The history of American economic foreign policy has been distinguished by scholarly neglect for most of the twentieth century. With the exception of a brief flurry of interest in tariffs, stimulated in the 1930's by the experience of the Great Depression and a newfound belief in the need for freer trade, diplomatic historians have overwhelmingly concentrated their efforts on the study of political, strategic, and even social, intellectual and cultural aspects of America's relations with the world. This concentration seems curious. Since at least the Bretton Woods Conference of 1944, and arguably a good deal earlier, the primary goal of American diplomacy has been the creation and maintenance of an order that is overwhelmingly economic in definition and character. Contrary to much of the documentary classifications and escapades surrounding military of intelligence issues, the record of American economic foreign policy is as open as it is copious.
Even so, it is simple enough to deduce the chief causes of this neglect. Economic foreign policy rarely came to the attention of top policymakers as such. It virtually never mattered to the American military or intelligence communities. There were no economic "crises" during the period under consideration in this paper, and even those outside that period, whether the London Economic Conference of 1933 or the demise of the very briefly-lived Bretton Woods system in 1971 and 1973, have little of the excitement attending the dramas of Cuba or Berlin. Last but hardly least, much of American foreign economic policy, during this era or any other, was the result of protracted negotiation not only with foreign governments but also between the Executive and Congress, and diplomatic historians have shown nearly as great an allergic reaction to treating with Congress as they have in considering economic issues.
The study of American economic foreign policy and Japan has suffered not only from this general inattention, but also from two themes--perhaps better described as obsessions--influencing those who do practice in this area and era. The first was the search for origins of America's Vietnam War. Some accounts, such as William S. Borden's The Pacific Alliance,(1) were seized upon in claims that Washington's quest to ensure Japan's swift economic recovery through access to cheap raw materials led to an initial interest in Southeast Asia and thus America's eventual tragedy there. The second has been the chronic trade difficulties afflicting U.S. -Japanese relations since the 1970's and the suspicion that clever, even insidious, Japanese diplomats cunningly took advantage of American economic naïveté and Washington's desire to stop the Kremlin no matter what the cost in order to execute "an economic Pearl Harbor" or, as former Senator Paul Tsongas claimed, win the Cold War.(2)
But if the past is taken on its own merits, rather than upon these two current concerns, a quite different pattern emerges in American economic foreign policy and Japan. That policy was shaped primarily by struggles between the American Executive and Congress, neither one of which saw Japan as at all central in its concerns in those struggles. And that policy was shaped secondarily by struggles among agencies, some within the executive branch (such as the Department of State versus the Department of Agriculture), and some not (the American Export-Import Bank against the putatively non-American World Bank, for example), which likewise hardly saw Japan as central in their fights. Greatly unlike American economic policy toward Europe, which was well debated in Washington on its own merits, which had a dedicated cadre of senior American "Atlanticist" policy-makers to champion it who often succeeded in connecting it to key issues in the Cold War, and which enjoyed the support of well-connected (and well-travelled) Europeans, there really was no American economic policy toward Japan during these years. Instead, American economic policy considered Japan as an important but distinctly secondary affair to the greater issues of Europe and Congress. Japan, one might say, pursued its own policies to take advantage of that relative inattention.
Inattention may not have been an option for Washington during the years of the Occupation, but American economic policy in Japan during those years nevertheless was chiefly colored by the clash between the Executive and Congress. By early 1947 senior State Department officials such as Dean Acheson and Paul Nitze had concluded that Japan was an economic wreck that had to be rehabilitated rapidly to enable Tokyo to become a reliable partner in the emerging Cold War. It was simple enough to compel America's occupation partners in the Far Eastern Commission to sharply limit Japan's reparations obligations, but Japan needed positive funding as well. Stuffing the U.S. Army's occupation budget was one alternative copiously pursued. Extending the Occupation itself ensured that this alternative remained open for as long as possible. But Congress proved reluctant to extend actual recovery funding unless it was tied to domestic interests, such as a $150 million credit line offered to the Japanese authorities to purchase American raw cotton.(3)
Given Congress' reluctance to provide either direct relief aid or, more important for the long-run, capital for industrial reconstruction and development, Americans in Japan were compelled to resort to drastic methods. The Dodge Line (named after American banker Joseph Dodge) instituted austerity for already hard-pressed Japanese consumers not only to control inflation but also to dry up a Japanese domestic market and thus force Japan to export. Dodge retired Japanese government debt using American GARIOA counterpart funds and encouraged investment in coal, shipbuilding and electric power industries.(4) He also overrode prior American economic studies in pegging the exchange rate at 360 yen to the dollar--an artificially high ratio facilitating Japanese exports.
Those exports grew, but to the Sterling Area, not Southeast Asia or the United States, and Japan's dollar shortage actually worsened through 1949 and 1950. By April 1950 Japanese Finance Minister Ikeda Hayato was on his way to Washington to request fundamental revisions in the Dodge Line, not least the abandonment of austerity. There, representatives from State and Treasury railed against continued British opposition to sterling-dollar convertibility but did nothing about it. A proposal for a "yen fund," allowing Japan to buy American goods in yen, which the United States would then loan or grant to Southeast Asian nations, received little encouragement (and even less optimism) until the American military began casting about for ways to increase assistance to that area.(5)
The immediate savior was the outbreak of war in Korea and large American military procurement spending in Japan, a good deal of it under the terms of the Mutual Defense Assistance Act of 1949. But this salvation was quite short-lived. Japan reacquired sovereignty in early 1952 just as such spending began to drop and Japan's dollar shortage difficulties resurfaced. State Department efforts that year to enter into long-term procurement arrangements encountered stiff resistance in Congress as Japan's overall trade deficit ballooned toward $750 million.
Matters promised to get no better for Japan under the new Eisenhower administration. Although Secretary of State John Foster Dulles had firsthand experience with Japanese leaders, he was not inclined to press for a showdown with Congress over aid to Japan, or for that matter an overall set of American foreign economic policies beneficial to Tokyo. Nor was the President. Eisenhower quickly abandoned efforts to secure a long-term renewal of executive authority under the Reciprocal Trade Agreements Act in exchange for a one-year extension, and that at the price of agreeing that he would enter into no tariff negotiations for the interim.(6)
The timing of these arrangements could hardly have been worse for Japan, which had just initialed a treaty of commerce and navigation with the United States in April 1953.(7) This was not a bilateral affair, as both Tokyo and Washington were eager to have Japan gain accession into the General Agreement on Tariffs and Trade (GATT). But accession required tariff criteria that could best be met by negotiation, and Eisenhower had promised Congress no negotiation for exactly the critical year in which such talks would have been most important. The resulting finesse--temporary GATT membership for Japan--hardly pleased Tokyo, especially since 1953 saw a record trade deficit.
Nevertheless, American economic foreign policy provided substantial aid to Japan during this crucial period, if not always intentionally. Japan had joined the World Bank (technically, the International Bank for Reconstruction and Development) in August 1952. The resulting Bank mission to Japan drew up a dismal forecast for Japan's economic prospects. Yet this was good news in a sense, as the Bank had defined its mission as aiding development and Japan appeared as a prime candidate. The Bank's staff, moreover, was most comfortable issuing loans for the specific development of industrial infrastructure, especially in transportation and energy generation. The Bank's loan terms did not require trade liberalization, and were quite generous in permitting domestic procurement.(8) Needless to say, Japan was a perfect fit and one of the heaviest borrowers from the World Bank from 1952 to 1966.
Even so, the Bank might not have lent so quickly but for a key dispute in 1952-53 with the American Government's EximBank. Exim had agreed to extend two loans worth $40 million to finance Japan's purchase of generating equipment for steam power plants from Westinghouse and General Electric. Eugene Black, President of the World Bank, strongly felt that these infringed upon the central loan mission of his institution, bitterly complaining to the Departments of State and Treasury and threatening to withhold all loans to Japan if the deal went through. Black won this fight and the World Bank took over these loans, but Japan was the chief victor as both Exim and the World Bank copiously supplied capital far into the 1960's.(9)
These infusions of capital would aid Japan's creation of the successful industries of that decade and later, but they did little to address the pressing trade issues going into 1954. Fortune again smiled as communists overran French positions at Dien Bien Phu that spring, allowing Eisenhower to threaten Congress with weakening a critical American ally in Asia at a critical moment. That, and the political wiles of Speaker Sam Rayburn, secured renewal of the Reciprocal Trade Agreements Act and enabled Eisenhower to extend substantial American tariff concessions to other nations in exchange for their agreement to support Japan's full membership in GATT.(10) Congress also obliged Japan with generous treatment under Public Law 480, a scheme to promote the "sale" of American agricultural products.(11)
It would exaggerate to say that these resolutions of 1954 were primarily responsible for Japan's economic takeoff, but 1955 and 1956 were very good years for its foreign trade. Clarence Randall, Eisenhower's free trade advocate, had been retained as Chairman of the Committee on Foreign Economic Policy and visited Tokyo in late 1956.
Randall marvelled at Japan's trade surplus and lauded Japanese efforts. But he remained cautious. Too much of Japan's foreign exchange earnings (about 20%) were still due to U.S. defense expenditures in Japan.(12) Japan was still capital-poor and could not compete internationally in heavy industries such as steel or chemicals. Prospects for an integrated Asian market to benefit Japan were dim. Fortunately, bilateral American-Japanese trade was flourishing, with Japan the largest purchaser of important American products such as cotton and grains.(13)
In fact, to some American textile companies and political leaders in the American South, Japan was purchasing all too much cotton. As early as the summer of 1955 their demands for a textile import quota had reached Eisenhower, who was surprised to learn that the United States had guaranteed Japan a minimum floor of textile imports as part of the GATT concessionary negotiations.(14) Dulles fended off complaints from Japanese leaders(15) but was able to defeat a 1956 congressional attempt to impose import quotas on Japanese textiles only by securing Tokyo's agreement to voluntary export restraints through 1957.(16) By the end of that year, Japanese textile imports had declined significantly and the issue disappeared, for a time.
Tokyo complained about these arrangements, noting that Japan again had lapsed into a trade deficit, especially with the United States. Kishi Nobusuke, a rising political star, pointed out that renewed austerity steps were emboldening the Japanese Left, especially the teachers union. Foreign Minister Fujiyama Aiichiro argued that many of the exporters hurt by American (or Japanese voluntary) trade restrictions were small, vulnerable, and lured by the prospect of trade with communist China. They appealed for a suspension of American anti-trust provisions over Japanese export arrangements to American markets and for the creation of a special East Asian development bank.(17)
Washington was unsympathetic for a variety of reasons. Deeply concerned about the rising Soviet economic threat,(18) the Eisenhower administration had resolved to press much harder for general arrangements toward Western economic integration rather than the bilateral suggestions of Kishi and Fujiyama. Randall, C. Douglas Dillon, Henry Owen, and George Ball were powerful proponents of enlarging the Organization for European Economic Cooperation (OEEC) into a much broader entity that would include the United States, Canada, and Japan.(19)
As well, economic foreign policy-makers worried about America's lapse into a trade deficit.(20)In 1958 and 1959 these worries were not great. Practically everyone, including the most senior experts at the International Monetary Fund, believed the situation only temporary and even desirable as a way to end the dollar shortage difficulties that had plagued the early 1950's.(21) There was some sentiment for pressuring Europe to ease the United States' burden by providing more support for NATO and lowering tariff and other barriers to American agricultural goods.(22) But while American Ambassador Douglas MacArthur II did protest Japanese trade "discrimination and restrictionism," there was little effort made to compel adjustments in American-Japanese trade and investment patterns.(23)
Little effort was made due to a number of considerations. Foremost was a desire to avoid increasing tensions during the crucial renegotiation of the Japanese-American Security Treaty and, to a lesser degree, the final settlement of occupation-era GARIOA fund repayments. The Americans also recognized that Japan did not enjoy a colossal trade surplus with the United States.(24) Japanese leaders were correct when they argued that Japan was just emerging from a highly volatile trading environment and, despite a good record of growth since 1955, remained highly dependent upon low global trade barriers, especially with the United States. There was no fear in Washington of a Japanese economic bloc, in other words, unlike growing suspicions of the Europeans. Indeed, while Washington resolved to actively discourage further World Bank loans to Italy and France, and determined to reduce or eliminate military aid to Italy and the Low Countries (and press West Germany for greater support of U.S. forces there),(25) Japan escaped these pressures altogether.(26)
Japan's prospects appeared even brighter with John F. Kennedy's victory in the 1960 presidential contest. Kennedy had openly criticized "Republican protectionism" during his campaign. He advocated sharply lower barriers to international trade as the way to grow out of the recession of 1960 and the surest guarantee to win the economic struggle against the communist bloc. Before the end of his first year in office, Kennedy was calling for a replacement of the Reciprocal Trade Agreements Act (its latest renewal due to expire in June 1962) to permit sweeping reductions in American trade restrictions as a way to induce similar liberalization elsewhere.(27)
The resulting Trade Expansion Act was roundly attacked by Republicans in Congress, especially Senator Prescott Bush of Connecticut. Bush argued that lower trade barriers might indeed encourage more international trade, but to the further detriment of the American balance-of-payments deficit. The Europeans imposed quotas upon Japanese imports because Japan had lower labor costs. Why shouldn't the United States have quotas against the EEC for the same reason?(28) By October 1962, however, Kennedy had his law at the cheap price of continued voluntary export restriction in textiles embodied in a "long-term arrangement" (LTA) covering these goods, and an agreement that a Special Trade Representative (STR) would oversee economic negotiations instead of the State Department.(29)
Kennedy thinkers (such as Owen, Dillon, and Ball) believed that the chief cause of American payments deficits was homegrown. A substantial amount of capital was flowing out of the United States through private investment overseas,(30) governmental expenditures (primarily to support American forces abroad and foreign aid), and tourism. Curbing tourism would be unpopular. Reducing foreign aid was out of the question under the New Frontier. But Kennedy was quite willing to pressure Europe, especially West Germany, to increase support for American forces there.
There would be no similar pressure on Japan, however, for a number of compelling reasons. There were not large numbers of American ground forces in Japan to begin with. The major installations were on Okinawa, which operated under American sovereignty and thus a dollar economy. Japan was willing to come to a settlement on GARIOA repayments(31)and these would provide for a return of capital. But at base, Kennedy was not willing to press Japan because he was not sure of its economic strength or political resiliency. After all, Japan itself had often lapsed into trade deficits. It constantly had run a large negative balance with the United States. If the American market were shut off, or if undue strain were otherwise placed on the Japanese economy, it might easily turn to trade with China or even the Soviet Union. Senior advisor Walt Rostow and America's ambassador to Japan, Edwin Reischauer, stressed that the roots of democracy in Japan were shallow and the stem itself a foreign transplant of recent vintage. There was no viable moderate-left political force to buffer the communist extreme, and the security treaty riots of 1960 had demonstrated how much turmoil lay just under the surface of Japanese politics.
Instead, Kennedy sought to appeal to Japan by offering economic attractions. He proposed the creation of a New Pacific Community to rival the Common Market. He sharply increased American payments for the Okinawan base facilities and granted All Nippon Airways, a Japanese carrier, daily landing rights at Naha.(32) He agreed to establish the U.S.-Japan Committee on Trade and Economic Affairs, a mechanism for regular consultation among business and government leaders from both countries and strongly opposed by the American lumber and textile industries.(33)He issued an Executive Order allowing exceptions to the "Buy American" Act for American governmental procurement overseas. When howls of congressional opposition led to a bill to observe 7 December as "Infamy Day," Kennedy personally took charge of the successful effort to kill it.(34)
Even so, American-Japanese relations were not altogether smooth during the second half of Kennedy's presidency. The joint committee was well received in Tokyo, but the new community was not. It was too obviously a Cold War device to forestall overtures for trade with communist nations(35) and a way to reduce Japan's role in the newly-forming Organization for Economic Co-operation and Development (OECD, the successor to the OEEC) even more.(36) Textile and a range of other issues provided chronic irritation and a warning from George Ball that Japan was being pressed too hard in response to American domestic interests, a consideration that encouraged a presidential goodwill trip to Japan in February 1962.(37)
The opening salvos of the Kennedy Round also highlighted Japanese-American differences. Washington pushed for linear tariff reductions rather than item-by-item ones. The approach was not popular in Europe, which already had more lower rates than the Americans, nor was it favored by Japan. This meant no European-Japanese alliance, however. Indeed, Ikeda had been irritated by the Trade Expansion Act's passage. To him, it seemed (and in fact it was) geared almost entirely to US-European trade issues, promised to lower US trade barriers to European exports, and at the price of continued "voluntary" restraints on Japanese exports in the American market. Nor had the Americans done anything to have the Common Market lower obstacles to Japanese exports to Europe. These complaints produced a quick trip by the first Special Trade Representative, Christian Herter, to Tokyo in April 1963 with promises to press the EEC to end quotas on Japanese imports if Japan dropped its objections to the linear approach. Ikeda agreed.(38)
As importantly, other American financial initiatives bid fair to injure Japan's prosperity significantly, none more than the Interest Equalization Tax, which Kennedy proposed in June 1963.
The Interest Equalization Tax was the result of Kennedy's increasing frustration with his inability to reverse the flow of dollars from the United States. Reducing American foreign aid or military spending overseas were not attractive options, nor was a general increase in the domestic discount rate. Drawing on American tranches with the IMF to counterbalance the outflow was rejected out of hand, as was a reversion to protectionism to achieve similar results.(39)Compelling other nations to buy additional U.S. Treasury securities or to convert their existing holdings into long-term obligations struck Treasury Secretary Douglas Dillon as the equivalent of debt rescheduling, befitting a Brazil or Argentina but not the United States.(40) Kennedy and Dillon thought much of the problem was due to private American capital going to Europe to get behind the tariff walls that the new European Economic Community seemed certain to raise. They were reluctant to directly discourage this flow. Instead, they struck upon restricting foreign access to American capital markets through a tax on foreign borrowings.
Simply put, the equalization tax raised the effective cost of borrowing capital in American markets by one percent in order to discourage the, as Ball put it, "marginal borrowing" of dollars by Europeans.(41) There was a good deal of such borrowing, however, by the Japanese (and American banks operating in Japan) under arrangements that made the Japanese capital markets especially vulnerable to restrictions on access to American ones.(42) Japan's reaction was a swift dispatch of Foreign Minister _hira Masayoshi, who predicted that Japan would find borrowing difficult and experience a substantial capital shortage. Had the United States even bothered to study this possibility?(43) Could Japan be granted an exemption from the tax, as Canada would be? American replies were not encouraging.(44) Nor were American protests concerning Japanese changes to foreign investment laws that appeared to make such investment more difficult than ever.(45) These new troubles led Kennedy to decide in October 1963 to visit Japan in early 1964, a trip that Secretary of State Dean Rusk made in the slain president's stead.
Under Lyndon Johnson, Japan at last would win its exemption from the interest equalization tax,(46) but at a price. In return, Tokyo promised that it would hold its balance of American dollars rather than convert them into gold.(47) This was hardly a policy exception. It was a continuation of American attempts to impose de facto controls on the use and flow of international capital, which still overwhelmingly meant the dollar and the pound.(48) Canada, which already had enjoyed the exemption, was compelled to accept an actual cap on the dollar reserves it could hold. The Johnson administration enjoyed less success in forcing Europe, especially the always nettlesome French,(49)to agree to similar terms and resorted in February 1965 to calls for voluntary restraints on transfer of American capital abroad.(50)
The "dollar overhang," already serious when Johnson became president, grew worse during his administration despite these measures.(51)One straightforward solution would have been to drive the United States' trade balance into greater surplus by increasing exports or reducing imports.(52) But the latter option was unappealing. Johnson was strongly committed to the idea of free trade and uncomfortable with trade restrictions, especially on a Japan which had cooperated in the capital control affair and which still needed to "export or die." So Washington would grant a liberalized export quota for textiles to Japan and Hong Kong in 1965-1966.(53) When Warren Christopher led a delegation of American wool-makers to Japan in June 1965 to secure a voluntary export restriction in those goods, he declined to press the issue after a Japanese rebuff.(54) Most famously, Johnson committed his administration to making the "Kennedy Round" of trade reduction negotiations under the GATT a success.
It was a sincere but awkward commitment, made so by a congressionally-imposed deadline on presidential negotiating authority. The Americans remained chiefly concerned with Europe, especially European barriers to American agricultural exports. The Europeans simply stonewalled until the deadline approached in the spring of 1967. Rather than accept failed negotiations, the United States agreed to take agriculture off the table.(55). The resulting agreement was hardly a mere symbolic victory for "free trade," however. Tariffs on industrial goods were greatly reduced, with Washington giving concessions on imports valued at $8.5 billion and gaining reductions on exports worth $8.1 billion.(56)
For most of the Johnson administration, though, American-Japanese economic relations were not fractious. In part, there was little concern because few Americans could conceive of a robust Japanese economy. During hearings on the Trade Expansion Act, Director Nelson A. Stitt of the U.S.-Japan Trade Council had assured Congress that Japan simply lacked the capacity to increase its exports to the United States by much.(57) A presidential strongarm tactic in mid-1965 to force Japan to liberalize its investment practices backfired badly as many American companies protested the possible loss of their markets in Japan if Tokyo retaliated. Besides, if worst came to worst, Tokyo had a good record of agreeing to voluntary export restraints and appeared far more accommodating to American imports than the EEC, which in 1967 proceeded to adopt a Value-Added Tax (VAT) that clearly discouraged imports of all kinds.(58)
In addition, there were persuasive political reasons for avoiding friction with Japan. Japan was a quiet supporter of the American war effort in Vietnam.(59) The return of Okinawa had to be confronted therefore at a moment when American facilities there appeared more valuable than ever. Where there were powerful domestic interests to balance these reasons, as with textiles, American officials could be prodded into action. But the story of the end of the 1960's was not terribly different from that of the early 1950's: "diplomatic" considerations outweighed parochial, "economic" ones. The sea change would come only after concerns about the Cold War were eclipsed by rising anxiety in Washington that there was another struggle afoot and America was losing it.
Yet 1967 marked the beginning of a change in American attitudes toward Japan. One factor was the result of the Kennedy Round itself. Contemporary studies admitted that while American-EEC concessions were roughly equivalent, Japan (and Britain and Canada) had gotten more than they had given. In this light, Tokyo's balkiness over the food-aid issue appeared distinctly unhelpful,(60) and last-round Japanese withdrawals of tariff concessions prompted similar American pullbacks to Washington's disappointment.(61)
Congress was vocally dissatisfied with the results of the Kennedy Round and, by implication, the Trade Expansion Act. One particularly sore point involved a complicated deal in chemical tariffs which entailed the elimination of existing legislation.(62) Congress felt that STR William Roth's team had presumed too much and refused to enact the repeal. In February, the American steel industry had charged that its Japanese competitors were dumping products on the American market as a result of excess Japanese capacity.(63) For the first time, industry representatives were joined by the steelworkers union. American textile interests pushed for an international accord covering wool similar to the Long-Term Arrangement already negotiated for cotton, a push targeted at Japan.(64) Although Johnson vowed to veto any import quota bill (many were before Congress), he did resort to "voluntary" export restraints increasingly. As ominously, Congress refused to renew any trade bill in 1967, and close questioning of STR Roth by Wilbur Mills in March 1968 led to a damning litany of complaints about a closed Japanese market to American goods and investment.(65) Mills' Ways & Means Committee held marathon hearings on trade issues in June and July of 1968 that focused attention, and a good portion of the upcoming presidential campaign, on America's declining competitiveness in international trade.(66)
Unhappily for Japan, these concerns increased simultaneously with renewed and redoubled American worries over increasingly large and chronic balance of payments deficits. The surrender of sterling in November 1967 led to massive European purchases of gold and a resulting assault on the dollar in 1968. Japan was increasingly singled out as the ally doing least to "burden-share," especially in terms of obligingly purchasing American military hardware, and American eyes increasingly glared at a growing bilateral trade imbalance in Tokyo's favor, and a Japan that was, at least among OECD member states, uniquely closed to American investment.(67)
There is a measure of irony in this sea change. The story of American economic policy and Japan from 1945 to 1968 is essentially a story of the United States setting the economic agenda of the West and ensuring that Europe and Japan subscribed to that agenda. Primary American concerns during these years were directed toward Europe, and rightly so. Washington saw Japan as economically unsteady, as many Japanese did themselves. The Americans indeed were accommodating in opening their market to Japanese goods, but it is difficult to see how else they might have acted under the circumstances, especially given European resistance to accepting Japanese products and the sheer impossibility of Japan relying heavily upon Southeast Asia--a region wracked by war and poverty throughout this period--or undesirability of reopened Japanese trade with the communist states, at least on a large scale.(68) American financial foreign policy likewise was determined in Washington and dominated by concerns over dollar shortages (for about a decade after the war) and dollar surpluses (a decade after that) in Europe. Throughout the 1960's the United States could have accepted higher domestic interest rates instead of the dodge of the interest equalization tax and the compulsory restraints on transfer of funds abroad that took effect in early 1968 (around the time of Johnson's decision to finally rein in the escalation of the war in Vietnam). But it did not. Washington could have accepted a "Mansfield solution" and reduced its military and hence financial burden in Europe, but the Executive Branch never took this option seriously and never thought, at least during the 1950's and 1960's, that the American burden in Japan was especially great anyway. Perhaps Washington might have pressured the World Bank to restrict its capital development loans to Japan. Congress might have been less generous in its unmeaning provision of substantial aid such as the P.L. 480 program. But it is difficult to imagine scenarios where such pressure or parsimony were likely. It is just as difficult to see a foreign conspiracy, certainly not one made in Japan, as the root of American economic difficulties by the end of the 1960's. In retrospect, it seems curious that Japanese-American friction would emerge so powerfully and centrally and survive so well in the years that followed. Whether this result arose from the falling away of the factors contributing to relative harmony discussed here or the rise of a different constellation of American and Japanese priorities is the task of the papers to follow.
(1) (Wisconsin, 1984). Reviews of Borden's book stressed this connection more heavily than he did. A recent example chronicling the interests of senior State Department officials in Southeast Asia for Japan's sake is Ronald McGlothen, Controlling the Waves (New York: Norton, 1993), 43-52, 75-76, and especially ch. 6.
(2) For "economic Pearl Harbor" see The Wall Street Journal, 16 May 1989, A9.
(3) Borden, 75. Japan quickly became a leading export market for American agricultural products. The cotton itself was turned into textiles and exported, chiefly to British imperial areas, where it earned a considerable balance of sterling. SCAP negotiated a foreign exchange payments agreement with the Sterling Area in May 1948, but at the price of agreeing to Britain's insistence that the sterling not be convertible into dollar balances.
(4) Borden, 89-93.
(5) Borden, 136-7.
(6) Aaron Forsberg, "Eisenhower and Japanese Economic Recovery: The Politics of Integration with the Western Trading Bloc, 1952-1955," The Journal of American-east Asian Relations 5 (Spring 1996): 57-76. Eisenhower also established a special commission under Clarence Randall to make trade policy recommendations, naming congressional protectionists Milliken, Simpson, and Reed to it.
(7) The treaty permitted continued restrictions on American capital investment in Japan for purposes of gaining voting control of Japanese companies. One effect was to markedly restrict all forms of direct foreign investment in Japan. This effect, however, hardly meant that Japan was denied capital funding from abroad, see below.
(8) Mason & Asher, 276-7.
(9) Mason & Asher, 500-501. From October 1953 to July 1966, the World Bank would lend $857 million to Japan. From March 1956 to November 1969, Exim lent $886 million. Remarkably, the Bank permitted Japan to use some of the loans for yen (internal) costs. Hunsberger, 73.
(10) Forsberg, 69-74.
(11) Borden, 182-5. Of the initial $400 million earmarked for P.L. 480 in Fiscal Year 1955, over one third went to Japan. FRUS, 1955-57, v. 9, 286-9. Not all P.L. 480 provisions were giveaways. Some incurred repayment obligations on soft loans that became much "harder" for the Americans in the late 1960's.
(12) In fact, American assistance including procurement orders was responsible for funding 20% of Japan's imports of goods and services from 1945 through 1962. Warren S. Hunsberger, Japan and the United States in World Trade (New York: Harper & Row, 1964), 35.
(13) FRUS, 1955-57, v. 9, 29-43. Randall's views were closely incorporated into NCS 5516/1, see FRUS, 1955-57, v. 23, pt. 1, 52-62. There was a squeeze in the grain trade during these years. Britain's earlier refusal to permit sterling-dollar convertibility, continued under GATT exception clauses, had channeled Japanese grain imports toward the sterling bloc. The United States had to consider renewing its membership in the International Wheat Agreement in 1956. Washington blocked GATT endorsement of the agreement but Commerce and Treasury lined up against State and Agriculture in an unsuccessful attempt to end US adherence to the agreement's terms. Congress was the arbiter, as it supported adherence so long as domestic agricultural policies [and PL 480] were not interfered with. See Burton I. Kaufman, Trade and Aid: Eisenhower's Foreign Economic Policy, 1953-1961 (Baltimore: The Johns Hopkins University Press, 1982), ch. 5.
(14) FRUS, 1955-57, v.9, 144-50.
(15) Shigemitsu, Kono, and Kishi, who visited Washington in late August 1955. FRUS, 1955-57, v.23, pt. 2, 111-6.
(16) FRUS, 1955-7, v23, pt1, 183-7. Randall's committee agreed that American GATT concessions had helped lead to a "flood" of Japanese textile imports, but dismissed claims of injury to the American industry and argued, with dubious political sense, that if Japanese mills could buy American raw cotton at cheaper prices than American mills, then U.S. domestic price support programs ought to be revised. FRUS, 1955-57, v9, 179-82. These arguments led the following Kennedy administration to consider an "export tax" as an equivalent, see below.
(17) FRUS, 1955-57, v23, pt1, 479-83, 488-504.
(18) That is, that the Soviet bloc would overtake the West in the production of many key industrial products. Steel gap, anyone?
(19) Pascaline Winand, Eisenhower, Kennedy, and the United States of Europe (New York: St. Martin's Press, 1993), 128-9. A related initiative was British membership in the Common Market. Washington recognized, however, that full Japanese membership in the OEEC or whatever replaced it would complicate efforts to resolve outstanding problems with Europe. FRUS, 1958-60, v. 4, 58-62.
(20) FRUS, 1958-60, v. 4, 82-86.
(21) Margaret G. deVries, The International Monetary Fund, 1966-1971; Volume I: Narrative (Washington: International Monetary Fund, 1976), 485.
(22) Winand, 135.
(23) FRUS, 1958-60, v.18, 206-12, 214-21, 226-9
(24) In fact, Japan had run large trade deficits in 1956 and 1957, compelling an IMF drawing by the spring of 1957. A second deficit in 1961 compelled negotiations for a stand-by arrangement with the IMF that year. Harold James, International Monetary Cooperation Since Bretton Woods (Washington: International Monetary Fund and New York: Oxford University Press, 1996), 116-7.
(25) FRUS, 1958-60, v.4, 134-9, 142-7.
(26) There were complaints about the inordinately high telephone rates Japan charged U.S. forces in Japan. FRUS 1958-60, v.18, 268-73.
(27) Winand, ch. 7.
(28) Winand, 181.
(29) Robert A. Pastor, Congress and the Politics of U.S. Foreign Economic Policy, 1929-1976 (Berkeley: University of California Press, 1980), 109. As well, Congress-chiefly Wilbur Mills--secured direct representation in the U.S. delegation to the ensuing Kennedy Round of trade negotiations. Steve Dryden, Trade Warriors: USTR and the American Crusade for Free Trade (New York: Oxford University Press, 1995), 52.
(30) A brief account with statistics can be found in Pastor, 205. U.S. foreign direct investment grw from $19.3 billion in 1955 to $32.7 billion in 1960.
(31) That settlement would be reached in 1962. FRUS, 1961-3, v. 22, 682-5, 726-7. American claims of $1.8 billion were settled at $490 million, to be paid over fifteen years at 2.5% with the proceeds to be used for aid programs. By 1967-8, Washington would press for an acceleration of these payments.
(32) From $6 million annually to $150 million. Kennedy also reiterated Dulles' earlier confirmation of Japan's "residual sovereighty" over the Ryukyus.
(33) The joint committee, which indeed would play a major role in U.S.-Japanese relations for the rest of the decade, was modelled after a similar U.S.-Canadian body. An important catalyst was a Japanese diplomat active in American and Canadian economic affairs in the 1950's: Kiyoaki Kikuchi. Interview with Kiyoaki Kikuchi, 15 March 1997, San Diego, California.
(34) Detail citations to follow.
(35) This was a primary reason why Australia was included as well. The Australians had a similar (and more public) reaction.
(36) In fact, Kennedy initially had been reluctant to push for Japanese membership in OECD in the face of British opposition and his belief that the organization ought to be a "tool" of the "Atlantic Community." FRUS, 1961-3, v. 22, 693-6. Full membership finally came in July 1963 with Prime Minister Ikeda acknowledging American help in November. Ibid., 805-6.
(37) Kennedy had considered an "equalization fee" on exports of raw cotton to bring its price abroad in line with the American (subsidized) equivalent. Tokyo immediately protested such a step as an indirect tariff hike, which of course it would have been. The Agency for International Development blocked Japanese firms from bidding on fertilizer procurement contracts for South Korea and the Defense Department had stopped oil purchases from a Japanese supplier. See Ball to Rusk, 9 February 1962. FRUS, 1961-3, v. 9, 517-9. Consideration of adding woolens to textile export arrangements was another irritant. Kennedy had made a pledge to American wool manufacturers under a mistaken impression, provoking loud if private protests from Ball and the Japanese. Ibid., 532-6, 555-7, 570-2, 572-6, 580, 585-8, 619-20. Kennedy did hike American tariffs on wool carpets in March 1962, but mollified Tokyo somewhat by refusing a Tariff Commission recommendation to do the same for mosaic tile and baseball gloves. John W. Evans, The Kennedy Round in American Trade Policy: The Twilight of the GATT? (Cambridge: Harvard University Press, 1971), 168-70. Japanese requests for civil air rights into New York and beyond (to Europe) were vetoed. FRUS, 1961-3, v. 22, 677. American automobile manufacturers complained of their inability to export directly to Japan and to invest in Japanese automotive companies, prompting Commerce Department discussions with MITI Minister Fukuda, who explained that Japanese roads were "narrow and congested.". FRUS, 1961-3, v. 22, 754-7.
(38) Thomas B. Curtis and John R. Vastive, Jr., The Kennedy Round and the Future of American Trade (New York: Preager, 1971), ch. 2; Dryden, 67. Ikeda had also been unhappy with U.S. anti-dumping legislation, which negated American tariff concessions in steel. Evans, 226.
(39) FRUS, 1961-63, v. 9, 15-18, 25-26, 49-50, 51-62. Of interest is a blunt memorandum from John Kenneth Galbraith to Kennedy in August 1963 arguing that the Kennedy Round's lowering of tariffs would only worsen the balance of payments deficit. Galbraith advocated tariff surcharges on EEC manufactured goods and accepting the trade war that would ensue. Ibid., 78-86.
(40) FRUS, 1961-63, v. 9, 160-64. Dillon was overruled. The Treasury floated "Roosa bonds" expressly designed to be held by foreign central banks. James, 152-62. By 1967-68, American pressure for conversion into longer-term securities (Roosa bonds were one- and two-year instruments) was persistent and Japan applauded for bending to it. Indeed, in August 1967 Japan even announced (to the OECD's Working Party 3 charged with monitoring global capital movements) specific reserve targets. James, 192-7.
(41) FRUS, 1961-63, v. 22, 779.
(42) There were a number of reasons for this vulnerability. The Bank of Japan held a comparatively very small amount of gold and foreign currency reserves versus Japan's current account payments. As well, it was common for Japanese banks, and American banks in Japan using Japanese nationals, to borrow dollars and deposit them and then borrow yen from the banks which would receive kickbacks and, in 1963, attractive interest rates. But the borrowers typically used these funds for long-term capital investment projects while the deposits were overwhelmingly short term. Leon Hollerman, Japan's Dependence on the World Economy: The Approach Toward Economic Liberalization (Princeton: Princeton University Press, 1967), 110-3. Hollerman notes the large keiretsu combinations at this time were investing extremely heavily in plant and equipment to expand production capacity massively. Hollerman, 61-2. Much of this expansion was driven by competition for domestic market share, to be sure, but it nevertheless led to the export boom so noticeable by 1967-8 in the United States. It is possible to speculate that some of this investment was also driven by fears that, after the investment liberalization promised for 1964 and Japan's full membership in the GATT and OECD in April that year, capital might be available only with the strings of equity stakes by foreigners, especially in the automotive and consumer electronics sectors.
(43) In fact, Ball himself had raised the problem the tax would create for Japan and Canada. Dillon was sympathetic. FRUS, 1961-63, v. 9, 51-62.
(44) It appears that, at least in part, American reluctance to extend exceptions to Japan arose from German complaints of unequal treatment. FRUS, 1961-3, v. 9, 180-1, 181-4.
(45) Ibid., 799-800. It was not lost on the Japanese that the Interest Equalization Tax did not apply to direct investment overseas by American corporations.
(46) The tax went into effect in September 1964 but was applied retroactively to all transactions made after 18 July 1963. The exemption, for new securities issued or guaranteed by the Japanese Government up to $100 million, was granted in February 1965. The tax was to have expired at the end of 1965 but was extended for two years. Hollerman, 122n.
(47) Fred L. Block, The Origins of International Economic Disorder (Berkeley: University of California Press, 1977), 184.
(48) A central facet of American foreign economic policy during the Johnson years was a protracted and ultimately unsuccessful defense of the pound to prevent its devaluation, which finally occurred in November 1967. The reasons were not hard to see. From 1964 to 1967 Britain's Labour government ran an expansionary domestic policy, recorded high balance-of-payments deficits, experienced a large "overhang" abroad of the pound, yet still maintained a global military presence. The parallels to America were obvious and disturbing.
(49) In January 1965 the French government announced that henceforth it would convert all new accruals of dollars into gold. Diane Kunz, Butter and Guns (New York: Free Press, 1997), 164.
(50) The American capital controls were partially successful, prompting international fears of a capital liquidity crisis in the mid-1960's and the origins of Special Drawing Rights (SDR's) at the International Monetary Fund.
(51) The Interest Equalization Tax, at least as it applied to Japan, failed to reduce the American balance of payments deficit to any degree. In fact, American direct investment in Japan, which was not subject to the tax, fell the first year after its implementation while lending from American banks, on terms usually of 34 or 35 months to avoid the tax, more than doubled during the same period. Hollerman, 142.
(52) Another option was to retrench the American military commitment to NATO, as proposed by Senator Mike Mansfield on several occasions. It received renewed attention in 1967 when West German Chancellor Erhard asked to be excused from a German obligation to make purchases of American goods worth $1 billion to offset American military expenditures in Germany. Kunz, 164-70.
(53) Hong Kong textile exporters had been quick to take advantage of the restrants imposed upon their Japanese competitors, which had prompted Japanese complaints as early as 1961 and thence Hong Kong's inclusion in the export arrangements. FRUS, 1961-63, v. 9, 479-84; FRUS, 1961-3, v. 22, 687-9.
(54) Alfred E. Eckes, Jr., Opening America's Market: U.S. Foreign Trade Policy Since 1776 (Chapel Hill: University of North Carolina Press, 1995), 183.
(55) The one sop towards (American) agricultural interests, and American desires that the Kennedy Round negotiations appear to do something for the "developing countries" was an agreement among the industrial powers to contribute food aid. Ironically, this agreement led to considerable fricton with Japan, which, as a large importer of agricultural goods, argued that its food aid would have to come directly from its foreign exchange reserves in the form of purchases from abroad as it had no domestic surplus to offer. After an initial stand marked by considerable friction with Tokyo, Washington ultimately conceded this point as well and secured an exception permitting Japan to contribute non-food goods. Curtis and Vastine, 55-58.
(56) Eckes, 199-200.
(57) Eckes, 186-7.
(58) Pastor, 115-20. Japan and Europe would agree to a VER covering steel in January 1969. The textile situation was more complicated.
(59) The question of American aid and direct military procurements requires more investigation.
(60) Japanese intransigence over food aid had nearly wrecked the entire agreement as other food importers, such as Scandinavia, had threatened withdrawal. Evans, 270-1.
(61) Dryden, 107, 110. The United States reduced duties on Japanese imports worth $1.44 billion in exchange for concessions on $667 million. A more detailed breakdown of the concessions can be found in Ernest H. Preeg, Traders and Diplomats (Washington: Brookings, 1970), 214. Japan offered substantial tariff reductions in steel and textiles, precisely those areas where its competitive prowess was greatest.
(62) Passed in 1922 creating the American Selling Price (ASP) basis for duties. Japan was implicated in the chemicals agreement as well. Abolition of the byzantine ASP system would have given Japanese rubber-soled footwear and canned clams (!) substantial tariff benefits, but Tokyo refused to offer any concessions in return. Evans, 272.
(63) There was a measure of truth to these charges. Japan's steelmaking production had increased from 34.7 million metric tons in 1963 to 52.6 million in 1966 and exports from 7.9 million to 14.1 million in the same period. This increase, however, was only a part of a global surge in steel production and production capacity, a good deal of it fueled by official American (and World Bank) developmental programs. House Ways and Means chairman Wilbur Mills took up steel's cause and, with Assistant Secretary of State for Economic Affairs Anthony Solomon, secured voluntary export restraints to run from 1968 to 1971. The immediate result, given a boom in steel demand in 1968-9, was a substantial price hike by American steelmakers. Curtis and Vastine, 144-153.
(64) More to follow on the wool issue.
(65) Dryden, ch. 6.
(66) Evans, 301-3.
(67) Hollerman, 273; but more on this to come as well.
(68) This situation was beginning to change by the end of the 1960's, however, as Japanese trade with Hong Kong, Taiwan, Singapore, and the Philippines increased. Trade Bulletin Corporation, 1971 Foreign Trade White Paper of Japan (Tokyo: Trade Bulletin Corporation, 1971), Book One, 4-5.