The document discusses various non-tariff barriers that make it difficult for US businesses to penetrate the Japanese market. These include strict government regulations that add costs to imported products, laws restricting large retailers which benefit domestic producers, and keiretsu business groups that integrate Japanese firms and exclude foreign suppliers. While tariffs may be low, these other policies help Japanese industries at the expense of consumers and contribute to Japan's large trade surplus with the US. The Japanese view trade as a means to strengthen the economy and industry rather than maximize consumer welfare, as is the view in the US.

1. Protection) Japanese-Style
American producers regularly complain that
the Japanese market is particularly tough to
crack. Public officials in the United States in-
sist that the enormous trade deficit with
Japan-$26 billion in the first four months of
1998-must be reduced.
The Japanese, for their part, c1aÌm that
they have greatly reduced their tariffs in re-
cent years; the average tariff level of Japan is
in fact below that of the United States. If
Japanese tariffs are not especially high, why is
it so diffcult for U.S. businesses to penetrate
the Japanese market?
One area in which Japan does have stiff
import restrictions is on agricultural products.
Quotas on imports of meat and fruit create
large price differences between the Japanese
market and the American markn-$20 a
pound for steak and $35 for melons in Tokyo,
for example. Overall, food is three times more
expensive and clothes two times more expen-
sive than in the United States.
The main obstacles to selling more Amer-
ican products in Japan, however, are not for-
mal trade barriers; one of them is Japanese

2. government red tape. For instance, documen-
tation and testing of American cars sold in
Japan add as much as $500 to the price of
each car. Testing for the safety of U.s. health
care products is required in Japan, even if
similar tests have already been performed for
the same products marketed in the United
States.
To protect the way of life of small retaÌl-
ers, the Japanese also have "big store laws"
that make it very diffcult to build large de-
partment stores. Not only does this keep
prices high because of the inability to take ad-
vantage of the great economies of scale in
America's love aHair with the automobile is becoming
a lasting romance with imported Japanese cars.
high-volume retailing, but it also imposes dif-
ficulties on foreign manufacturers of con-
sumer goods. Sony and Canon can sell thou-
sands of televisions and cameras in the U ni ted
States through one or two massive sales agree-
ments with Wal-Mart or Sears. Foreign pro-
ducers cannot do this in Japan because they
need to reach agreements with thousands of
independent retailers.
Chapter 15 International Trade

3. Still another problem for foreigners in
penetrating the Japanese market is the exis-
tence of tightly linked organizations of Japan-
ese firms-the keiretzu-that produce a final
product and most of the intermediate prod-
ucts needed to produce it. The biggest
keìretzu are those that produce motor vehicles
(for example, Toyota, Honda, and Nissan)
and consumer electronics (for example, Sony,
Hitachi, and Sanyo). Member firms of an au-
tomobile keìretzu produce steel, glass, tires,
paint, and upholstery. The keiretzu will in-
clude a bank to provide financing and a ship-
ping company to carry the cars overseas. For-
eign suppliers of intermediate products have
no chance of selling them to the tightly inte-
grated Japanese firms. Even the smaller Japan-
ese producers are frozen out of their own do-
mestic markets in this way. As a result, some
of them are now entering into joint produc-
tion and marketing arrangements with Ameri-
can and other foreign firms-taking advantage
of trade Ii beralization pressures on the J apan-
ese government-in order to gain an entry
into their own country)s markets!
Other Japanese policies are directly fo-
ciised on helping their industries at the ex-
pense of their consumers. For example, the
shaken (pronounced "shah-khan") system is a
policy designed to impose extremely tough
automobile inspections on all cars in Japan.

4. Once a car becomes 5 or 6 years old, it can
cost a car owner hundreds of dollars to pass
the annual safety inspection. While it docs
lead to marginally safer cars on Japan's roads,
it also provides an incentive for car ownCfS to
buy new cars more frequently, thus helping
the Japanese auto industry.
All these policies and practices contradict
the notion that the purpose of trade is to en-
hance consumer well-being. This is because
while an improved standard of living is the ac-
cepted basis for free trade in the United
States, it is not so in all countries. In Japan
(and South Koreã.), for example, people be-
lieve that the purpose of trade is to improve
the nation's economic strength and its share
of world markets. Consumption and con-
sumer well-being do not have the importance
that they do in the United States. Incrcased
consumption also subtracts from saving, and
saving is necessary to finance thc capital in-
vestment neccssary for industrial growth.
(This is anothcr reason for our trade dcticit
with Japan: Americans like to spcnd and
Japanese like to savc. As a rcsult they put
money into U.S. bonds and stocks and we use
the money to buy Japanese imports.)
From the Japancse perspective, the world
does not remembcr the great consumers, it re-
members thc great producers. Japanese trade

5. policies reflect their ideology. Consumers may
suffer in terms of higher prices and less con-
sumption, but this is consistent with their na-
tional economic goals. American busincsses
complain that Japanese policies make for an
"uneven playing field." The Japanese response
is that theirs is simply a policy decision de-
signed to strengthen domestic inL! Llstries at the
expense of their consumcrs.
1. What types of nontariff barriers, other than
quotas, restrict imports into Japan? Can
you think of any similar barriers that re-
strct imports into the United States?
2. Would U.S. farmcrs and ranchers be able
to export morc to J apm if the J apancse ap-
plied tariffs rather than quotas to imports
of agricultural products? What are the as-
sumptions underlying your answer?
3. Do YOll think that the United States should
adopt J apanese-stylc policies that arc de-
signed to promote production at the ex-
pense of consumers' well-being? Could the
average American household do with fewer
consumer goods?
The Snidy of Economics

6. increase in the cost of living has slowed 1955 with the prices
today. A cost of loving
down recently, but the same isn't tre for the index might be
calculated as shown in Table 1.
cost of loving. Raymond F. DeVoe Ie., who The 1998 COL
index was 748.
writes a, stock market newsletter, has been cal- Tti~C?~~of
lovi-i.ß-il_,!.~J;-Une up mJ_cl~more
culating a cost of loving (COL) index since tliaB. ll~..l-LThe
ÇQL ass_u-ie~tha.U~o~
1955. (Please note that t1e COL index is not rnen still court
young women the same way
the same as COLA, the cost-of-Iiving adjust- t!!~Lc!i-aJ-
ij~T9_~~,- T;J;y'S~o~-;tingpractlces
ment.) Since that time, the general price level may include
fewer candlelight dinners and
of consumer goods and services has increased fewer birthday
gifts of expensive perfume. The
6.1 ties the level in 1955. In other words if same type of
problem affects the CPr. Changes
í955 were the base period, the CPI would h~ve in lifestyles and
consumption habits make com-
risen from ioa to 610. parisons of the cost of living over a
number of
To figure the COL, we take a representa- years diffcult. For this
reason, the base period
tive sample of goods and services involved in ;. . ....., ..... and
the contents of the market basket of goods
the mating game and compare their prices)Il~;;;;."':.¡ for the cpr
are periodically updated.
;;;;¡~~~~~iJ':¡;'

7. Chapter 11
.:" . ',;,.:_ " ...2¡:~~J..":...7~,
',i
.::?i' :
'fl~.Ji¡ , ,
' ,i
i i
d
'Ii
;¡A~-: i -!'; .,~-~ , ,.dÚàj;g:t~;b;.h~¡~~~r
Table 1..'. Cost,of Loving Index*
Item Number Price in PoxQ Price in P1 x Q
Pm-chased 1955 (Po) 1998 (P1)
(Q)
Botte of wine 4 $1.55 $6.20 $9.95 $39.80
First-run movie 14 1.00 14.00 7.50 105.00
Candlelight diner 6 2.75 16.50 80.00 480.00
Silver bracelet 2 1.29 2.58 26.00 52.00
Dozen roses 2 5.00 10.00 40.00 80.00
Perfme 1 35.00 35.00 95.00 95.00
Diamond ring 1 400.00 400.00 2,750.00 2,750.00

8. Blood test 1 7.00 7.00 45.00 45.00
Marriage license 1 2.00 2.00 45.00 45.00
$493.28 $3,691.80
COL (1998) = ~ x 100 = $3,691.80 x 100 = 748
Po x Q $493.28
*This index is based on but is not identical to the one devised
by Raymond F. DeVoe Jr.
Economic Reasoning
1. One of the most inflationary items in the
COL was the candlelight dinnee. The price
of dining out increased because more
women entered the labor force and, with
two people working full time, they dined
out more frequently. Would you call the
inflation of dining out a demand-pull or a
cost-push type of inflation? Why?
't;~;~
~
(Continued from page 300)
whether it be large or small, because the mon-
etary unit itself is arbitrary.
The quantity theory of money made a come-
back in the 1980s, and the monetarists had a
large influence on policy. First they noted that T
grows over time-it is the growth rate of the
economy. They argued that if the economy is at

9. full employment and V is stable, then increasing
the money supply annually by the same percent-
age as the annual growth rate of T would result
in a stable price level over time. Although this
works on paper, e~!'1i.sts.ha~e_J.9..nçi-~
problems with it. Ei!st, velocity might not be sta-
L~ ;!;d~
~.~ '.'' ,',' ,.I"'" :l.i;l¡.~..J...
~i~e Stud)' of r~conol1ics
2; Which index is a better measure of our r.
purchasing power, the cpr or the COL? (-t)' ,1( Vt'Why? .' ,)), ~
;," ' l(¥ ~
Do you thnk that the high cost of loving ,.
has actually affected dating practices? How?
Do price changes affect our buying habits - '¥!'"
in general? What implication does this have
for the validity of t11e CPP _ . 1_""Li- i,.n",up' ,.1: II ~"v' Y
)
1~ )oJi/
ble, ~.?_t:ere.is no ~~know ~hat(:f!èct ~jn-
crease ir-M_Iljg~tti_aY~..i-ix_r-. Sec()!ldL~i~e
financial markets have been deregulated, itjs in-
cre~~í~!Y__~lmcult to a~curateiy_~ontroi ~~e
growth rate of the money supply. Third, there
hj~~e_e~';J~~k ¿'f co¿;ejp_9Dsl-eil-c.eJi0WUn .
changes in the money supplLandPJe rate üti-i--

10. tlation in-recentyèa:s.As we saw in di-;i1ter-r: re-
g~di~~s'h;~ good; theory may look on paper, if
it doesn't work in the real world, it must be re-
jected. As a consequence, monetarism has been
relegated to t1e back seat of economic analysis.