DEFENSE-ECONOMIC LINKAGES IN U.S.-JAPAN RELATIONS:

AN OVERVIEW OF POLICY POSITIONS AND OBJECTIVES

Michael W. Chinworth

Senior Analyst, Asian Technology

TASC, Inc.

1101 Wilson Blvd., Suite 1500

Arlington, VA 22209 USA

703/358-9090, ext. 6648

703/524-6666

e-mail: mwchinworth@tasc.com

Introduction

The U.S.-Japan security relationship has undergone transformations reflecting the political, economic and security environments of the time during the forty-plus years of its formal existence. From the U.S. perspective, the relationship has fulfilled various goals and objectives over this period, including maintaining domestic order in Japan; exerting U.S. influence in the Asia-Pacific region; providing a defense line against what the United States saw as a distinct communist threat from the Soviet Union; and, assuring that Japan would not remilitarize with the absence of a formal occupying power. While the original security treaty was far from an equal one, the Japanese government saw it as a convenient and practical means to focus on what where at the time far more important priorities: stabilizing the economy and implementing policies to promote domestic economic growth.

Throughout that history, the production of military equipment in Japan has been a major element in the United States' security policies toward Japan as well as in Japan's security strategy. The nature, degree and aims of this production have changed just as the policy environment surrounding the bilateral security relationship has transformed. Those policies have been marked by controversy and concern within the United States. In recent years, technology transfers to Japan by the United States government and its defense contractors under these programs have assumed greater prominence in policy debates.

While government officials and scholars have spoken of the "separate" elements of the relationship — viewing economic considerations and security issues in isolation — they have been intimately related with one another from the Occupation to the present day. Economic aspects of the security relationship have received particularly strong attention at points — the FSX debate of a decade ago is the most visible example in recent memory — but they never have been totally absent from discussions of bilateral security issues, particularly in the area of cooperative defense equipment programs and technology transfers; only the degree to which they have been articulated in public forums has shifted from one decade to the next.

The economic, competitiveness, and trade arguments surrounding the bilateral security relationship take several forms, but three general themes tend to stand out:

1) Japan has a "free ride" on defense, enabling the country to focus on economic development and expanded trade markets at the expense of the United States, its principle protector and benefactor.

2) Japan has pursued defense research, development and production in order to further its domestic economic goals, including the development of "high tech" industries, often at the economic expense of the United States.

3) Japan has utilized technology from U.S. defense systems to develop commercial spinoffs and import substitutes for the original imported military system.

Encompassing all these themes is the longstanding issue of whether Japan and the United States truly are allies, or whether the security relationship masks fundamental differences in economic interests and goals. U.S. critics of the bilateral security relationship have suggested that although Japan may be committed to the Western alliance, it nevertheless utilizes the security relationship with the United States to pursue domestic economic gains. These gains, the critics argue, often come with the assistance of the United States and at the expense of its own economic interests.(1)

The purpose of this paper is to review perspectives of economic-defense linkages throughout the postwar period; identify issues that have emerged from those perspectives; and, identify the ways in which they may or may not be pertinent today. The paper also discusses a proposed research plan to address the postwar history in a manner that would shed meaningful insights for future security relations.

I. The "Free Ride" on Defense

Regardless of the interpretation of Japan's motives in entering into defense production, there can be no doubt that postwar policies toward Japan have drawn attention in the United States to varying degrees throughout that period for their economic and/or competitive considerations. U.S. aid policies, including the transfer of surplus military equipment, were motivated in part by a desire to build Japan's self-defense capabilities without causing drains on the still war-torn economy. As Japan emerged from the war period as a more formidable economic competitor, pressures developed in the U.S. Congress to suspend aid and replace it with programs more appropriate for a nation that could more than carry its own weight in the global economy.

Japan's defense budgets have been constrained throughout the postwar era. The "doctrine" of former Prime Minister Shigeru Yoshida emphasized economic development over military might as a response to the pressing domestic need for economic recovery and expansion (Weinstein [1971]; Ward and Sakamoto [1987]; and Dower [1979]). Defense spending has been restrained throughout the postwar period, in part because of this priority on domestic development (political factors have entered the picture as well, of course, with voters and many politicians alike suspicious of the Japanese military and its contractors). Present day observers criticize this situation, arguing that the appropriateness of the Yoshida doctrine has long since passed for Japan, which now purposefully chooses to focus on economic development while offering the principles of the Yoshida doctrine as an excuse to commit as few resources as possible to defense (See, for example, Harrison and Prestowitz [1990]).

Japan's defense budgets at one point equaled nearly three percent of its gross national product (this being due, in part, to the relatively low base of the economy itself in the early postwar years). Since the 1970s, defense budgets have been equal more or less to one percent of the gross national product (GNP). This has been enforced by formal and informal policy measures.

The defense budget rose from ¥800.2 billion in JFY 1972 to ¥1,512.4 billion in JFY 1976 and to ¥4.7 trillion in JFY 1995 (Annual spending increases have generally been lower each year since 1975). While spending has increased in real terms for the last several years, JFY 1991 represented the last substantial hike in spending, with recent increases limping along at just above inflation rates. Procurement programs in particular have dropped dramatically over the last five years. Procurement funding represented ¥1.1 trillion and 28 percent of the JDA budget in JFY 1989; by JFY 1995, that had dropped to ¥0.9 and 18.4 percent of the entire budget (see Table 1).(2)

Dollar comparisons of Japan's defense budget, of course, are somewhat misleading due to wildly fluctuating exchange rates since the September 1985 Plaza Accord. Nevertheless, if one examines current budgets at average exchange rates for the present period, Japan ranks in the top five in terms of military spending globally, a surprisingly high level for a country committed to minimizing its defense spending. Specific budgetary and funding mechanisms — particularly the practice of deferred payments on major procurement programs — have enabled Japan to expand its military forces considerably during low inflation and high economic growth years while remaining faithful to the one percent guideline on total spending. Thus, despite budgetary constraints, equipment purchases have been substantial during various periods over the last forty years. Japan's defense forces today are among the best equipped — qualitatively and quantitatively — in the world in terms of advanced frontline equipment.

Table 1: Japan Defense Agency Budget (Initial Budget), JFY 1986-1996

Unit: ¥billion

The critics of Japan's budget allocations view these funding levels as sufficient only to assure the local production of exceedingly costly weapons systems with U.S. technical assistance. Low volumes are assured with these outlays, making systems more costly than might be if other alternatives were pursued. The more critical point, particularly in the era of the high yen, is that "off-the-shelf" purchases should be dictated by such low expenditures.(3) The fact that Japan insists on domestic production whenever possible only underscores the economic objectives of Japan's defense policy in the eyes of its critics.(4) A country committed to self-defense as its major objective, the argument goes, would be more mindful of scarce budgetary resources and would focus cost-effective procurement decisions regardless of industrial base or import considerations.(5)

Much of the recent perception concerning Japan's contributions to its self-defense as well as regional security and the support of U.S. forces in the area has been shaped by U.S. government reports on burdensharing by its allies. These assessments were particularly influential during the U.S. defense buildup of the 1980s. In general, the assessments tended to chide Japan for not spending more on defense, although some recognized other forms of contributions such as generous host nation support to the United States (Ways and Means Committee [1988]; Armed Services Committee [1988]; and, Department of Defense [April 1988]).

II. Defense Production and Technology Transfers in Bilateral Security

The United States has used several means of transferring military equipment and technology to Japan over the postwar period, including military assistance programs, coproduction, codevelopment and company-to-company licensed production. It is worth noting that of these approaches, all remain in place except military assistance. Objectives for these programs have varied, but certain characteristics — particularly the desire to assist Japan in becoming a reasonably self-sustaining economy capable of a modest self-defense capability — have remained constant.

Despite contemporary assumptions to the contrary, writers and analysts in both Japan and the United States have been cognizant of the economic impact of defense production in and technology transfers to Japan. Military related production in Japan during the Korean conflict (1950-53) provided a significant boost to Japanese economy. That assistance did not go unnoticed by Japanese industrialists, who urged resumption of defense production in part to stimulate domestic economy. To a certain degree, some U.S. government officials held some sympathy toward this view, although were cautious to keep it under wraps by restricting production of complete aircraft and space launch vehicles (this was motivated more from lingering concerns about Japan's political intentions rather than for competitive reasons). Long before there was ever discussion of "dual use" technology, U.S. military helped revive the domestic Japanese electronics industry through radio licensing and production. Spinoffs from the radio industry helped stimulate development of the commercial television industry many years later. (Moritani [1986]; SJAC [1989]; Spencer [1967]). To the extent that economic factors entered into the thinking of U.S. officials, these benefits were viewed as potentially valuable to a struggling Japanese economy that posed the potential of becoming a long-term burden to the U.S.

Debates in the United States over the wisdom of continued military assistance standpoint offered insights into what would remain a significant issue for the security relationship, namely, the degree to which the United States should subsidize the economic growth of a country that increasingly could rely on its own capabilities for prosperity. The arguments that later would characterize the "free ride" debate on Japanese defense were articulated, for example, in the U.S. Congress over continuation of military aid programs to Japan. Military assistance ended in 1964, which in turn provided impetus to Japanese domestic proponents for expanded autonomy in defense production.

As aid programs were replaced permanently by local production, the economic implications of defense production became more pronounced and attracted greater attention in the United States. Cognizance of the industrial implications of licensing policies was indicated in the statement by Lockheed engineers who at the time were responsible for launching F-104 production in Japan. Hall and Johnson [1970, p. 317] noted the words of one U.S. executive long before the FSX debate that in transferring technology from what was then the most advanced fighter in the United States, "We were paid to put them in business" he noted, "and we gave them everything we had."

Through the 1980s, Japan benefitted more than any other U.S. ally from licensed production (OTA [May 1990]. The peak of licensing activity reached in late 1980s with the Patriot surface-to-air missile coproduction program, which resulted in the licensing and transfer of virtually every element of hardware and early generations of software in the system. This program continues with various upgrade packages, although production of the Patriot missiles and launchers has come to a close. No program attracted more political fire, however, than the subsequent FSX/F-2 "codevelopment" program, which utilized the U.S. F-16 fighter aircraft as a base for a modified Japanese variant that included numerous, indigenous technologies developed by government and industry in Japan (Chinworth [1992]; Lorell [1995]).

Economic factors became a stronger focus of some early Japanese contributions on the security relationship and the defense production it engendered. The intent of early Japanese authors represented by Tanaka [1975] typically were two-fold: first, to educate Japanese audiences on the extent of defense production in their own country; and, second: to address the political, social and economic implications of such production. Early postwar surveys of the domestic defense industry tended to waiver between denouncing the militaristic inclinations of the defense establishment and promoting the economic benefits of such production.

With the increasing transfer of military technologies to Japan under cooperative military programs, several authors have emerged to note the importance of economic considerations to Japanese government and industry. Many have suggested that the United States government has been somewhat shortsighted in appreciating the value perceived by Japanese interests in U.S. defense technology, allowing undue economic gains to accrue to Japan through these programs at the expense of the United States.

At the broadest level, one school of thought argues that economics and security are intricately intertwined in the Japanese view of its position in the world. On the defense front, it is not uncommon for nations to insist on domestic production of defense equipment in the name of national security. Modern nations believe that extensive, indigenous defense production capabilities are essential to assure sufficient production of armaments to assure their territorial integrity (Martin [1996]). Japan's notion of economics, production and security extend somewhat farther (or at least have been articulated more extensively than is the case with many other nations). The Japanese concept of economics and security extends not only to arms production (where the very act of producing a defense related good is viewed as a contribution to economic security) but also to items such as access to natural resource, sufficient energy supplies, food production, and open sealanes for shipment of imported and exported goods (Chinworth [1988]).

Chapman, Drifte and Gow [1982] explored this concept extensively, noting that Japan was in search of something more pervasive than the territorial integrity assured by sufficient military hardware. More recently, Katzenstein and Okawara [1993] explored this notion in the context of Japan's energy security. Samuels [1994] alluded to Japan's sense of vulnerability and the central impact of this vulnerability on its thinking regarding global, regional and national security.

From the perspective of this school, Japan is in search of a comprehensive security — a notion that reflects a sense of danger in all corners of the globe for this island nation bereft of natural resources and set adrift on hostile seas. Akao [1983] articulated this notion as well — the significance being that the author was then a senior Ministry of Foreign affairs official on sabbatical when completing the work. In the defense arena, this sense of vulnerability and desire for comprehensive security thus extends to production and indigenization of foreign technologies. With an stress on securing stable input sources and resource supplies, Japan also emphasizes maximizing technological inputs into its domestic industry and economic as one aspect of its comprehensive security concept (Chinworth [1992]; Samuels [1994]).

The belief that Japan effectively exploits this posture and emphasizes technological absorption is widely held among U.S. analysts (Samuels [1994]; U.S. Congress, Office of Technology Assessment [May 1990], Vogel [1989, 1991], Drifte [1986], and Pempel [1990]). Katzenstein and Okawara, note the commonly held view of Japanese success in technology absorption, dual-use applications and the spinoff of defense related technologies for commercial purposes as do Friedman and Samuels [1992] and Samuels [1994]. It is this perspective that has led to criticism of U.S. technology transfers to Japan. There has been a strong sense that Japanese industry and government utilize its security programs in order to achieve domestic commercial gains at the expense of the United States. Extensive anecdotal evidence exists of numerous cases in which Japanese industry has been able to adapt defense technology for commercial purposes and/or utilize its own commercial capabilities for defense (Chinworth [1992]; Samuels [1994]; Alic, et al [1992]). A report by the U.S. General Accounting Office in 1982 declared that Japanese government policies supported commercial ambitions to utilize the F-15 coproduction program for domestic economic gains, specifically in the area of enhancing the commercial aircraft industry within Japan (GAO [1982]).

Technological spinoff, however, should not be surprising for advanced nations. Japan's history is replete with examples of incremental improvements made to imported and domestically developed technologies for the past three centuries (Morris-Suzuki [1995]). In addition, since Japan has benefitted from generous technology transfer and licensing programs, it should come as no surprise that spinoffs may have occurred. Indeed, the real surprise may be that the list of spinoffs has not been greater given the relatively generous levels of technology transfers that have accompanied production programs. European nations have, in many respects, been far more successful at developing domestic aircraft industries, enhancing electronics production and other major industries with less substantial transfers than those experienced throughout the postwar period by Japan (OTA [May 1990]).

Nevertheless, the issue remains of whether Japan has pursued domestic defense production and cooperative programs with the United Stats solely for the purpose of economic development and gain. Drifte [1986] declared "yes" with no hesitation, adding that the dual-use technology strategy of industry and government in Japan provides a specific advantage to Japanese producers. Samuels [1994] also underscores the economic gain aspects of Japanese military production, while Prestowitz [1989], focusing on the FSX codevelopment example, supports this position while also criticizing the refusal of the U.S. government to recognize this reality and thus aiding Japan's broader economic strategy.

A second group of authors has asserted that economics is an important factor in Japanese defense programs but that additional considerations enter into both broader policies and specific decisions as well (for example, Chinworth [1992]; Green [1995]). Among these factors are political pressures generated internally and externally; genuine perceptions of a security threat in the region; and, industrial base considerations. Furthermore, proponents of expanded defense spending and production in Japan have not always been granted their every wish. In the drive toward autonomous production, kokusanka advocates have often failed in gaining the bureaucratic support necessary for launching additional domestic development/production programs (Green [1995]). Stronger critics of Japanese policies would cite these examples as temporary setbacks rather than confirmation that other forces are at play in these decisions.

It should be noted also that a "purely political" school of thought exists in viewing U.S.-Japan defense relations. Keddell [1990; 1993] argues, for example, that defense procurement is little more than a shadow play meant to mollify U.S. political pressures so that industry and government in Japan can pursue the far more important objective of economic growth. In the Keddell interpretation, specific procurement decisions and defense programs in general are determined almost entirely on the basis of satisfying short term U.S. political pressures, void of any serious thinking on national security (that view was underscored by at least one Japanese government official — former cabinet secretary Masaharu Gotoda, who served under Prime Minister Nakasone — who wrote in his personnel memoirs that former Prime Minister Nakasone's decision to exempt the United States from restrictions on Japanese defense technology transfers was nothing more than a political gesture to generate goodwill toward the premier and his new administration (Gotoda [1989]). Renwick [1995], shares that perception, arguing that Japan has pursued an economic oriented policy in parallel with the security treaty, while the U.S. focus on the treaty was in fact security. Renwick argues that the security interests of the two countries, however, have never been in parallel, making the relationship "fundamentally flawed," and open to a possible replacement by Japan or deterioration over the long term.

Japanese contributions to the discussion, particularly in recent years, have tended to focus on the capabilities of Japanese companies to produce their own weapons systems (Asahi Shimbun [1989]). These have bordered on sensationalist, ultimately concluding that the rise in perceived "frictions" on the defense front resulted from a re-emergence of economic factors, particularly increasing U.S. insecurities about its own competitiveness in the face of rising Japanese capabilities. The nadir of such assessments came with evaluations of the FSX case (Kibino [1987]; Otsuki and Honda [1991]; Teshima [1991]), which more often than not faulted U.S. postures for problems in this controversial program.

More reasoned and authoritative treatments have explored a range of motivations evident in Japanese and American security policies given Japan's commercial capabilities. Most notable among these is Kinoshita [1988], who examined the objectives of U.S. technology policies toward Japan in the context of a new era of cooperation, and identified potential opportunities for the future. Kinoshita's overview remains one of the few assessments that attempted to outline the logic and opportunities in a changing defense technology relationship with the United States instead of focusing on "frictions" and deficiencies in U.S. policies. Murayama [1996] offers a thorough and balanced perspective on the issue of frictions in defense technology relations, but sides with the view that a relative decline of the U.S. economy, coupled with a rise in Japanese economic strength, have heightened U.S. concerns over the security relationship in general and defense programs in particular.

This is not to say that criticisms of U.S. concerns over its competitiveness vis-a-vis Japan are groundless. A series of foreign dependence studies in the United States reflected concern over economic issues and potential dependencies on Japanese technology in domestic weapons systems. These include a thorough assessment of component sourcing patterns in three major weapons systems by the U.S. Department of Commerce (Department of Commerce [March 1992]), assessments by Defense Department think tanks (Libicki, Nunn and Taylor [1987]; IDA [December 1990]), and popular/business press articles (for example, Schlesinger [1991], Alexander [1992]). (It is important to note that all these reports indicated that Japan has been contributing considerably to U.S. military systems for some time, and most likely will continue to do so in the future.) Preceding all these studies was an examination of semiconductor dependencies by the Defense Science Board that all but declared Japan a potential threat due to increasing reliance by the United States on Japanese supplies of what were viewed as critical components (DSB [1987]).

The studies that voiced these concerns, however, inadvertently complimented Japanese capabilities. One theme in the past two decades has been a rising awareness of Japanese technological prowess. In some instances, this awareness manifested itself in the form of competitive and dependency concerns. In other cases, however, the same sentiment led to efforts to identify new opportunities between the two countries to strength the security relationships (OUSD/R&E [May 1987]). The common denominator in both cases has been a growing respect for Japanese technological capabilities over time as their importance to the security relationship. It was this awareness that led to efforts by the U.S. government to negotiate an exemption in Japan's policies restricting defense technology transfers and the conclusion of notes to facilitate such exchanges in 1983 (OUSD/R&E [1986]).

Japan's Potential for Arms Exports

Much of the basis for frictions over U.S.-Japan defense production and technology programs has come from lingering concerns about long-term Japanese intentions regarding arms exports. Despite the existence of reasonably well enforced policies restricting arms exports, there have been doubts throughout the postwar period over the conviction behind Japan's restrictions on arms exports (Söderberg [1986]). Japanese defense industry analysts have addressed this question more than once (see, for example, Mabuchi [1975]). The Defense Production Committee of the Federation of Economic Organizations (Keidanren, Japan's largest business lobby) has urged the Japanese government to loosen present arms export policies to allow more liberal interpretations and, therefore, new arms-related sales.(6)

U.S. concerns are evident on two fronts with regard to the export issue. The first is concern over the local, regional and global security impact of such exports. Due to the political sensitivity of arms exports, the misgiving extends to the internal stability of the Japanese government as well (the assumption being that a well publicized incident could paralyze the government at least temporarily and perhaps bring about a more fundamental political transformation that could be detrimental to U.S. interests). The second area is the competitive implication of expanded exports. U.S. observers have seen American marketshares in numerous products decline in the face of Japanese competition. It is largely assumed that if Japanese arms exports began in earnest, companies would pursue expanded marketshares aggressively at the expense of U.S. producers. Emmerson [1971], OTA [May 1990], Endicott [1975], and McIntosh [1983] all have addressed this issue from various perspectives. It is worth noting that all these authors have approached the subject after the original "Three Principles" restricting Japanese arms exports were instituted in 1967.

More recently, Japan's rising capabilities in dual-use technologies have revived these worries. It is largely assumed that with the rise of Japanese technological capabilities in commercial fields, the ease of moving into these markets is enhanced, making the position of American producers more vulnerable.

The Dual-Use Argument

The notion of dual-use technology has taken a strong hold on the perceptions and analyses of authors in recent years. Driven in part by such examinations as the Defense Science Board report on semiconductor dependence, the popular view is that the distinction between purely military and commercial technologies has blurred or disappeared entirely as commercial technologies have advanced in sophistication and development tempo. In the present era, it also is assumed that due to defense budget reductions, military procurements increasingly will be dependent on these "commercial, off the shelf" (COTS) technologies.

It has been assumed by many authors that changes in the nature of technology and modern products have been such that companies should be able to implement effective dual-use strategies if they so desire. In addition, numerous authors have proclaimed the successful implementation of these strategies in Japan (Kodama [1995]). On the defense front, Drift [1986] declared that the ability of Japanese firms to rely on commercial technologies constituted a key element is the country's long-term military potential. Chinworth [1992] noted instances in which this strategy seemingly was implemented successfully. U.S. government assessments consistently have regarded Japanese capabilities highly in advanced technologies, contributing to the notion that they have much to offer in the defense arena through commercial capabilities (Defense Science Board [1987]; Department of Defense [June 1989]; Army Materiel Command [September 1989]; and, Department of Commerce [1993]).

Scholars have claimed that with the shift in technological dynamics, rising Japanese capabilities and superior organizational abilities, firms are able to "spin on" commercial products and technologies onto defense systems or substitute them one for one in place of what otherwise would be a component or system with military specifications (Alic, et al [1992]; Samuels [1994]; Drifte [1985]; Gansler [1989; 1995]. The technology development outlined by the Japan Defense Agency in its annual white papers (Defense of Japan, various years) underscores this approach, although there also have been allusions to the need for developing purely military technologies as well, suggesting that JDA has yet to accept what is considered common sense in the United States. (The white papers do endorse the spinoff value of military related production and technologies, and more recently have advanced the view that dual-use technologies are the dominant force in its technology development strategy.) Not all analysts agree with this perspective. Alexander [1993] argues that while Japanese government and industry have made significant inroads and advances, their industry and policymaking structure remains ill-equipped to handle the demands of a complete defense force.

Recent Perspectives

As noted, awareness of the economic implications of defense production programs and technology transfers to Japan has been evident long before military assistance was suspended in the 1960s. That awareness, however, has taken different forms over time. It is not entirely the case that U.S. government and industry officials were unconcerned about the implications of these policies. Given the state of Japan's economy, however, there was little reason to believe that the progression of policies and programs over the decades would emerge as a purely competitive issue. The U.S.-Japan trade balance favored the United States until the 1960s; by the decade of the 1970s, the trade balance routinely favored Japan. Yen appreciation — both a symbolic and tangible manifestation of Japan's global economic clout — did not come until a decade after that. While the viewpoint may have been shortsighted, few American officials ever believed that Japan would pose a serious competitive challenge to the United States. Even as Japanese products came to dominate markets once held primarily by U.S. brands, few defense or civilian officials truly believed that Japan would be able to crack the most advanced and technologically demanding sectors such as missile and aircraft research, development and production. Such skills as systems integration, the argument goes, were still beyond the capabilities of Japanese government and industry, and remained an American stronghold.

The growing belief in the United States that widely dispersed dual-use technological capabilities are evident within the Japanese economy as well as such developments as its move toward systems integration with the FSX project, however, challenged that view and has brought about a reassessment of Japan's intentions and capabilities. This perception, coupled with more visible and advanced defense programs, increased political attention toward economic considerations of defense relationship. The high point may have come with the GAO's report on F-15 (the F-15 being the most advanced aircraft the U.S. had to offer at the time; Japan remains the only country in the world to produce it locally under license).

Consequently, anxieties over the competitive implications of bilateral defense programs will remain. Expressed crudely, the United States remains uncertain over whether Japan is an economic ally or challenger when it comes to its aims and capabilities in defense programs. The FSX debate represented the high water mark of political attention to the economic aspects of the security relationship. The articulation — however vague — of a "technology for technology" policy (TfT) by the Department of Defense was motivated in part by these sentiments.(7) Criticisms, however, continue. A recent report by the Defense Task Force of the National Research Council (NRC [1995]) represents the most penetrating criticism of the technology relationship, on the basis that defense has been used essentially as an excuse by Japan to draw technology from the United States for the purpose of its own economic development. The NRC report flatly declares that under these circumstances, the technology relationship with Japan cannot continue, and that major realignment is necessary.

Even with the appearance of the periodic NRC-like report, worries over technology transfers to Japan seem to have subsided somewhat in recent years for several reasons:

Few new, large scale defense programs have begun between the United States and Japan since the FSX/F-2 – Production of the U.S. AWACS system based on a Boeing 737 airframe has begun, but despite the cost, volumes are limited and there were few critical technology issues involved in the case. The F-2 production MOU, at this writing, is viewed as something of a beneficial arrangement to U.S. industry, in that it will generate far greater sales than would have been possible had the original F-16 been sold "off the shelf" to Japanese producers.(8)

U.S. competitiveness is perceived as having rebounded – While actual relative performance may be debated, there is a perception in the United States that the competitiveness of important industrial sectors such as the automotive and semiconductor industries has improved dramatically compared with world class producers, including Japanese companies. This may have led industry and government officials in the United States to become somewhat less concerned about the Japanese economic challenge, compared with earlier periods.

The Japanese "bubble economy" has burst – Coupled with the rise of U.S. competitiveness has been a decline in Japanese competitiveness. The Japanese economy of the last five years has been characterized by slow or stagnant economic growth, complicated by precipitous declines in real estate prices, an uncertain stock market (after dropping by more than 50 percent in value following the burst of the "bubble"), an unsound financial system, and erratic trading of the yen in international markets. These conditions may have led many in both Japan and the United States to discount the possibility that Japan will seriously challenge the U.S. economically for the immediate future.

"New Japans" have emerged in Asia – Rather than minimizing concern over Japan, political leaders in the United States may have placed greater emphasis on the competitive challenges posed by such nations as the People's Republic of China, thus "demoting" the relative importance of Japan to the U.S. economy. In addition, European economic integration may have attracted increased attention do to the implications raised by the sheer dimensions of a unified market (the collective GDP of European Union members at the beginning of 1995 was $6.7 trillion, with a per capita GDP of $18,000).

The U.S. government now addresses the competitive implications of defense programs with Japan – One of the most notable bureaucratic shifts within the U.S. government resulting from the FSX fallout has been the inclusion of the Department of Commerce in reviews of MOUs negotiated by the two governments. To date, the Commerce Department has not exercised its new found authority to reject an MOU on this basis. Supporters of the process argue that the very inclusion of Commerce assures negotiation of MOUs that are more favorable to U.S. economic interests.

DoD fully accepts the unity of economics and security policies – The "technology for technology" (TfT) notion articulated early in the Clinton administration managed to establish the fact that the "business as usual" frame of mind would not continue within DoD. Acquisition reform within DoD encourages this thinking as well, to the extent that it encourages policymakers in the defense arena to follow the examples established within commercial sectors regarding such matters as international teaming and technical assistance.

Other possibilities are on the horizon that could reverse this situation. While still in a formative stage, theater missile defense (TMD) would represent a major joint development/ roduction effort if the two countries reach an agreement on jointly deploying such a system in Japan. In the near term, upgrades of existing systems could always raise economic considerations. In addition, Defense Department seeks expanded cooperative relations in the area of research and development, as indicated in the September 1996 meeting of the Systems and Technology Forum (S&TF) and by an early policy memorandum distributed by Defense Secretary William Cohen.(9) Previous research and development programs have been the source of minor controversies, suggesting that future programs also could come under political scrutiny. Political dissatisfaction with the broader economic relationship, of course, can also influence security programs at any time. (This is perhaps the most uncertain and unpredictable element in the equation.) Thus, economic factors will be with bilateral defense for the foreseeable future.

In examining the coupling of defense and economic elements in the bilateral relationship, it also is important to keep the defense elements in perspective relative to total economic activity between the two countries. While bilateral defense programs generally involve advanced technologies and high profile systems, their total economic value nevertheless represents only a fraction of total economic activity between the United States and Japan. The entire FSX/F-2 program, from research to development and production is likely to span over fifteen years with an official total program cost of $16-20 billion (depending on exchange rates and other factors). This is hardly an insignificant sum. In contrast, however, trade in automobiles and automotive parts between the United States and Japan in a single year amounts to over $44.2 billion, and total merchandise trade between the two countries currently exceeds $169 billion annually. Thus, while not an trivial element of the economic relationship with Japan, its importance must not be exaggerated compared to the totality of economic ties between the two countries. American competitiveness vis-a-vis Japan extends far beyond the military relationship.

III. Issues Surrounding Economics, Technology and U.S.-Japan Defense Programs

Several issues involving U.S.-Japan defense programs stand out over time that have implications for the future conduct of the security relationship (to the extent that it will continue in the decades ahead). Among them are the following:

• To what extent have U.S. government officials been sensitive to the economic aspects of the relationship and how have they characterized/perceived those factors?
• What were the complete set of motivations that moved policymakers toward increasing transfers of production and technology to Japan under bilateral programs? What was the relative balance of interests within the U.S. government regarding these motivations and how have they changed over time?
• Are policies consistently formed in the short term without respect to future considerations, or have they resulted from long-term thinking with an eye on the future?
• Have government officials been capable of assessing the economic impact of their production/licensing decisions regarding Japan? What criteria was used for allowing the transfer of equipment and technology to Japan?
• What have been U.S. policymakers' perceptions of Japanese government and industry motivations and aims in cooperative defense programs?
• Have policymakers anticipated an eventual end to these programs — and possibly the formal security relationship itself? If so, what options/alternatives have been identified that would protect U.S. interests in the Asia-Pacific region?

As noted above, there has been awareness of the economic implications of defense programs with Japan. Industry was aware that transferring production processes meant the establishment of a competing industry. Whether U.S. industry felt that the domestic Japanese industry would ever be able to compete with the United States is another matter, but it is clear that during the formative years of bilateral coproduction programs that there was realization that a significantly enhanced domestic aircraft industry would be the end result of initial coproduction programs. Once established, the seemingly inexorable logic of increased technology transfers took hold until the Japanese industry was able to produce import substitutes for numerous weapon systems.

It would be valuable for the conduct of current relations to understand more fully the various factors that led to these individual and collective decisions. One of the most important questions facing the bilateral security relationship is whether it should continue in the future and, if so, what form should it take. Within this question is the subset of issues involving defense production and technology programs between the two countries. It is important to understand past programs in order to assess their viability for the future as well as to implement future programs (should they exist) more effectively.

One point should also be mentioned about the analyses of U.S.-Japan defense related "frictions" to date. All too often the analyses assume the cause of such frictions to be resident in such factors as growing U.S. perceptions over changed Japanese capabilities, heightened sensitive to domestic competitiveness concerns, and changed U.S. perceptions of the regional/global environment that these programs originally were meant to address. Rarely does one find an analysis that places a equal share of attention to the possibility that the origins of these frictions reside in the failure of the Japanese government or industry to adjust their objectives or perceptions in accordance with internal and/or external transformations.

As noted earlier, the literature to date suggests that the United States has altered its programs to adjust to changing economic conditions, threat perceptions, and appraisals of Japanese capabilities. Less has been said, however, about the flip side of that situation, namely, that Japan has (or has not) shifted its focus based on the same considerations. The argument that Japanese government and industry pursue defense production for non-military purposes is at the core of this lack in the literature, but that is only one side of the issue. In addition to the argument that Japan has and always will be focused on economics, it also is essential to address the question of whether policymakers have recognized external and internal transformations that might necessitate a shift in the economic aspects of its security relationship with the United States. Examining this question will result in insights into Japanese policymaking processes and policy decisions. Failure to pursue this line of research and analysis would result in a decidedly one-sided and misleading understanding of the bilateral security relationship.

IV. Filling in the Missing Pieces: A Research Agenda

Many of the issues noted above have been addressed in the literature, although often from a third party perspective. One important purpose of the upcoming research agenda should be to answer these questions from the viewpoint of the participants, as evidenced in internal documents, official statements and communications among relevant government offices. The number and range of participants involved in bilateral programs is daunting when viewed from the perspective of documenting various positions and inputs from policymakers and those responsible for implementing specific programs. At a minimum, it would be important to identify views and inputs into these programs by Defense and State Department offices responsible for mutual security affairs; DoD program offices involved in implementing bilateral programs; U.S. Embassy officials who communicated with State and DoD officers in outlining and implementing bilateral programs; U.S. industry officials who sought business opportunities in Japan; and, specific members of Congress who may have become involved in specific Japanese defense procurement decisions due to local constituency concerns.

Not only would it be important to gain insights into internal interactions among these groups, but it also would be enlightening to gain insights to their interactions with and perceptions of their Japanese industry and government counterparts throughout this period. It is clear that other interests prevailed over economic concerns through much of the postwar period — specifically, the desire to counterbalance Soviet military influence with expanded Japanese defense production. More extensive documentation of how this position evolved as well as insights into countervailing views would place these policies in a more balanced perspective that should lay the basis for future conduct of the bilateral security relationship.

Detailed evaluation of program implementation also should shed insights into the extent to which the Japanese government and industry attempted to utilize these programs for commercial gains. Specifically, technology transfer requests, requests for data exchanges beyond the scope of specific programs, personnel exchanges, flowback opportunities identified by Japanese participants and other details would shed light on the degree to which Japanese companies may have benefitted at the expense of the United States as well as opportunities that were missed by their U.S. counterparts. Side letters that remain beyond the reach of current scholars but defined specific details of joint programs also would bring deeper understandings of the degree to which Japanese government officials may have acquiesced to U.S. positions (side letters often have been a convenient means for officials in both countries to resolve controversial issues by keeping them out of a Memorandum of Understanding — MOU). Due to political sensitivities, many of these documents have remained classified or otherwise controlled; releasing them to the light of contemporary research would benefit not only present day scholars, but also current and future policymakers in both countries.

Finally, deeper insight into the motivations and risk assessments by U.S. industries is essential. Hall and Johnson [1970] provided a groundbreaking evaluation of the economic impact of technology transfers to Japan through defense programs. Less appreciated in that study was the effort to evaluate the process and criteria utilized by U.S. industry to remain present in Japanese markets through licensing agreements (and royalties). Numerous companies have faced the same issues since Hall and Johnson completed their study, including General Dynamics, McDonnell-Douglas, Boeing and others. All these firms have survived, although the full impact of technology transfers carried out under programs involving the companies have not yet been felt. Contemporary authors have noted the negative impact to specific U.S. firms and the economy as a whole of generous technology transfers, and the defense industry is no exception, as indicated by successful import substitutions by Japanese industry. Yet the complete thinking and risk assessment by these U.S. firms remains out of view to current scholars. Access to the thinking of these companies and their perceptions of the competitive environment would assist in identifying lessons for future policymakers in the United States.

ENDNOTES

(1)One could make the argument that the U.S. and Japan are intense rivals and that this relationship, along with broader economic and trade ties, should be severely modified, curtailed or abandoned outright. The Coming War With Japan (George Friedman and Meredith Lebard, New York: St. Martin's Press, 1991) attempts to make the case that the economic and political interests between the United States and Japan are diametrically opposed, and inevitably will lead to conflict. This chapter assumes, however, that all economic and political aspects of normal relations will continue. The security relationship -- while undergoing significant transformation -- is expected to remain as well for the foreseeable future.

(2)These figures are for the initial budget only. From time to time, annual supplemental budgets sometimes allocate additional funds for various defense related activities. It should be noted that these funding levels are not inconsistent with those in the defense budgets of many other advanced industrialized nations. For a comparison with U.S. spending trends, see Office of the Undersecretary of Defense (Comptroller), National Defense Budget Estimates for FY 1996, March 1995 (and subsequent volumes).

(3)Strict comparisons of domestic production and off-the-shelf purchases may be equally misleading. Margins clearly are so large in the case of the FSX/F-2 that direct purchase of an imported product may have been a far more economical alternative for Japan if it was indeed interested solely in the provision of a cost-effective defense with the lowest possible budget outlays. The same is not necessarily true for earlier programs, however. Hall and Johnson [1970] indicated that the marginal differences in production prices of the F-104 in Japan compared with those for the United States were attributable solely to differences in economies of scale that actually diminished in significance over time in the Japanese program. Chinworth [1992] noted that the F-15 coproduction program for Japan was only one case that proved very costly once the Japan Defense Agency committed to the U.S. system and its producer (McDonnell-Douglas, in the case of the F-15).

(4)The Defense Agency makes its intentions on local production clear, stating that "the existence of a sound defense industry is thought to be a major precondition for securing an adequate defense capability" (Japan Defense Agency, Defense of Japan 1996 (Tokyo: Japan Times Co., Ltd.), 1996, p. 216). Earlier policy statements regarding local production since the first white paper was published in 1970 were more direct, indicating JDA's preference to procure equipment from Japanese companies and to import from foreign countries only as a last resort.

(5)Arthur Alexander [1993] argues that Japan has been able to make moderate strides in developing an effective defense capability. Alexander further argues that economic pressures inevitably will force Japan to make more off the shelf purchases from foreign suppliers.

(6)"Japan Lobbyist Seeks End of Weapons Export Ban," Wall Street Journal, March 8, 1996, p. B-12. This is not the first time Keidanren has urged consideration of exports. It should be noted that Germany also is reconsidering its arms export restraint policies, while not as restrictive as Japan's, have curtailed potential overseas sales significantly. See Jack Hoschouer, "Germany: Export or Perish," Defense News, March 17-23, 1997, Vol. 12, No. 11, p. 1, 40.

(7)Kenneth Flamm laid down the notion of "TfT" -- "technology for technology" -- when he occupied the position of Assistant Secretary of Defense for International Affairs in the Department of Defense. The basic notion was that the United States would expect greater technology transfers from Japan as part of a continued defense technology relationship with Japan. The policy did not necessarily imply a strict quid pro quo for each defense technology transfer from the United States to Japan, but indicated U.S. government expectations that Japanese government and industry would "bring something to the table" in future cooperative programs that, over time, would bring greater balance in mutually beneficial technology transfers between the two countries.

(8)Total program costs are far from certain, given several long term uncertainties, including fluctuating exchange rates; a yet to be determined number of aircraft to be produced; upgrades; and, potential cost overruns. A "back of the envelop" estimate based on past experience plus known expenses to date provide a basis for determining rough order of magnitude costs and, therefore, the U.S. share of the program's total value. Based on an average exchange rate of U.S.$1.00=¥120, the research and development phase of the FSX program totaled approximately $3.5 billion for 14 prototype aircraft — a staggering $250 million per aircraft and far more than double Mitsubishi Heavy Industries' initial estimates. JDA's initial order for 11 F-2s (the production version of the FSX prototype) will cost ¥130.9 billion, roughly ¥11.9 billion or $99.1 million per aircraft at the same exchange rate. The "fly away" cost of the Lockheed-Martin F-16, the base aircraft for the improved FSX/F-2, currently is about $30 million. Lockheed-Martin and other U.S. firms involved in the program will have a 40 percent share — by value — of the total program. Therefore, its earnings from the program from R&D through the initial production run will total roughly $2.16 billion for the 61 aircraft, compared to a price tag of approximately $1.8 billion for the same number of aircraft purchased "off the shelf."

Expanded production and learning curve efficiency gains will reduce the cost of the Japanese aircraft, and a license produced F-16 most likely would have cost considerably more than the cost of the aircraft to the U.S. Air Force. Nevertheless, from a crude analysis of the financial gains accruing to Lockheed-Martin through the FSX/F-2 program, one is pressed to conclude that the company does not have reason to be pleased with the outcome. For budget figures and accurate costs of the program, see Japan Defense Agency, Defense of Japan 1996 (Tokyo: Japan Times Co., Ltd.), 1996, p. 295, and Ministry of Finance, Kuni no Yosan (The National Budget), (Tokyo: Government Printing Office), various years.

(9)Memorandum from the Secretary, "DoD International Armaments Cooperation Policy," March 27, 1997

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