(Reprinted from HKCER Letters, Vol. 3, July 1990)
Japanese Industrial Groups and U.S.-Japan Trade
The stubbornly persistent trade imbalance between the two nations has been a center of dispute. There are at least three aspects of the trade frictions. One is the macro element, which essentially includes the huge government budget deficit, the low savings rate, and the overall lack of competitiveness in the U.S. economy. A second aspect relates to alleged Japanese government policies to promote Japan's industries, such as tax incentives for investment and subsidized loans. The third aspect focuses on the organization of industry in Japan and how it might impede imports. It is this last aspect that is the subject matter of Professor Fung's seminar.
Japanese industry groups can be classified into three types. The first is the descendant of the pre-war Zaibatsu (giant business combine), including Mitsubishi, Matsui and Sumitomo. Pre-war Zaibatsu were groups of companies owned and controlled by a family holding company. After the war, all the major Zaibatsu were dissolved, but gradually some splinter companies re-established their former associations. They exchanged shares with other firms which bore the common Zaibatsu name and did business with each other.
The second type of group is that which centers around a principal bank. Examples are Sanwa, DKB, Takai and IBJ. Besides being the main financier of the member companies, the group bank also holds large chunks of shares of these companies and monitors their performances.
The last type of industrial type is formed around a prime manufacturing company. This type includes Nippon Steel, Hitachi, Toyota, Hitachi, and Nissan. Around the major company and its important affiliates, there are dozens and even hundreds of smaller suppliers and sales companies.
The forms of linkages between group members, which can have important implications for foreign imports, are quite diverse. Linkages can be in the form of reciprocal shareholding, exchange of information in the presidents' clubs, financing by nucleus banks, long-term subcontracting, and group-oriented networking of distributors. However, it has to be emphasized that group affiliations are never exclusive, and firms do often engage in transactions with outsiders.
How important are these industrial groups in the Japanese economy? With the internalization of the Japanese economy, these groups may decline in significance overtime, but at least currently they still contribute fairly substantially to the economy. In 1980, member companies of 16 industrial groups studied by Professor Fung together accounted for 10 percent of Japanese employment, 23.7 percent of sales, and 23.6 percent of net profits in the non-financial sector. On an international level, each of the six leading groups is larger than most major multinationals. For example, the Mitsubishi group, which is the largest in Japan, is about twice as large as Royal Dutch/Shell.
Theoretically, one interpretation of these industrial groups is that they are there to form some kind of monopoly. They form alliances with each other and they raise prices above what they should be. The anti-trust laws should then be changed to take care of this anti-competitive behavior. Evidence, however, show that their profits are not higher than those of independent non-member firms. Their profits just tend to be more stable. This leads to a second view of these groups. They are there to form long-term relationships in order to share risk. The two views have different implications concerning economic efficiency, but they do not really affect the fact that the Japanese industrial organization may still form invisible barriers to trade.
Using statistical analysis, Professor Fung was able to show that the industrial groups affect negatively U.S. net export. Professor Fung stressed that his was among the first studies on the effects of Japanese industrial groups on U.S.-Japan trade imbalance, and so his results should only be viewed as preliminary. He also conjectured that changing the industrial organization in Japan would probably not affect the bilateral trade balance in large enough scale to settle the whole dispute. The macroeconomic factors have also to be taken seriously. Nevertheless, the organization of industry does have a role in international trade and should be considered in official trade negotiations.
Professor Kwok-chiu Fung, an economist currently affiliated with both Stanford University and the University of California at Santa Cruz, visited the Hong Kong Centre for Economic Research and gave a lunch seminar on March 27, 1990. Professor Fung specializes in international trade and industrial organization. In his seminar, he gave a descriptive account of the various industrial groups in Japan and how the organization of these groups might affect bilateral trade between U.S. and Japan, the most significant trade relationship in the world.