a drag on U.S. income growth. The combination of dumping, closed markets, and undervalued currencies in Asia have resulted in asymmetrical income elasticities. Blecker's estimates may exaggerate the difference in elasticities, but his estimates are for global trade. Experience over the past twenty years, when America has been running huge trade deficits with Asia despite the fact that Asian economies have been growing more rapidly, suggests that the gap between our export and import elasticities for trade with Asia has been growing. If one assumes conservatively that a one percent increase in U.S. economic growth leads to a 2.5 percent increase in imports from Asia, and that a one percent increase in Asian growth leads to only a 1.5 percent increase in U.S. exports to Asia, it becomes clear that U.S. income growth would have to be lower than its historical 3.4 percent growth rate to keep its deficit with Asia from expanding. Over time, most of this lower income growth shows up as lower productivity growth. This factor accounts for about eighteen percent of the U.S. productivity slowdown.

Another indirect effect of our economic relationship with Asia is the decline of U.S. manufacturing output as a share of GDP. In 1970, manufacturing industries accounted for about 21.1 percent of real output. In 1994, they provided only about 17.6 percent of real GDP. This decline has occurred despite an apparent rise in U.S. demand for manufactured goods. The shift in the composition of the U.S. economy away from manufacturing industries, which exhibit relatively fast productivity growth, to low productivity nonmanufacturing industries has been another source of the U.S. productivity slowdown.

Finally, a cost that is usually ignored but that has enormous ramifications is social adjustments. When imports result in closed factories and displaced workers, much is lost. Most of the capital invested in the factories is lost as a productive asset to the society. Workers not only lose wages, but they must often sell their homes and move and adjust to new communities. Homes can't always be sold for what they cost, and new homes in new locales may cost more than the old ones. New jobs can't always be found and often not at the old wage levels. A 1986 U.S. Labor Department survey of 6.3 million blue-collar workers displaced between 1979 and 1984, found that only 77 percent had gained new employment and their median income was 87 percent of their previous earnings. Beyond this, there are the incalculable costs of broken homes, rising crime rates, devastated schools, and shrinking tax bases.

Again, precise quantification is difficult, but the $100 billion structural trade deficit with Asia implies an adjustment affecting about two million U.S. jobs. If the average annual wage is $30,000 and 23 percent of these people don't find new jobs, the annual loss to the economy is about $14 billion. If the remaining 1,540,000 displaced workers all find jobs at 87 percent of $30,000, the annual loss to the economy is an additional $6 billion. Since it typically takes between $100,000 and $200,000 of invested capital to create one job, the new investment necessary to handle all the displacement is between $200 and $400 billion. These figures, of course, do not take into account the social costs mentioned above.

While this is not a total disaster, it is also not a desirable scenario for the future. In the years ahead, it will be more difficult for the United States to justify its security role and openness to trade with Asia if the terms of economic engagement continue to trend so unfavorably. This is not to suggest that the United States should interrupt its trade with Asia or that it cannot find ways to trade profitably and advantageously. But it does suggest that the U.S. should adopt policies that magnify the positive and diminish the negative in our economic relations with Asia.


1. See C. Fred Bergsten and Marcus Noland, Reconcilable Differences? (Washington, DC: Institute for International Economics, 1993); Robert Z. Lawrence, "Closed Markets or Closed Minds?" Brookings Papers on Economic Activity 2:517-54; Robert Z. Lawrence, "How Open Is Japan?" in Paul Krugman, ed., Trade With Japan (Chicago: University of Chicago Press, 1991), pp. 9-50; Peter A. Petri, "Japanese Trade in Transition: Hypotheses and Recent Evidence" in Paul Krugman, ed., Trade With Japan, pp. 51-84; and Clyde V. Prestowitz, Jr., Lawrence Chimerine, and Paul Willen, Closing the Trade Gap with Japan (Washington, DC: Economic Strategy Institute, 1993).

2. See Japanese government documents collected and translated by Dewey Ballantine for the Eastman Kodak Company in support of a petition against Fuji Film under Section 301 of the U.S. Trade Act of 1974. These documents are available from Dewey Ballantine as Privatizing Protection: Japanese Market Barriers in Consumer Photographic Film and Consumer Photographic Paper (May 1995), 1 vol.; and Japanese Market Barriers in Consumer Photographic Film and Paper (November 1995), 2 vols.

CLYDE V. PRESTOWITZ, JR. is President of the Economic Strategy Institute in Washington, DC. He is a former counselor to the Secretary of Commerce, a member of the Board of Advisers of JPRI, and author of Trading Places: How We Allowed Japan to Take the Lead (Basic Books, 1988) and many other works. On October 15, 1996, he presented an earlier version of this paper to the inaugural meeting of the study group on "American Interests in Asia: Economic and Security Priorities," sponsored by the Economic Strategy Institute.

Table 1

Japan's Productivity, the Weak Yen, and Their Impact on U.S.-Japan Trade


Av. Annual Productivity Differential

Av. Annual Price Advantage
Due to Undervalued
Real Yen

Av. Annual Import Subsidy to Japan
(In $ million)

Av. Annual Potential Increase in U.S. Exports
(In $ million)







3. 56%









Sources: Japanese data from the Economic Planning Agency and the Statistics Bureau of the Management and Coordination Agency; U.S. data from the Bureau of Economic Analysis and the Bureau of the Census. Calculations by the Economic Strategy Institute.

Table 2

Fluctuations in Real Exchange Rates, Annual Productivity Differentials (1965-1990), and Cumulative Bilateral Trade Deficits (1980-1995) with Selected Asian Economies


Annual Change in
Real Exchange Rate


Trade Surplus
(1980-95, in $ billion)










+ .7%







+ .2%





+ .8%




- .4%



*Malaysian and Indonesian exchange rates and productivity are for 1970-1990.

Sources: International Monetary Fund, DRI/McGraw Hill and Bureau of the Census. Calculations by the Economic Strategy Institute.

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