Japan and Latin America in the New Global Order 9781685856328

Table of contents :
Contents
List of Tables
Foreword
Preface
Introduction
1 Japanese Economic Relations with Latin America: An Overview
2 Japan in Mexico: A Changing Pattern
3 Brazil and Japan: Potential Versus Reality
4 Japan, Latin America, and the United States: Prospects for Cooperation and Conflict
Appendix A Key Provisions of the "Enterprise for the Americas Initiative"
Appendix B The United States-Canada Free Trade Agreement
Appendix C Study Group Sessions and Participants
The Contributors
Selected Bibliography
Index
About the Book

Citation preview

Japan and Latin America in the New Global Order

A Publication of the Americas X Society

Japan and Latin America in the New Global Order edited by

Susan Kaufman Purcell Robert M. Immerman foreword by

Stephen W. Bosworth

Lynne Rienner Publishers • Boulder & London

Published in the United States of America in 1992 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 1992 by the Americas Society. All rights reserved

Library of Congress Cataloging-in-Publication Data Japan and Latin America in the new global order / Susan Kaufman Purcell and Robert M. Immerman, editors, p. cm. Includes bibliographical references and index. I S B N 1-55587-316-2 (alk. paper) 1. Latin America—Relations—Japan. 2. Japan—Relations—Latin America. 3. Japan—Relations—United States. 4. United States— Relations—Japan. I. Purcell, Susan Kaufman. II. Immerman, Robert M. F1416.J3J37 1992 303.48'25208—dc20 92-4865 CIP

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984.

Contents List of Tables Foreword Stephen W. Bosworth Preface

vii ix xi

Introduction Susan Kaufman Purcell and Robert M. Immerman

1

1 Japanese Economic Relations with Latin America: An Overview

A. Blake Friscia

2 Japan in Mexico: A Changing Pattern

5 Luis Rubio

3 Brazil and Japan: Potential Versus Reality Riordan Roett

69 101

4 Japan, Latin America, and the United States: Prospects for Cooperation and Conflict Susan Kaufman Purcell and Robert M. Immerman

121

Appendix A Key Provisions of the "Enterprise for the Americas Initiative"

147

Appendix B The United States-Canada Free Trade Agreement

149

Appendix C Study Group Sessions and Participants The Contributors Selected Bibliography Index About the Book

151 153 155 157 163

Tables 1.1 1.2a

Japanese Trade with Latin America Relative Importance of Japanese Exports to Latin American Countries, 1991 1.2b Relative Importance of Japanese Imports to Latin American Countries, 1991 Leading Latin American Countries in Japan's 1.3 Trade with the Region, 1991 1.4a Japanese Direct Investment in Latin America and Other Areas 1.4b Foreign Direct Investment in Latin America 1.4c Japanese Foreign Direct Investment, Sectoral Composition by Area Exposure of Creditor Banks, 1985 1.5 1.6a Japanese Medium- and Long-Term Bank Claims on Latin America 1.6b U.S. Short-, Medium-, and Long-Term Bank Claims on Latin America 1.6c Total Short-, Medium-, and Long-Term Bank Claims on Latin America 1.6d Japanese Commercial Bank Claims on Developing Countries 1.7 Japan's $65 Billion Capital Recycling Program Latin American Country Loan Commitments by 1.8 Export-Import Bank of Japan 1.9 Japan's Bilateral Overseas Development Assistance by Region 1.10 Top Latin American Country Recipients of Japanese Overseas Development Assistance, 1989 1.11 Latin America's Receipt of Overseas Development Assistance by Country of Origin 1.12 Location of Top Five Trading Companies' Overseas Subsidiaries and Affiliates

vii

10 15 15 16 20 22 24 29 34 34 35 36 40 42 47 49 51 55

viii 2.1 2.2 2.3 2.4 2.5a 2.5b 2.6 2.7 2.8 2.9 2A 2 B 3.1 3.2 3.3

List of Tables

Foreign Direct Investment in Mexico by Country of Origin, 1960-1978 Japanese Foreign Direct Investment by Sector, 1965-1974 Trade Balance, Mexico Trade Balance, Japan Direct Eximbank Loans Agreement of December 1979 Direct Eximbank Loans Agreement of December 1990 Value of Japanese Investment in Mexico by Sector Japanese Investment in Mexico Top Eleven Japanese Firms in Mexico Sectoral Distribution of Firms with Japanese Investment in Mexico Mexico-OECD Trade, 1980-1987 Evolution of Japanese Investment in Mexico Brazilian Exports to Japan Japanese Exports to Brazil Bilateral Trade

74 74 76 76 78 79 80 81 83 84 97 98 108 109 110

Foreword Japan now has the second largest national economy in the world, and by many standards of measurement the Japanese economy is the world's most dynamic. Japan has also become the most important source of new foreign direct investment for a great many countries, particularly in Asia, and the Japanese market absorbs an ever e x p a n d i n g share of developing countries' manufactured exports. J a p a n ' s official d e v e l o p m e n t assistance program is currently the largest of all countries, including the United States. Moreover, given current trends, Japan's importance in the international e c o n o m i c system can be e x p e c t e d to grow even f u r t h e r over the c o m i n g decade. T o date, however, J a p a n ' s role in Latin A m e r i c a has b e e n relatively insignificant. For obvious reasons, Japan has concentrated its e c o n o m i c assistance p r o g r a m s in Asia, and the J a p a n e s e private sector has focused its manufacturing and investment activities in the U n i t e d States, Western Europe, and Asia. T h e Japanese g o v e r n m e n t has played an important role in trying to address the n e e d f o r d e b t relief in some Latin A m e r i c a n countries, particularly Mexico. But this seems to have been motivated primarily by a Japanese desire to be supportive of U.S. policies rather than by any p e r c e p t i o n of a strong Japanese interest in the region. For J a p a n , Latin A m e r i c a has b e e n s o m e t h i n g of a terra incognita. It seems likely that this situation will change, albeit gradually. T h e forces of globalization and the new models of international p r o d u c t i o n and investment are likely to draw J a p a n e s e firms increasingly into Latin America. Furthermore, the end of the global competition between the former Soviet Union and the United States is likely to lead the Japanese to regard Latin America less as an area of primary U.S. interest and responsibility. And, finally, the apparent growth of regional trading arrangements, both in North A m e r i c a and potentially in the entire Western H e m i s p h e r e , is likely to

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h e i g h t e n t h e i n t e r e s t of J a p a n e s e c o m p a n i e s in s e c u r i n g a production base in the region. In the final analysis, however, the extent of Japanese interest and activity in Latin America will d e p e n d principally on what happens in Latin America itself. If the c u r r e n t trends toward market-oriented economic policies and stable democratic political systems c o n t i n u e and are consolidated, the region will become increasingly attractive, n o t only to J a p a n e s e , but to Europeans and North Americans as well. It seems increasingly imperative that the United States and J a p a n begin to put some c o n t e n t into their much discussed new "Global Partnership." Their bilateral relationship, so important not just to them but to the rest of the world as well, is currently u n d e r strain. T h e United States and J a p a n need to adjust their views of each other and of themselves to take account of the end of the Cold War and the resulting loss of much of the glue formerly provided by their security relationship. T h e e m e r g i n g parity of U.S. and J a p a n e s e e c o n o m i c power p r o d u c e s an unavoidable rise in competition between t h e m that must be offset by new a t t e n t i o n to areas where their interests converge. Latin America is such a region. However, any b r o a d e n i n g of their relationship must be founded on a far greater understanding of each other's interests and priorities than now exists. This timely study of the relations a m o n g the United States, J a p a n , and Latin America makes a useful contribution to that goal. Stephen W. Bosworth President, U.S.Japan Foundation

Preface This book is the result of the combined efforts of a n u m b e r of individuals a n d institutions. We are especially g r a t e f u l to t h e m e m b e r s of the study g r o u p "Japan and Latin America in the New Global O r d e r , " whose i n f o r m a t i o n and ideas regarding J a p a n e s e L a t i n A m e r i c a n - U . S . r e l a t i o n s were i n v a l u a b l e to us. T h e cooperation of the Consulate General of Japan in New York and the Foreign Ministry in Tokyo in facilitating J a p a n e s e g o v e r n m e n t participation in t h e study g r o u p is also greatly appreciated. We would like to t h a n k Alessandra Griffiths, assistant to t h e vice president for Latin American Affairs at the Americas Society, for the fine work she did in editing the manuscript for both substance and style, for organizing and supervising the publication process, and for serving as r a p p o r t e u r for the study group. Maria Vecchio, secretary to the vice president for Latin American Affairs at the Americas Society, helped organize the meetings of the study group, and Linda Pakula, h e r successor, provided assistance in the final stages of the p u b l i c a t i o n process. C l a u d i a Calich, C h r i s t i n e Dowling, a n d Stuyvesant Fox, interns for the Department of Latin American Affairs at the Americas Society, also greatly contributed to the publication process. We also wish to thank William Gleysteen, Barbara Stallings, Ernest Preeg, and A n n e Emig f o r their constructive critiques of earlier versions of the manuscript. Finally, we wish to acknowledge Lynne R i e n n e r for her useful contributions to the editorial a n d publication processes. This book, and the study group on which it is based, were m a d e possible by g e n e r o u s grants to the D e p a r t m e n t of Latin American Affairs of t h e A m e r i c a s Society by the A n d r e w W. M e l l o n F o u n d a t i o n , the Starr Foundation, the Smith Richardson Foundation, a n d the J o h n M. Olin Foundation. Susan Kaufman Purcell Robert M. Immerman

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Introduction Susan Kaufman Purcell Robert M. Immerman In recent years, relations between the United States and Japan have become more complicated and difficult. The relative decline in the international economic standing of the United States, combined with Japan's economic surge, have caused many U.S. citizens to view Japan as a competitor or potential adversary instead of an ally. At the same time, within Japan increasing numbers of Japanese have begun to demand less reliance on, or support of, U.S. policy initiatives in other regions of the world. Until now, these new tensions between the United States and Japan have not been evident in their bilateral relationship regarding Latin America. In fact, Latin America has been one area where Washington and Tokyo have been able to implement their stated policy of a global partnership for development. Both governments have cooperated in helping to resolve the debt crisis that shook the region in 1982. Both have also worked together in seeking ways to reinforce the region's transition to democracy and market economies. Because of geography and history, of course, Latin America has been much more important to the United States than to Japan. As a result, Tokyo has shaped its policies toward the region in such a way as to reinforce its primary relationship with Washington. During the Bush administration, there has been no severe conflict between U.S. and Japanese priorities and goals in Latin America. Whether this will continue to be the case in the coming years remains to be seen. In order to explore the future of the U.S. and Japanese global partnership in Latin America, and to better understand the forces that have allowed it to function well in the region until now, the Americas Society invited a number of noted experts on U.S.-Latin American, U.S.-Japanese, and Japanese-Latin American relations to

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participate in a study group, "Japan and Latin America in the New Global Order." The group included business executives, academics, and f o r m e r and c u r r e n t government officials and media representatives from the United States, Japan, and Latin America. Papers commissioned for each of the three meetings were subsequently revised to reflect the comments and observations of the study group members, as well as those of discussion leaders. The final versions of the essays, which are included in this book, nevertheless represent the personal views of each of the authors, not the conclusions of the study group as a whole. In the first chapter, "Japanese Economic Relations with Latin America: An Overview," A. Blake Friscia of New York University examines the variety of Japanese economic policies toward Latin America and concludes that, overall, Latin America as a region has not been a top priority for Japan, although Japanese lending to Latin America in the aftermath of the debt crisis of 1982 has become significant. He adds, however, that Japan cannot afford to neglect Latin America because of its considerable resource base and growing domestic markets. When and if Latin America becomes more important to Japan will nevertheless depend on the outcome of Latin America's current efforts to restructure and revive its economies. In "Japan in Mexico: A Changing Pattern," Luis Rubio of the Centro de Investigación para el Desarrollo, A.C. (CIDAC) in Mexico City provides a case study of Japanese economic relations with Mexico. Rubio argues that the Japanese have not viewed Mexico in an independent context, with the exception of Japan's interest in Mexico's oil resources. Instead, Japan has regarded Mexico as part of a Japan-United States-Mexico triangle. Recent economic reforms in Mexico, however, combined with movement toward the creation of a North American free trade area, have increased Japan's interest in the country. For this reason, Rubio concludes that past Japanese behavior toward Mexico may not be very useful in predicting its future behavior. In the third chapter, "Brazil and Japan: Potential Versus Reality," Riordan Roett of the Paul H. Nitze School of Advanced International Studies at the Johns Hopkins University speaks of the potential for a strong relationship between the two countries, given Brazil's large internal market and natural resource base, as well as Brazil's possible future role as a Third World "influential." He concludes, however, that Japan will maintain its relatively low-level engagement with Brazil as long as macroeconomic uncertainty and

Introduction

3

social and political instability persist. Roett does not rule out the possibility of a more dynamic relationship between the two countries once Brazil implements an appropriate growth strategy. In the final chapter, "Japan, Latin America, and the United States: Prospects for Cooperation and Conflict," Susan Kaufman Purcell and Robert M. Immerman argue that Japan's policies toward Latin America must be understood in the context of its most important bilateral relationship—its ties to the United States. This explains why Tokyo hopes to continue using its policies toward Latin America to offset some of the serious bilateral tensions between Japan and the United States. The authors conclude, however, that Japan's growing sense of equality with the United States means that Tokyo's support of Washington's Latin American policies will not be as automatic as in the past. At the same time, they point out that recent changes in the world and, specifically, in Latin America present especially fruitful opportunities for JapaneseU.S. cooperation in the region.

Chapter 1

Japanese Economic Relations with Latin America: An Overview A. Blake Friscia Latin America and Japan both made great economic strides during the 1960s and 1970s. And, as development accelerated for both, economic links became closer. Latin America was in a fast development mode in these two decades, first through protective import barriers that gave a stimulus to domestic industries and later through debt-financed growth. Japan was attracted to the region as a source of trade, raw materials, and new outlets for direct investments and bank lending. The volume of trade between Japan and Latin America grew rapidly as Japan imported large amounts of metals, raw materials, and commodities from the region. Substantial investments in natural resources were made, especially in Brazil and Peru. Industries protected by high tariffs or barriers drew other investments, and in some countries—notably Brazil—new export-oriented ventures were established. Private Japanese bank loans helped finance many of these investments. Japan viewed Latin America as an important provider of raw materials and other resources, a new area for investments, and a developing market for its exports. In turn, the Latin Americans welcomed Japan as a strong second or third source of trade, investment, and finance to supplement the traditionally greater reliance on the United States and Europe. The closer economic linkages were abruptly disturbed by the Latin American debt crisis of 1982. This near-default of the region's external debt had adverse consequences in the form of a sharp fall in finance, foreign investments, and economic growth. Latin America's attractiveness suffered and Japanese investments in manufacturing dropped off, while the pace of trade slackened. External debt problems had the effect of reversing the gains that had been made in the previous two decades. Economic relationships between

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A. Blake Friscia

Japan and Latin America consequently changed and weakened considerably during the 1980s. As a direct result of the debt crisis, the relative importance of Latin American trade and investment for Japan diminished. Latin America became relatively less important compared to other regions. Other and faster-growing areas of the world—North America, Europe, Asia—became the main attractions for Japan as Latin America became mired in its debt problems. But despite this, as "natural" economic relationships weakened, Japan felt impelled, as an emerging creditor nation, to provide special financial resources to help Latin America. In a sense, the reduced flow of private trade and investment between Latin America and Japan was offset by increased official assistance and lending. These shifting trends have led to changed economic structures between Japan and Latin America—changes that have policy implications, not only for Japan and Latin America but for the United States as well. The structure of the economic relationships between Japan and Latín America can be surveyed from the different perspectives of foreign trade, direct investments, lending, and economic assistance. The importance of the relationships varies considerably, depending on whether Japan or Latin America is used as the reference to measure the importance of the bilateral relationships. Although exports and imports between Japan and Latin America have been rising, the amount of trade is limited. For a few countries—Brazil, Mexico, Chile—exports to Japan are quite significant, but for the rest of the region the amounts are still small. Japanese direct investment in Latin America, though greater, is concentrated in a few countries. Financial investments predominate in Panama and the Caribbean, while industrial operations are more important in Brazil and Mexico. Lending to Latin America, although not always voluntary, became an emerging Japanese economic relationship. Among developing countries, the outstanding loans Japanese banks made to Latin America are second only to those made to Asia. Because of a slowness in writing off their loans, Japanese banks hold a considerable exposure in Latin American external debt and rival U.S. banks in this involvement. In terms of Japanese official development assistance, Latin America is in a fourth position, behind Asia, the Middle East, and Africa. But Japanese strategic technical assistance projects are numerous in countries such as Brazil, Peru, and Paraguay. Overall, viewed from Japan, Latin America as a region is not

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currently a top priority area in terms of trade, investment, lending, or overseas assistance. This is not to say that Japan is neglecting or ignoring Latin America. Rather, the Latin American region is lower on the scale of Japan's international economic relationships and policy interests than three other world regions. The United States, the European Community, and East Asia are of greater importance economically to Japan and higher in foreign economic policy considerations. Nonetheless, Latin America and the Caribbean, with a 443 million population and a $1 trillion economy, has the potential of a considerable resource base and growing domestic markets that Japan cannot afford to neglect. A future free trade area of the Americas, combining the economies of the United States, Canada, and Latin America, would be attractive to Japanese trade and investment. Mexico, Chile, and Colombia have already begun to demonstrate that the adoption of open, competitive systems, even without economic integration, has a considerable potential for spurring growth. And as the large economies of Brazil and Argentina overcome their inflation problems, the region has a good chance to make a successful transition from the "lost decade" of the 1980s to the hoped-for "growth decade" of the 1990s. This development would make the region far more attractive to Japan. But a considerable period of time may be needed for economic activity to accelerate and for Japanese trading companies, investors, and lenders to be persuaded about a new potential in Latin America. If Latin America is not within the purview of Japan as a primary area for trade or investment, is there the need for an official government policy toward the region? Compared with what are clear statements of Japanese policies toward the United States, the European Community, and Asia, a specific and comprehensive economic policy framework toward Latin America is not discernible. The main official concern with Latin America is the region's stagnation induced by the debt crisis, and it is here that Japan has pioneered an initiative that can be interpreted as a unique policy response toward the region. Japan's initiative has taken the form of "recycling," or directing part of the country's large trade surplus to Latin America via official assistance and loans. The prime objective of "official" Japan is to support the economic development of Latin America. In view of Japan's great involvement—both through official institutions and its great trading companies and multinational enterprises—in the global economy, an improvement in Latin America is seen to benefit Japan. This is the justification for financial assistance to the region.

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By helping to economically invigorate Latin America, the region will b e c o m e more attractive to Japanese traders and investors—thereby meriting official support by Japan. But, conscious o f the traditional U.S. role in Latin America, official J a p a n has to keep a wary eye on Washington. If Japan helps in the development of Latin America, this should help improve U.S.J a p a n e s e relations on the presumption that the United States welcomes partners in its efforts to revitalize the region. This would explain J a p a n ' s participation in the U.S.-initiated Enterprise for the Americas program. Yet, as Japan expands its involvement in Latin America, the potential for serious conflict with U.S. interests exists. This conflict can take the form of competitive business challenges to U.S. firms and in J a p a n ' s possible role in a U.S.-led regional free trade arrangement. From the reference point of Latin America itself, a new financial awareness of J a p a n has developed. The external debt problem of the region has made access to sources of finance in Japan a key priority. J a p a n has, in fact, begun to rival the United States as Latin America's leading source of external financial resources. This parallels J a p a n ' s lead, as o f 1989, over the United States as the largest provider of net official and private financial resource flow to the developing regions and multilateral institutions. In this new c o n t e x t , t h e r e f o r e , the c h a l l e n g e f o r the Latin A m e r i c a n policymakers is to demonstrate to official Japan that their efforts at stabilization and e c o n o m i c reforms warrant support. Further, the Latin Americans have to demonstrate to skeptical Japanese business interests that the region can be competitive with other regions and thus able to attract more trade, investment, and finance. Thus, in Latin American terms, J a p a n could be increasingly viewed as a superpower country of trade, finance, and investment, assuming the Japanese economy maintains its buoyancy, rivaling the United States as a key participant in the region's economic development. Whether J a p a n ' s potential interest in Latin America will lead to conflict with U.S. policies and interests in the region is an issue that warrants a more detailed analysis.

JAPANESE TRADE WITH LATIN AMERICA J a p a n e s e foreign trade is on a considerably smaller scale in Latin A m e r i c a 1 than in the United States, Asia, and Europe. But the promise of a Latin American free trade agreement with the United

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States plus a better economic outlook in several countries could lead to a renewed momentum. Japanese-Latin American foreign trade grew vigorously during the region's high-growth period of the 1960s and 1970s. Total trade—exports plus imports—increased at 15 percent annually in the 1960s. Japanese imports from Latin America were concentrated in raw materials, fuels, and agricultural goods with only a very small amount of manufactured products. Japanese exports to the region were almost the opposite: 95 percent industrial products with transportation equipment predominating. The composition of this trade was as expected, Latin America exporting its abundant natural resources and Japan selling industrial products in which it was increasingly demonstrating its comparative advantages in product, quality, and technical advances. In the 1970s decade of rapid Latin American growth, Japanese exports to the countries increased by over 20 percent per annum. Rising commodity prices in Latin America and Japan's demand for raw materials pushed up the value of imports from the region from $1.3 billion in 1970 to $5.7 billion by 1980. In addition, higher oil prices, the product of OPEC crises, led to larger Japanese purchases from Latin America. The region also had rising demands for Japanese products. Industrialization promoted through protective policies in Latin America, although designed to "substitute" domestic manufactures for imported goods, required increasingly advanced manufactured equipment imports. These policies created a large demand for machinery and equipment from Japan. Japanese exports to the region reached a peak of $10.5 billion in 1981; but then, as a consequence of the debt crisis, a decline set in, and by 1989 shipments were almost 11 percent below what they were at the beginning of the decade. Large Latin American cuts in investment spending during the decade particularly affected Japanese capital goods sales to the region. During the same period, from 1981 to 1989, Japanese exports to all countries rose by 78 percent. In 1990, led by improving conditions in Panama, the Bahamas, Mexico, and Venezuela, Japanese exports to Latin America rose by 9.5 percent. But in 1991, with Latin American economic growth rising to nearly 3 percent, Japan's exports to the region increased sharply by almost 25 percent. The 1991 exports finally surpassed the level of 1981, the year before the start of the debt crisis. The evolution of Japanese trade with Latin America from 1981 through 1991 is shown in Table 1.1. Japanese imports from Latin America during the 1981-1991 decade did rise by over 47 percent, but this was less than the 65

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Table 1.1 Japanese Trade with Latin America (million U.S.$)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 % Change 1981-1991

Total Exports

L.A. L.A. L.A. Exports Total Imports to L.A. Share i Imports from L.A. Share % Balance

152,030 138,831 146,927 170,114 175,638 209,151 229,221 269,917 274,175 286,948 314,525

10,516 9,086 6,391 8,549 8,486 9,494 8,760 9,297 9,381 10,279 12,793

106.9

21.6

6.9 6.5 4.3 5.0 4.8 4.5 3.8 3.4 3.4 3.6 4.1

143,290 131,931 126,393 136,503 129,539 126,408 149,515 187,354 210,847 234,797 236,737

6,669 6,268 6,462 7,230 6,242 6,194 6,355 8,313 8,870 9,851 9,838

65.2

47.5

4.7 4.8 5.1 5.3 4.8 4.9 4.3 4.4 4.2 4.2 4.2

3,857 2,818 -71 1,319 2,244 3,300 2,405 984 511 428 2,955

Japanese Trade with Other Areas in 1991 Exports United States Southeast Asia European Community Middle East-Africa China

91,538 96,176 59,158 15,888 8,593

% Share 29.1 30.5 18.8 5.1 2.7

Imports 53,317 58,810 31,792 31,203 14,215

% Share 22.5 24.8 13.4 13.1 6.0

Source: Japan Ministry of International Trade and Industry and Japan Tariff Association (1991).

p e r c e n t increase in purchases f r o m all world countries. T h e 1980s import buying f r o m Latin America was also far less than the fourfold increase during the 1970s, w h e n Japanese sourcing of raw materials and intermediate g o o d s f r o m the region accelerated. Part of this i m p o r t d e m a n d by Japan shifted to Asia as a c o n s e q u e n c e of an increasing p r e s e n c e of Japanese multinational c o m p a n i e s locating in that area and developing new raw material sources. O n e c o n s e q u e n c e of the 1982 Latin American d e b t crisis was thus a considerable slowdown and decline of the foreign trade that

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had developed in the previous two decades. During 1990, there was an appreciable increase in Japanese imports from Latin America. Purchases were up almost 17 percent from the region as a whole, with notable gains of Japanese buying from Argentina, Panama, Mexico, and Venezuela. In 1991, imports from Latin America dropped slightly, as purchases from Mexico fell by almost 10 percent, and from Venezuela by 27 percent. Declining Shares Two developments contributed to a relative loss of position in Japanese trade with Latin America from the 1970s to the 1980s. One factor was the loss of economic momentum of Latin America itself. The other was a shift of Japanese buying to other regions, particularly to Asia in the form of manufactured goods. In terms of the export and import shares shown in Table 1.1, both measures show a decline for Latin America since 1981. The Japanese share of its exports to Latin America dropped from almost 7 percent of the world total in 1981 to only 3.4 percent in 1989, then rose to 4.1 percent by 1991. By comparison with other countries or regions, Latin America has become a minor area for Japanese export markets. As shown in Table 1.1, the largest single market for Japan is neighboring Southeast Asia, with a 30 percent share, and the United States, with a 29 percent share. The European Community also represents a sizable 18.8 percent destination for Japanese exports. The smaller Latin American share is comparable only to the Middle East-Africa region and the individual country markets of China and Australia. On the imports side, the decline in the Japanese share of buying from Latin America has been less dramatic. From 1981 to 1991, the decline has been only from 4.7 percent to 4.2 percent. However, in the 1960s and early 1970s, Japan had been sourcing 7 percent to 8 percent of its imports from Latin America. This relative loss of Latin American position in Japan's trade has been taken up particularly by Southeast Asia and the United States, which currently represent about one-fourth each of Japan's total imports. Purchases from the United States are partly a consequence of higher incomes in Japan and increased U.S. pressures to open up Japanese markets. Buying f r o m Southeast Asia represents the influence of Japanese investments that have been made in that region. As Japan itself concentrates on high-technology goods and services, more basic manufacturing industries have migrated to Southeast Asia. The outputs of these industries are then exported to the Japanese home

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market. None of the influences—demand for upscale goods, outside pressure to open up Japanese markets, or the exports by transplanted Japanese firms—characterizes the nature of Japanese imports from Latin America. T h e J a p a n e s e trade intensities with Southeast Asia are particularly noteworthy, since the composition of goods has increasingly shifted to manufactures. In the 1960s, Japanese buying from Latin America was strong in raw materials for Japanese manufacturing activities. But as more Japanese production has shifted to Southeast Asia, the composition of Japanese imports has turned increasingly to manufactured goods from Asia. This is a market that has been difficult for Latin American goods to penetrate because of quality, price, and delivery advantages among the Asian producers. Further, Latin American goods would face formidable competition from Japanese-based firms producing in Asia and selling to the home market in Japan. From Deficit to Surplus In the 1960s, Japan had a trade deficit vis-à-vis Latin America. This was the product of a strong Japanese demand for foodstuffs and raw materials from Latin America. But the Japanese trade deficit was transformed into substantial surpluses in the 1970s with higher demand in Latin America for Japanese equipment and machinery goods and the shift of Japanese buying to other regions. Even though the Latin American debt crisis then forced a contraction of imports from all sources, Japanese trade surpluses with Latin America continued during the 1980s—except in 1983 when Japan's exports dropped $3 billion in one year alone. However, it should be noted that Japanese data include the exports of ships and boats to Latin America, nominally exported to Panama but actually sent for shipping registry in that country. In 1990, for example, Japanese export of ships to Latin America was almost $3 billion. Most of these vessels went to Panama for registration under flags of convenience for Japanese shipping. Removing this special category from Japanese export data, Japan would show a trade deficit for 1990 instead of the $428 million surplus indicated in Table 1.1. Adjusting for this factor, the Japanese export surpluses with Latin America would be significantly reduced or eliminated. Trade Composition In the most recent trade data, industrial exports continue to be the key component of Japanese goods sold to Latin America, with

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motor vehicles representing over 16 percent of the total. Electronic goods are another large Japanese export to the region. Overall machinery and equipment exports to Latin America reached a high 86 percent of the total in 1991, which also represented a substantial rise from earlier in the decade. As the region seeks to industrialize, demand for Japanese high-technology products is strong in Latin America. In the nature of Latin American exports to Japan, foodstuffs, fuels, and raw materials are still dominant, but the share of these goods has dropped considerably. As recently as 1986, primary goods, such as soybeans and wood, represented over threefourths of Japanese purchases from the region, but this has dropped to less than half. Industrial goods exports from Latin America, particularly for iron ore, steel products, and nonferrous metals, have been on the ascendancy, reaching 40 percent of Japan's buying from the region. This reflects a growing industrial capacity in Latin America. But 60 percent of Japan's imports from Asia are manufactured goods, indicating that region's advantage over Latin America as a source of Japanese purchases. This is an indicator of the lag of Latin countries as industrial exporters behind the newly industrializing economies (NIEs) of Southeast Asia. Key exports to Japan among the Latin American countries are petroleum from Mexico and Venezuela, wood pulp from Chile, and foodstuffs from Argentina. Brazil has notable exports to Japan—it supplies one-fourth of its iron ore import needs as well as advanced industrial products such as small aircraft. The significant increase in the manufacturing component of Latin America's exports to Japan is particularly noteworthy, as it demonstrates the region's recent gains of comparative advantage in such goods. This is a product of better policies in Latin America—realistic exchange rates and greater export promotion—as well as technological improvements of the region's industries. Relative Importance ofJapan to Latin American Trade

As a region, Japan ranks relatively high for the Latin American countries. Japan is the second-ranking source of imports after the United States and also the second-largest export destination. However, in the aggregate, these are not large shares—almost 6 percent for imports and 7.5 percent for exports. Latin America trades with Germany at almost the same level as with Japan. The United States, meanwhile, supplies 40 percent of Latin America's imports and buys over 40 percent of its exports. Nevertheless, Japan is quite important to the region. Indeed, Japan is more important to

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Latin America than vice versa—a fact that Latin American governments and businesses are increasingly recognizing. During the past few years, there has been a steady progression of official and private business missions to Japan to promote trade. The InterAmerican Development Bank has also initiated a series of financial and business cooperation meetings in Japan, having held four since 1979, plus its first annual meeting in Nagoya in 1991. But most important, Latin American policies have changed to emphasize more competitive economic structures, a change that is probably of greater importance toward influencing Japanese perceptions than are trade missions. On an individual country basis, however, Japan looms larger for a number of individual country markets. The relative importance of Japan as an export market is quite significant for about a half-dozen countries in the region. This is shown in Table 1.2a. In terms of exports, Chile and Peru are the leaders, with 21 percent and 12 percent, respectively, of their overseas sales going to Japan in 1991. These were primarily sales of metals—copper, lead, zinc—by Chile and Peru. Brazil sold 10 percent of its exports, notably soybeans and iron ore, to Japan. Other countries with sizable export shares to Japan include Mexico, Argentina, and Venezuela. In the category of $1 billion or more of exports to Japan are Brazil, with over $3 billion; Mexico with $1.7 billion; and Chile with $1.8 billion. The import dependence on Japan is the highest for smaller economies that rely particularly on motor vehicle and electronics imports to meet domestic demand (see Table 1.2b). The Bahamas, an economy that is highly import dependent, led the list in 1991 with 16 percent of its imported goods coming from Japan. Among the Latin economies with the largest (8-10 percent or more) import shares from Japan are Colombia, Ecuador, Paraguay, and Chile. In U.S. dollar amounts, however, Mexico is the largest importer, with $2.8 billion of purchases from Japan in 1990. Brazil imported $1.2 billion, and Chile was the third largest importer with $631 million. Another measure of Japan's importance to the trade of Latin America can be represented by the weight of various countries in total exports to, or imports from, the region. This analysis is shown in Table 1.3. Not only does Japan represent an important market for individual countries, but the export trade of Latin America to Japan is concentrated in just a few economies. Thus, only six countries— Brazil, Mexico, Chile, Venezuela, Peru, and Argentina—account for 84 percent of all Latin American exports to Japan. Imports from Japan are equally concentrated among a few

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Table 1.2a Relative Importance ofJapanese Exports to Latin American Countries, 1991 (eleven leading exporters) Exports to Japan (million U.S.$) Chile Peru Honduras Brazil Guyana Mexico Argentina Ecuador Colombia Venezuela Guatemala

1,888 395 103 3,180 18 1,741 603 107 274 468 47

Japan % Share of Country's Exports 21.1 11.9 11.2 10.1 7.2 6.2 5.0 3.7 3.6 3.0 2.6

Sources:Japan TariffAssociation, The Summary Report on Trade of Japan, 12,1991. IMF, Direction of Trade, March 1992.

Table 1.2b Relative Importance ofJapanese Imports to Latin American Countries, 1991 (eleven leading importers) Imports from Japan (million U.S.$) Bahamas Colombia Ecuador Paraguay Chile Mexico Argentina Brazil Dominican Republic Venezuela Costa Rica

385 495 193 147 631 2.817 448 1,226 104 529 78

Japan % Share of Country's Imports 16.0 10.5 8.7 8.7 8.6 7.4 6.1 5.8 4.9 3.7 3.3

Sources:Japan TariffAssociation, The Summary Report on TradeofJapan, 12,1991. IMF, Direction of Trade, March 1992.

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Table 1.3 Leading Latin American Countries in Japan's Trade with the Region, 1991 Importers from Japan Panama" Mexico Brazil Chile Puerto Rico b Colombia Bahamas Venezuela Argentina Ecuador Paraguay Others Total

% Share of Region 26.4 22.0 9.6 4.9 3.8 3.8 3.0 4.1 3.5 1.5 1.1 16.3 100.0

Exporters to Japan Brazil Mexico Chile Venezuela Peru Argentina Puerto Rico Colombia Cuba Ecuador Panama Others Total

% Share of Region 32.3 17.7 19.2 4.8 4.0 6.1 5.5 2.8 1.4 1.1 1.0 4.1 100.0

Source: Japan Tariff Association (1992). Notes: a. Mainly ship» and boats for flags of convenience, b. U.S. Commonwealth.

countries. Panama is the largest importer with $3.3 billion in 1991, or 26 percent of the total. These are mainly Japanese exports of ships and boats and are not indicators of domestic demand in Panama. Adding the imports of Mexico, Chile, Brazil, and Colombia, another 40 percent of Japanese purchases contribute to the high concentration. Thus, in terms of import income intensity of demand for Japanese goods, the larger economies—with the special exception of Panama—are the dominant ones. Trade

Outlook

No large increases are foreseen in the penetration of Latin American exports in Japan since this is a competitively difficult market to gain shares. But Japanese export trade with the Latin American countries appears more promising. Trade with Japan should rise incrementally in line with continued good economic growth in Japan and the beginning of revival of demand in the Latin economies. Latin America represents a relatively small market for

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Japan, but the market could be enhanced as the region begins to show economic improvements. An increasing presence of Japanese investments in Latin America could also boost Japanese exports to the area. New investments of this type promote trade by virtue of the intrafirm relations between groups or divisions within trading companies and multinational corporations. The traditional exchange of goods by independent buyers and sellers explains only part of the trade volume between any two regions or countries. Foreign investment flows, and particularly the intrafirm movement of goods within worldwide multinational companies, have an important bearing on trade. New foreign investments from Japan, for example, can have both export and import implications for Latin America. Export of equipment from Japan is needed to establish new manufacturing facilities. And exports from Latin America result if the company uses the site as a source of goods for other parts of its world trading network. "Reverse" exports from Latin America to Japan is one possibility. For example, the plans of Nissan to set up an assembly plant in Mexico for export of motor vehicles to Japan illustrates a case of reverse exports. A few large capital investment projects by Japan in Latin America could thus spur both substantial new exports and imports. When, and if, a new Western Hemisphere free trade agreement is realized, there could be further inducements for Japanese trade with Latin America. By establishing investments in Latin America in order to enter the U.S. market, or the regional market, Japan could create new additional exports from the region. This trend, however, may be moderated because of U.S. labor opposition to Japanese plants being used as "export platforms" to enter the U.S. market in a free trade arrangement. The restrictiveness or ease of rules of origin defining the domestic content of eligible goods in the free trade area will be a key determinant for both Japanese investments and exports from Latin America. Rules of origin requiring a high local content of assembled goods could dampen Japanese investment and exports from the free trade area. The outlook for new Latin American exports from future Japanese investments is therefore dependent on the nature of the institutional arrangements and policies establishing the free trade area. A special case of Japanese trade with Latin America should be noted. These are the exports of U.S. goods to Latin America by the U.S. subsidiaries of the Japanese trading companies. These exports, although made by Japanese companies, are counted as U.S. exports

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to Latín America. Similarly, goods shipped to the United States by Japanese companies in Latin America are registered as U.S. imports. T h e total volume of this trade, although not publicly disclosed, is considered to be significant. This trade points to the possible incompleteness of measuring exports and imports in terms of trade between geographic regions rather than as the trade of worldwide corporations. T h e significance o f this phenomenon is that Japanese-Latin American trade possibilities are much greater than would be suggested by simply projecting exports and imports with Japan itself.

JAPANESE FOREIGN DIRECT INVESTMENT IN LATIN AMERICA Japanese investment in Latin America has declined in comparison with other regions, but in key countries Japan has important and strategic ventures. During the 1950s and early 1960s, Latin America was a favored site of Japanese foreign direct investment. In this period, Latin America received almost half of all Japanese foreign investment. Two-thirds of these investments were in manufacturing, with Brazil especially prominent. From 1951 through 1979, Brazil was the third-ranking country for all Japanese investments abroad. Important investments were made initially in the Brazilian steel, shipbuilding, and textile industries. During the 1970s, more Japanese investments started in the Brazilian aluminum, fertilizer, petrochemicals, and agribusiness industries. Peru was also a main investment site during the 1950s-1970s, ranking second only to Brazil by 1974. Mexican investments by Japan became more numerous in the late 1970s. But, after 1982, aside from new investments in tax havens and in shipping, challenges from other areas began to dim Japanese investment interest in Latin America. Around the mid-1960s, J a p a n e s e investment in Asia by multinational enterprises and trading companies increased strongly, first in raw materials and energy and then, in the late 1970s, in manufacturing ventures. Investments in Latin America continued to rise, particularly for import substitution industries such as textiles, consumer electronics, and shipbuilding. But these Latin American investments by Japan peaked at $1.2 billion in 1979 and dropped to less than $600 million the next year. With the onset of the 1982 debt crisis, investments in the region slowed but then revived with a different characteristic—shifting from manufacturing investments to

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financial ventures in offshore tax havens (partly in response to the debt crisis) in the Caribbean. Investments for Japanese shipping registered in Panama also became a new trend. The composition of the financial investments represent for the most part a special Japanese facility set up in the Cayman Islands in 1987 to buy Latin American debt at a discount to give Japanese banks a tax advantage for the sale of their Latin American country loans. In just three of these countries—Bahamas, Cayman Islands, and Panama—Japanese investments rose from $640 million in 1981 to $5 billion by 1988, an increase of almost eight times. These details are shown in Table 1.4a, where investments are indicated in terms of groups of Latin American economies. For these small economies—Bahamas, Caymans, Panama—their share of Japanese investment flows to Latin America rose from over 50 percent to almost 80 percent between 1981 and 1988. Meanwhile, nonfinancial investments in the six larger economies of Latin America—Brazil, Mexico, Argentina, Venezuela, Chile, and Peru— went up at a far slower pace than the financial investments in the Caribbean and Panama. In 1989, the flow of investments to these six countries dropped to only $510 million, while the three smaller countries registered $4.3 billion from Japan. In fact, 1989 investments made in the six larger countries, mainly for manufacturing and resources developments, were just at 0.8 percent of all Japanese direct investments that year (see Table 1.4a). The trend of Japanese investments in Latin America changed abruptly in the fiscal year ending March 1991. Investments in Argentina, Brazil, and Mexico went up sharply, while ventures in Panama/Caymans/Bahamas dropped by over 50 percent. For 1990, investments in the six larger economies represented 2 percent of all Japanese investments that year, a more than doubling from the previous period. Mexico's economic performance continued to improve in 1990, but the rises of investments in Argentina and Brazil occurred despite recessions in both countries. Increased working capital in Brazilian companies represented a large part of the investment rise in that country. This increase of Japanese investments in Brazil could represent an end to the hiatus of Japanese interest in the country once inflationary problems are corrected. Still, for all of Latin America, Japanese investments declined by $1.6 billion from 1989 to 1990. This fall of investments was mainly the result of a $1.3 billion decline in the Caribbean, such that total Japanese investments in Latin America fell by 16 percent from the previous fiscal year. This decline was in keeping with the overall 31 percent

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Table 1.4a Japanese Direct Investment in Latin America and Other Areas (million U.S.$, fiscal years starting in April and ending in March of following year, 1951-1990)

1988 Amount % Brazil Mexico Argentina Venezuela Chile Peru Subtotal

1989 Amount %

1990 Amount %

Cumulative April 1951March 1991 Amount %

510 87 24 51 46 0 718

1.1 0.2 0.1 0.1 0.1 0 1.5

349 36 3 75 47 0 510

0.5 0.1 0.0 0.1 0.1 0 0.8

615 168 213 77 30 0 1,103

1.1 0.3 0.4 0.1 0.1 0 2.0

6,560 1,874 431 341 311 696 10,203

2.1 0.5 0.1 0.1 0.1 0.2 3.3

1.712 2,609 737 5,058

3.6 5.5 1.6 10.8

2,044 1,658 620 4,322

3.0 2.5 0.9 6.4

1,342 588 121 2,051

2.4 1.0 0.2 3.6

16,244 7,332 3,459 27,035

5.2 2.4 1.1 8.7

Other Lat. Am.

652

1.4

396

0.6

474

0.8

3,245

1.0

Total Lat. Am.

6,428

13.7

5,238

7.8

3,628

6.4

40,483

13.0

Panama Cayman Is. Bahamas Subtotal

U.S. Europe Asia Other

21,701 9,116 5,569 4,208

46.2 32,540 19.4 14,808 11.8 8,238 8.9 6,716

48.2 26,128 21.9 14,290 12.2 7,054 9.9 5,811

45.9 130,529 42.0 25.1 59,265 19.0 12.4 47,519 15.3 10.2 33,012 10.7

World

47,022

100.0 67,540

100.0 56,911

100.0 310,808 100.0

Source: Japan Ministry of Finance (based on investment intentions reported to the Ministry of Finance) (1991). Note: Bermuda and Puerto Rico are included in Latin America.

fall of J a p a n e s e investments in all countries d u r i n g 1990. This was t h e first d r o p of these investments in eight years. Overseas ventures by J a p a n e s e c o m p a n i e s were h u r t by lower profits, less b a n k credit, a n d rising i n t e r e s t rates in J a p a n . A slowdown of e c o n o m i c activity outside of J a p a n also contributed to the investment decline. A g g r e g a t i n g t h e e n t i r e stock of J a p a n e s e investments in Latin

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America from April 1951 to March 1991—shown in Table 1.4a—the Latin American region represents 13 percent of the world total. However, this signifies a slipping share for Latin America. From 1951 to 1964, Latin America was the site of 28 percent of Japanese investments. But this share declined continuously to 17 percent in 1951-1980 and to just 6.4 percent in fiscal year 1990. Meanwhile, Japanese investments in the United States, Asia, and Europe have been greatly on the rise. Asia, as an investment location, has become quite important for Japan as a site for exports of Japanese multinational companies. Japanese investments have greatly increased in recent years in Hong Kong, Singapore, Korea, Thailand, Malaysia, China, and Taiwan. Investments have not been limited to the large Japanese multinational companies. More and more small and medium-size firms are undertaking ventures in Asia. In 1980, the Asian subsidiaries of Japanese firms exported almost 10 percent of their production back to Japan as intrafirm trade. By 1987, this share was up to almost 17 percent. 2 Japanese plant and equipment investments in the United States have been especially rapid, much in contrast with the stagnation in Latin America. Transplants of Japanese motor vehicle investments in the United States have pushed the U.S. share of Japanese world investments from 44 percent to 48 percent of the total between 1985 and 1989. The United States represents the largest 42 percent share of the accumulated stock of Japanese investments, with a total of $130.5 billion by March 1991. Europe and Asia are the next largest aggregations of Japanese investments, with Latin America in the fourth position with $40.4 billion. Location of Investments in Latin America The relative position of Japanese investments within the Latin American region is shown in Table 1.4b. In terms of the accumulated stock of investments, Brazil, Mexico, Peru, and Venezuela are the main locations of Japanese facilities. But these are generally small shares compared to the shares from other investor countries. The shares of Japan range from less than 4 percent in Venezuela to 9.6 percent in Brazil. On a country-by-country basis, Japan ranks as the third largest investor in Brazil, Colombia, and Venezuela, and the fourth largest in Mexico. The United States is the largest single country investor in Latin America, with 50 percent or more equity in most countries. European investments—particularly from Germany,

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Table 1.4b Foreign Direct Investment in Latin America I. Foreign Direct Investment Stock in Latin America Percent Shares by Country of Origin Total U.S. Japan Europe Other (million U.S.$) Argentina Brazil Bolivia Chile Colombia Mexico Peru Venezuela

1977-1986 1988 1989 1988 1988 1989 1988 1987

45.2 28.4 69.3 49.3 72.7 63.0 48.8 56.2

1.6 9.6 0.2 2.3 1.3 5.1 4.5 3.6

46.3 47.9 12.0 19.7 11.9 24.3 23.5 20.3

6.9 14.1 18.5 28.7 14.1 7.6 23.2 19.9

3,136 30,681 606 4,109 3,011 26,563 1,184 1,796

II. Foreign Direct Investment Flows to Latin America Million U.S.$, Annual Averages, 1986-1988 Total, Excluding Panama % $

Total, Including Panama % $

United States Japan Europe Other

489 187 1,791 48

19.4 7.4 71.2 2.0

771 1,311 1,870 48

19.3 32.8 46.8 1.1

Total

2,515

100.0

4,000

100.0

Source: Carlo Secchi, "European Financial Co-Operatìon with Latin America: A Variety of Approaches," Tables 1.8, 1.9, B6, based on OECD and country data, in Restoring Financial Flows to Latin America (Paris: Organization for Economic Cooperation and Development, 1991).

France, and Britain—represent large shares in Argentina, Mexico, and Brazil. In Argentina, despite the courting of Japanese investors, Japan's share of foreign investment stock is quite low compared to the holdings of Germany, France, and Britain in that country. Another representation of Japanese interest in Latin America can be seen in terms of the annual flows of investments to Latin America. The annual flows shown in Table 1.4b separate Panama from the other countries because of the large shipping registry,

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finance, and insurance investments in that country. Thus, excluding Panama, Japanese investments represented only 7.4 percent of the flows to Latin America during 1986-1988. Including Panama, the Japanese share rose to about one-third, larger than that of the United States during the 1987-1988 period. A comparison of the types of Japanese investments in Latin America with Japanese investments in other world areas is shown in Table 1.4c. Latin America's leading sectors are finance, insurance, shipping, and transport. Compared to other major regions, Latin America has the lowest share and the smallest absolute amount ($6.3 billion) of manufacturing facilities. Among the manufacturing facilities in Latin America, the steel and transportation industries are the leaders, with accumulated investments of $2 billion and $1.3 billion, respectively. As noted in Table 1.4c, Asia is the region with the largest share of Japanese manufacturing investments, but the largest dollar amounts are found in North America (more than $40 billion). Europe represents both a larger share and larger dollar amounts of Japanese finance and insurance investments compared to Latin America. In a survey conducted by the Export-Import Bank of Japan, Japanese foreign direct investment flows are expected to decline in 1992, except in Southeast Asia and the European Community. For Latin America and the Caribbean region, slightly less than half of Japanese companies indicate plans for an increase in investments; the rest plan to keep investments stable or even reduce them. 3 In the 1991 fiscal year (ending March 1992) total Japanese direct investments increased by $41.58 billion. But this represented a 27 percent decline from the previous year, especially for investments in the United States and Europe. Investments to Latin America rose by $3.34 billion, down only 8 percent from the $3.63 billion of the previous fiscal year. New investment growth was largest ($1,577 million) for the unique ventures in Panama. Still, investments did rise appreciably to Brazil ($171 million), Chile ($75 million), Mexico ($193 million), and Venezuela ($102 million). Surveys indicate that new ventures will be concentrated in these four countries. 4 Industrial

Outlook

As reflected in Table 1.4c, the particular situation of Latin America for Japan is that although the region has continued to gain investments, many of those investments have been "paper" facilities, while the United States and Asia have increasingly attracted manufacturing sites. As an indication of this, manufacturing

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Table 1.4c Japanese Foreign Direct Investment, Sectoral Composition by Area (accumulated investment, April 1951-March 1991; percent shares) Latin America Manufacturing Mining Commerce Finance,insurance Shipping, transport Agriculture, forestry Construction Fisheries Services Real estate Other Total

Asia

North America

Europe

Total

15.5 4.0 5.4 36.2 30.2 0.6 0.6 0.8 3.7 0.5 2.5

39.3 15.5 8.0 8.9 2.3 0.7 1.6 0.4 12.0 6.3 5.0

29.6 1.5 12.5 14.2 0.4 0.3 0.9 0.1 15.2 22.4 2.9

21.2 2.6 11.3 42.4 0.4 0.1 0.2 0.1 5.5 11.! 5.1

26.2 5.3 10.1 21.1 5.6 0.4 0.8 0.2 11.1 14.8 4.4

100.0

100.0

100.0

100.0

100.0

Source: Japan Ministry of Finance (1991). Note: North America is United States and Canada.

investments in Latin America represented two-thirds of Japanese ventures during 1951-1964, but this share dropped to 17 percent for 1951-1988 and to 15.5 percent for 1951-March 1991. But as the Latin economies appear to be poised for the resumption of economic growth in the 1990s and as the debt crisis fades, more attention will likely be focused on investments in manufacturing. Brazil a n d Mexico are the two largest production sites for Japanese investments, and in both economies Japan has staked out vital investment and commercial positions. Leon Hollerman, in his 1988 study Japan's Strategy in Brazil: Challenge for the United States, views J a p a n as a competitor to U.S. economic interests in Brazil. According to Hollerman, J a p a n ' s multinational corporations and giant trading companies have entrenched positions in the Brazilian economy and dominate the leading export firms. By helping to develop Brazil's industries, Japan's strategy is thus to strengthen that country's competitive power to seek markets in the United States and to compete with U.S. companies in third countries. 5 Japanese critics of Hollerman, however, maintain that these investments are made on purely economic grounds and are not part of an anti-U.S.

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competitive strategy. And, with the years of decline of Japanese investments in Brazil, Hollerman's thesis of a challenge seems weak, as the country still struggles to work free of its debt and inflation problems. The 1990 revival of Japanese investments to $615 million in Brazil, however, suggests that the potential of Brazil should not be underrated—neither in terms of Japanese interest nor in terms of Brazil evolving further as a world competitor in industrial goods markets. In Mexico, second to Brazil as the site for nonfinancial investments, the most visible Japanese presence has been in the "maquiladora" assembly industries. Under this program, U.S. firms, or Japanese firms located in the United States, can ship U.S.-made c o m p o n e n t s to Mexico, assemble them in Mexico at the maquiladora plant, and then ship them back to the United States under favorable tariff provisions. As of 1988, maquiladora plants represented fifty-eight of the 164 Japanese firms with investments in Mexico, stretching from Tijuana south of California to Matamoros, below Texas. However, as pointed out by Luis Rubio in Chapter 2, although maquiladora operations represent 34 percent of Japanese firms in Mexico, they account for only 14 percent of total Japanese foreign investment in the country. Nissan alone, in fact, comprises almost 55 percent of all Japanese investment in Mexico and is the top such firm in the country. Anticipating a free trade area, Japanese firms in Mexico are expanding capacity, building plants, entering joint ventures, and acquiring local companies. Japanese investments are important for both Brazil and Mexico. Japan is the third largest investor (9.6 percent of the total) in Brazil, behind the United States (28 percent) and Germany (16 percent). For Mexico, Japan is the third largest investor, following the United States, and Germany, with 5.1 percent of the total stock of $27 billion of investments in the country. Noteworthy is a planned investment of $1.2 billion by Nissan in Mexico to manufacture motor vehicles for export to Japan. Japan's companies made eightyfive separate investments in Mexico from 1955 to 1988, with an especially important stake of $1 billion in the Mexican steel industry and several firms in the maquiladora assembly industries along the U.S. border. A strong revival of the Latin American economies in the 1990s could attract new investments from Japan into the region to serve stronger domestic markets. Economic improvements in the countries could also spur new investments to serve as bases for the export of goods to other countries if labor costs and exchange rates

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provide sufficient incentives. The resurgence of investments to Brazil, Mexico, Argentina, and Venezuela in 1990 may be a harbinger of such a trend. But it will be a competitive challenge for Latin America in relation to the other countries and regions of the world. Japanese companies view themselves as global enterprises, and Latin America is, in a sense, in competition with North America, Europe, and Asia as the location for new investments or ventures. As companies vie for market share in world markets, so too will Latin America be competing with other regions for a share of Japanese investments. 6 Among specific countries, the best candidates for direct investments are probably Mexico, Chile, Colombia, and Venezuela—four countries that have resolved their immediate external debt problems and are making progress in restructuring their economies and attracting new investments. Mexico has appeal within a potential North American free trade area. Chile and Colombia have demonstrated consistently good performance and steadiness of economic management. Venezuela is an attractive site for investments in aluminum, petrochemicals, liquefied natural gas, coal, and new privatization ventures. Brazil, once a leader in Japanese investments, could be a latecomer on the verge of attracting new ventures if its deep-seated inflation problems are resolved. Argentina is also in such a position, as the revival of Japanese investments in 1990 may suggest. As to efforts the Latin American countries could make to attract new investments, general studies point clearly to the following factors as the key determinants in the foreign investment decision: good macroeconomic performance, the size and growth of the economy, and political stability. 7 On the contrary, image-building activities such as missions, seminars, and advertising are not usually effective in generating new foreign investments.8 Given this evidence, the best course Latin America can take to attract Japanese investment is simply to pursue good policies to control inflation, deregulate the economy, and follow freer international trade policies. As the numerous missions to Japan by Latin American delegations suggest, there is a receptive attitude toward new Japanese investment in the region. But the encouragement of this investment is not a matter of promotions, trips, or tax concessions—which represent fiscal costs and may not be effective. The best encouragement is to demonstrate to skeptical Japanese investors scanning countries on a worldwide horizon that Latin America is a sound investment, promising good returns based on solid economic fundamentals.

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JAPANESE COMMERCIAL BANK LENDING TO LATIN AMERICA T h e involvement of Japanese banks in Latin America has been episodic in character: enthusiasm in the 1970s, disillusion after 1982, and, with the exception of a few voluntary lendings, retreat in the early 1990s. Waves of lending enthusiasm have been followed by periods o f restraint, which, after some time, lead once again to renewed credits. T h e larger role of commercial banks from the industrial countries first became noticeable in the mid-1970s, and the Japanese banks were among the early participants. Overall creditor-country bank lending to Latin America was encouraged by their national authorities as a means of "recycling" the OPEC country balance of payments surpluses to the net oil-importing developing countries. But while the U.S. banks lent continuously during the 1970s, Japanese bank lending was in cycles close to the two OPEC oil shocks of the 1970s—a beginning in 1 9 7 2 / 7 3 , and much greater involvement in 1978/79. Restraints were imposed on the Japanese banks after each of these periods because Japan's balance of payments on current account went into deficit in 1974 and 1979 as the result of the higher oil prices. But a third surge of Japanese lending to Latin America occurred in 1981/82, when U.S. banks, although still lending, were beginning to ease back on their loans to Latin America. 9 T h e Japanese banks were latecomers to the Latin American lending boom and strove to increase their position both by syndicating new loans under their leadership and by joining U.S.-European bank syndications to Latin America. Generally, the Japanese banks followed U.S. bank lending leadership. According to a United Nations study of international bank lending, U.S. banks were responsible for 39 percent of the capital mobilized via syndicated credits by the top 50 banks in 1978-1982, and 64 percent in 1983/84. Japanese banks were responsible for 9 percent of the capital mobilized via syndicated credits among the top 50 banks of the world in 1978-1982, and 13 percent in 1983/84. This study comments that even though Japanese banks became increasingly important and even dominant among the world's banks in terms o f assets, this dominance did not translate into a leadership of the syndicated lendings to the Latin American countries. 10 Yet, the Japanese banks became more prominent after the 1982 Latin American debt crisis. This prominence was the result of the situation that Japanese banks continued to lend through concerted

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or enforced new money efforts in the bank advisory committees and that they did not sell or reduce bank loans, as U.S. banks started doing in the mid-1980s. For Japanese banks, governmental guidance encouraged them to lend their pro-rata share without exception. During the 1970s and early 1980s, Japanese private banks made 70 percent of their developing country loans and 38 percent of their total international loans to Latin America. 11 By 1982, Japan had attained a 16 percent share of all private bank loans to Latin America compared to the U.S. banks' 31 percent share. This was quite impressive, considering that U.S. banks had much greater experience in Latin America and the relative newness of the region to the Japanese banks. In the earlier period of the 1970s, most of the Japanese bank loans were in support of coordinated "national projects" involving the triad of Japanese government, trading companies, and the banks all jointly involved in natural resource ventures. Typical of these were a pipeline in Peru; port, pipeline, and steel complexes in Mexico; and agricultural and mineral developments in Brazil. 12 In these earlier lendings, from the late 1960s to the late 1970s, the Japanese banks limited their risks through participation with the official Export-Import Bank of Japan and by having sovereign risk covered by Japanese company guarantees. A change occurred in the late 1970s, when lending to Latin America accelerated, and the Japanese banks were willing to lend directly to governments on their own risk without guarantees. A consequence of this rush to lending by the Japanese banks is that they became enmeshed heavily in the Latin American debt crisis. They became participants in the various bank advisory committees formed during the period to restructure loans and provide new money to the affected countries. The Bank of Tokyo, once the government's designated foreign exchange bank and traditionally the leading Japanese international bank with the largest amount of lending to the developing countries, was the dominant participant in the Latin American debt negotiations. It was a member of the Argentina, Brazil, Mexico, and Venezuela advisory committees. Dai-Ichi Kangyo Bank, the largest Japanese bank, was also an early participant, being part of the initial bank steering committees for Ecuador and Panama, as well as the committee for the restructuring of PEMEX (Mexican state oil company) trade debt. By 1985, Japanese banks represented significant amounts and shares of debt to the largest Latin American debtors, thereby assuring them places on all the committees, along with U.S., Canadian, and European banks. 13 Table 1.5 indicates the United

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States and Japanese bank loans to key Latin American countries in 1985. From 1985 to 1988, the Japanese bank loans to Latin America rose by over $15 billion, reaching a high point of $45.5 billion. Overall, the share of medium- and long-term Latin American debt held by Japan increased to 21 percent. (See Table 1.6a.) By the first quarter of 1988, increased Japanese lending and possible currency changes led to exposure increases in Brazil up to almost $10 billion, in Mexico over $11 billion, and in Argentina almost $6 billion. 14

T a b l e 1.5 E x p o s u r e of Creditor Banks, 1985 Billion U.S.$

Brazil Mexico Argentina Venezuela Chile Latin America

% of Country Debt

U.S.

Japan

U.S.

Japan

25.6 24.1 8.9 8.9 7.0 90.5

8.2 10.0 4.3 3.6 1.4 29.7

40.9 39.8 34.7 38.6 47.3 41.7

13.1 16.5 16.8 15.6 9.5 13.7

Source: Economic Commission for Latin America and the Caribbean, Transnational Bank Behavior and the International Debt Crisis, March 1989, Table 12.

The Latin American debt crisis and its resolution evolved in terms of three stages in which the Japanese banks shifted from being passive participants in the earlier periods to much more active in later stages. The earlier Japanese bank passivity probably stemmed from a lack of experience in international lending and lack of a clear-cut debt policy on the part of the government. In the first stage—from 1982 to 1985—the banks undertook emergency rescheduling of bank loans and provisions of new money to keep the countries from b e c o m i n g insolvent. T h e J a p a n e s e banks participated in this process and refrained from becoming "free riders"—banks who refused to provide new loans but were left free to enjoy the benefit of continued interest payments made possible by the credits extended by the majority of banks. In many bank advisory

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committee meetings, when the different national bank groups were being urged to cajole other banks into participating with new lending, the Japanese bank representatives were the most vigorous in condemning free riders and insisting that all banks should make their pro-rata commitments to lend. The second stage of the Latin American bank debt cycle was ushered in by U.S. Secretary of the Treasury James A. Baker III in 1985, with a plan for linking bank loan increases to economic growth and structural reforms. The overall objective was to change the course of the debt strategy from the forced demand restraints the countries had to undertake in the first stage of the debt crisis to a new policy leading to the restoration of economic growth. However, the new money loan commitments expected of the banks, including the Japanese banks, were not fully realized. Bankers developed their own "menu approach," which included options for selling or converting bank debt rather than simply granting new money loans. The economic growth targets of the Baker Plan, set for the countries over the 1985-1988 period, were not fully met, and the banks grew restive about the overall debt strategy the creditor countries were following. Most uneasy were the Japanese banks. Specifically, Japanese public officials and private executives became dissatisfied with the U.S. leadership of the debt strategy and began to propose their own ideas. 15 Japanese officials said they were supportive of the Baker Plan but wanted to offer modifications. Under the leadership of the Bank of Japan, new ideas were proposed for the commercial banks to have their loans converted into bonds (a process of securitization) and for the IMF to provide support for the bonds and to guarantee interest payments. Each country was to demonstrate its capacity for economic reform and improvement in the balance of payments— conditions necessary for the IMF involvement in the securitization. 16 The J. P. Morgan Plan for the securitization of Mexican debt in early 1988 likely influenced Japanese thinking on this subject. The formulation of a number of proposals on debt were brought together in the Miyazawa Plan, articulated by Japan's finance minister in 1988, Kiichi Miyazawa, and were presented at the Berlin annual meeting of the IMF and World Bank by Bank of Japan Governor Satoshi Sumita. However, the Miyazawa proposal was dismissed summarily by the United States, apparently out of fear that it might surface as an election issue of "bailing out" the banks. Yet, it was later picked up, without attribution, in the March 1989 proposal of U.S. Secretary of the Treasury Nicholas Brady as part of the plan of voluntary

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reduction of bank debt through conversion into bonds backed by funds from the IMF and World Bank. The Miyazawa proposal, and the Nakasone recycling facility (described in the following section, "The Capital Recycling Program") together represent one of Japan's few major international initiatives of the post-World War II era. T h e Miyazawa proposal, transmuted and amplified into the Brady Plan for bank debt and debt service reduction, then led into the third—and perhaps final—stage of the Latin American debt crisis. This is the endgame stage in which Latin American countries (with the notable exceptions of Chile a n d Colombia) have converted a n d rescheduled bank debt within the context of reductions in principal and interest rates. Already, four Latin American countries, plus the Philippines, have reached this stage. These four, Mexico, Costa Rica, Venezuela, and Uruguay, have put the debt crisis behind them and are experiencing better economic growth while resuming their access to traditional forms of finance in the international capital markets. The concluding stages of the Latin American debt problem would eventually include the resolution of bank debt negotiations for the key countries of Argentina and Brazil, as well as for others, such as Peru, Ecuador, and Panama. In the four completed debt reduction agreements reached, the Japanese banks were important participants. Because of their large loan exposure, Japanese banks are certain to be i m p o r t a n t participants in the coming agreements for the remaining Latin American debtors. Reduction of Bank Debt Beginning in 1985, the U.S. banks embarked on an aggressive strategy to sell, write off, or convert their debt to Latin America over the subsequent years while the Japanese banks generally kept the debt in their loan portfolios. The president of the Bank of Tokyo indicated in 1989 that Japan had few instances of free riders—banks who refused to participate in new money lendings. While other international banks were reducing their financings, "Japan's financial institutions continued to provide funds at their own risk." 17 Japanese banks continued to add debt or were reluctant to sell or write off debt for various tax or regulatory reasons and because of their weak profit performance. In the mid-1980s, U.S. banks began to sell and write off their debt aggressively, led by regional banks in particular, who wrote off and sold public and private debt and withdrew interbank lines. The larger U.S. banks also wrote off and

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sold debt and were heavily involved in debt to equity programs for themselves and their clients. The result has been a much-reduced share of Latin American debt by U.S. banks and a relative rise in the share of Japanese-held bank debt. These trends can be noted in Tables 1.6a and 1.6b. It should be noted that exact comparisons between Japanese and U.S. bank loans to Latin American cannot be made because Japanese data is not available on short-term loans; and in U.S. data the loans of an original short-term maturity are difficult to segregate from medium-term loans subject to rescheduling and, for the time being, classified as short-term. Also, the reported exposure of U.S. bank loans may be understated because of special circumstances. For instance, mandatory loan charge-offs required by U.S. regulatory authorities may reduce the reported exposure, but a bank could still have a claim for the debt so long as the original contract is not amended or until the bank agrees on a unilateral debt forgiveness. Although there are these data difficulties to match exposures for comparable periods and comparable type of loans, the evidence seems to be clear enough that U.S. bank debt to Latin American has been substantially reduced since 1986, while Japanese banks either continued to add debt or were reluctant to sell or write off their debt until much later than their U.S. or European counterparts. It was only in 1990 that the Japanese banks began a substantial debt reduction as a result of the conversion of Mexican loans into securitized bonds. The Japanese banks' delay in reducing debt was the result of various tax or regulatory reasons unique to Japan. The banks' weak profit positions deterred their sale or write-off of Latin American debt until 1990, when it was possible to exchange debt for collateralized "Brady" bonds in the Mexico and Venezuela debt and debt service reduction agreements. In early 1991, it was reported that the Japanese banks began emulating the practices of other banks and sold some of their debt directly in the secondary markets, with an estimated sale of $200 million for Mexican debt. Also, traders of bank debt reported that a major Japanese bank sold $136 million in Argentina and Brazil debt in May 1991.18 Indications are that greater sales of debt have taken place in late 1991 and early 1992. The provision for tax credits on loan write-offs has been a restraining factor on Japanese banks' debt sales. Except for countries with Brady debt reduction agreements, Japanese tax credits for loans that could be written off are not assured and the

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banks have to negotiate the credits with Japan's Ministry of Finance. This ministry has been reluctant to permit banks to have large losses that would have the effect of reducing government tax revenues. But there have been some indications that the ministry is loosening its restrictions, and some banks are increasing their provisions for loan losses. The largest Japanese banks have increased reserves held against developing country debt to 30 percent. Yet, when tax requirements are considered, the effective reserve level rises to about 67 percent, comparable to the higher-reserved U.S. banks. Loan loss provisions could be increased even more by selling some "hidden reserves"—bank holdings of stock and real estate—but these have been seriously eroded as a result of declines of property and equity markets in Tokyo. Because of the Japanese banks' slowness in reducing debt, their share of medium- and long-term bank debt to Latin America continued to rise through 1991, reaching 26 percent in that year. (See Table 1.6a.) The data in Table 1.6a shows the increase from a 17 percent share in 1987 to 26 percent in 1991. Despite the 30 percent drop of Japanese bank loan exposure in 1990, the total allbank medium-term debt fell by a more rapid rate so that the Japanese share actually increased. In the first six months of 1991, Japanese loan exposure continued to decline by a smaller amount, but then rose slightly by year's end. The U.S. bank exposure—measuring all maturities of debt—had large declines in 1988 and 1989, and by 1990, the U.S. share of total bank debt had fallen from 29 percent in 1987 to 21 percent in 1990. (See Table 1.6b.) From 1990 through 1991, total U.S. bank exposure to Latin America has been further reduced by over $3 billion, and the share has dropped to 20 percent. Comparing the Japanese and U.S. bank loan exposures during the 1987-1991 period (with the caution that different measures are being used), it is clear from Tables 1.6a and 1.6b that the U.S. banks have been far more aggressive in reducing their debt to Latin America: U.S. bank debt has been reduced by $33 billion for the period while Japanese exposure has declined by $10 billion. The total position of all commercial banks in Latin America is shown in Table 1.6c. Between 1987 and 1991, almost $51 billion of bank debt has been reduced. U.S. banks have accounted for about two-thirds of this amount. Excluding short-term bank debt, which consists of trade and inter-bank finance, the medium- and long-term reduction by Japanese banks is about 18 percent of the all-bank decline.

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Table 1.6a Japanese Medium- and Long-Term Bank Claims on Latin America Billion U.S.$

Change 19871991 1991

1987

1988

1989

1990

Amount of claims 40.9 4.1 Change from year before 11.1 Percent change, year before Total medium- and long-term debt 243.5 Japanese % of all bank mediumand long-term debt 17

45.5 4.6 11.2

44.7 -0.8 -1.8

31.2 -13.5 -30.2

31.6 0.4 1.3

220.2

197.5

126.2

119.7

21

23

25

26

Sources: Japanese claims data f r o m Japan Ministry of Finance and Japan Center for International Finance. All bank medium- and long-term debt data from World Bank, World Debt Tables, 1991-1992, and communication from the World Bank for year 1991.

Table 1.6b U.S. Short-, Medium-, and Long-Term Bank Claims on Latin America Billion U.S.$

Amount of claims Change from year before Percent change, year before Total all bank debt U.S. % of all bank short-, medium-, and long-term dc

Change 19871991 1991

1987

1988

1989

1990

74.9 -4.3 -5.4 259.1

64.7 -10.0 -13.4 251.3

53.2 -11.5 -17.8 234.5

44.3 -8.9 -16.7 209.5

41.1 -3.2 -7.2 208.1

29

26

23

21

20

-33.8 -45.1

Sources: U.S. claims data from Federal Financial Institutions Examination Council, Country Exposure Lending Survey. Includes loans for all maturity terms. Because loans of an original maturity of less than one year cannot be identified, this table is not directly comparable with Japanese medium- and long-term loans shown in Table 1.6a. Total all bank short-, medium-, and long-term debt is from the Bank of International Settlements, International Banking and Financial Market Developments, 1992.

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Table 1.6c Total Short-, Medium-, and Long-Term Bank Claims o n Latin America Billion U.S.$

Amount of claims Change from year before Percent change, year before

1987

1988

259.1 3.7 1.5

251.3 -7.8 -3.0

1989 234.5 -16.8 -6.7

1990 209.5 -25.0 -10.7

Change 19871991 1991 208.1 -1.4

-51.0 -19.6

Sources: Bank of International Settlements, International Banking and Financial Market Developments, 1992.

The relative position of Latin America within total Japanese bank lending to all developing countries is shown in Table 1.6d. Latin America was a favored area for Japanese banks in the late 1970s, and this momentum carried through in the years of forced lendings and reschedulings up to the mid-1980s. By 1987, Latin American loans of Japanese banks represented 53 percent of all developing country credits. But lending to Asia began to accelerate while Latin America experienced its debt difficulties. By 1990, the positions were reversed, and the Asian area represented almost 56 percent of developing country debt while Latin America fell to 36 percent. In December 1991, the Latin American share was down to less than one-third of all developing countries and only 8 percent of all Japanese international loans. To some extent, lending by the official Export-Import Bank of Japan (JEXIM) has taken the place of some of the reduced commercial bank lending. But JEXIM is carrying out explicit policies to place loans in certain countries while the commercial banks have obvious business reasons for their hesitancy to lend. Outlook for Bank Lending In all likelihood, Japanese commercial bank lending to Latin America will stabilize or decline further during 1992. No large loan increases are foreseen in the short term. This outlook is influenced not only by the Japanese banks' perceptions about Latin America but also by a general slowdown of their international lending. With the Brady agreements reached for Mexico, Venezuela, Costa Rica,

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Table 1.6d Japanese Commercial Bank Claims on Developing Countries Billion U.S.$ 1986

1987

1988

1989

1990

June December 1991 1991

Total

65.5

77.0

92.0

98.2

87.3

90.9

96.1

By Region: Latin America Asia Middle East Africa Other

36.8 22.2 0.9 5.4 0.2

40.9 28.9 0.9 6.0 0.3

45.5 38.2 0.9 7.0 0.4

44.7 45.1 1.2 6.4 0.8

31.2 48.7 1.2 5.5 0.7

30.8 51.8 2.0 5.5 0.8

31.6 55.8 2.2 5.5 1.0

Source: Japan Ministry of Finance and Japan Center for International Finance, 1992.

and Uruguay, banks now hold a larger proportion of bonds of the Latin American countries in their portfolios. For the near-term future, Japanese banks are likely to constrain lending to Latin America because of country risk reasons and because of the banks' own strained capital positions. One Japanese constraint is the inherent difficulty of justifying new lending to countries that have been subject to forced new money agreements, restructurings, or debt forgiveness. Under Japanese government guidance, banks must keep special reserves against countries for at least five years after the most recent rescheduling or forced new money agreement. This will act to deter lending, particularly to countries like Argentina and Brazil, which, by early 1992, were still in the process of reaching agreements with their commercial banks. Another deterrent to lending is the Japanese banks' need to rebuild their capital base. This base is under pressure because of the need to meet the higher Bank for International Settlements (BIS) guidelines. These require that commercial banks maintain a level of capital—stockholders equity, preferred stock, reserves for credit losses—equal to 8 percent of risk-weighted assets (loans) and off-balance sheet financial instruments by March 1993. The Japanese city banks' capital adequacy ratio was below 8 percent in the third quarter of 1990. But, helped by the increasing sale of developing country debts in the secondary markets, which

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resulted in a reduction of assets, the capital ratio rose to 8.58 percent by the third quarter of 1991. Japanese banks can include the capital gains of common stocks they own as part of their capital. But unrealized stock gains have lost much of their value because of the decline of the Japanese stock market since the end of 1989.19 From the record high of 38,915 at end-1989 to 18,000 by AprilMay 1992, the Nikkei stock market index in Tokyo declined by about 55 percent. As the banks began to show unrealized losses in their equity portfolios, their capital adequacy ratios weakened, thereby inhibiting new lending. Depending on the future course of the Nikkei index, the banks' capital ratios will either be further weakened or strengthened. With lower stock market values, the Japanese banks would have trouble meeting their minimum capital requirements, leading to possibilities of curtailing new lending. Higher stock market prices would, of course, improve their positions. Regardless of the stock market indices, however, the banks' stance toward future lending overseas is cautionary. Many commentators have pointed to the strains on Japanese banks. Some analysts point to the possibility that the Japanese banks will have to curtail borrowing as their capital position weakens, and other observers believe that the attempts to puncture the country's "bubble economy" of inflated equity and property markets will mean a reduced international financial presence. 20 Speaking in early 1991, Yutaka Yamaguchi, chief representative of the Bank of Japan in the United States, was already cautioning that a more conservative Japanese bank loan growth was to be expected in the near term. 21 Increased business bankruptcies and bad business debts in Japan, along with the excesses of the "bubble economy," are added factors that suggest hesitancy in future Japanese bank lending to Latin America. 22 What new Japanese bank lending there may be in Latin America will probably be restricted to export-import trade finance; credits supported by international collateral; projects that generate their own foreign exchange earnings; or loans that can be guaranteed by third parties, such as multinational corporations. In aggregate amounts, this will be much less significant than the increase of Japanese bank loans that took place during the late 1970s and early 1980s. Japanese banks have a low creditworthiness opinion of Latin America (except for Mexico, Colombia, Chile, and perhaps Venezuela). It is extremely doubtful that they would undertake voluntary, unsupported sovereign government lending to Latin America in the foreseeable future. Cofinancings with the World

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Bank or the Inter-American Development Bank, and their investment affiliates, are better possibilities for future lending. The outlook for Japanese bank lending to Latin America is thus one of considerable restraint.

THE CAPITAL RECYCLING PLAN

The insufficiency of bank finance to Latin America in the 1980s prompted the Japanese to remedy the gap with an innovative capital "recycling" plan. This initiative perhaps represents Japan's most notable achievement in the economic assistance of Latin America. Japan's great success in introducing new products and capturing larger shares of world markets has resulted in substantial foreign exchange earnings. In the mid-1970s, the country began to register large trade surpluses of $12-$15 billion annually, and by 1980 the surpluses were over the $30 billion per year mark. Simultaneously, earnings from investments abroad began to accumulate, and large current account surpluses of over $35-50 billion per year became the norm. By the mid-1980s, the trade surpluses reached a peak of $95 billion annually, and the current account surpluses went over the $87 billion level, with international reserves hitting a high of $96 billion in 1988. The peak balance of payments earnings of Japan—on the foreign trade and current accounts—occurred while the developing countries, especially Latin America, were incurring current account deficits. Also, because banks stopped voluntary lending to Latin America after 1982, this meant that the region was exporting capital—mainly interest payments—to the creditor countries. Before the 1982 debt crisis, Latin America attracted or imported about $25 billion annually in net financial capital resources from outside the region. A confluence of rising world interest rates, falling commodity prices, and industrial country recession in 1980-1981 eventually led to a collapse of debt servicing capability in Ladn America. The Mexican near-default of 1982 was the beginning of the generalized debt crisis for most of the Latin American countries. After 1982, the region exported capital to the creditor countries, ranging from $11 billion in 1984 to $20 billion in 1985, and $15-$17 billion annually in the late 1980s. As a developing region, Ladn America should be a net recipient of financial resources from capital-rich countries, but the debt crisis effectively cut off commercial bank inflows. Thus, Latin America

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suffered from a mismatch with regard to its needs of finance and its available resources. This lack of sufficient financial resources forced the Latin American countries to cut investment spending and thus contributed to a decade-long economic recession. Japan developed the concept of transferring part of the country's balance of payments surpluses to help finance the deficits of Latin America. This transfer was presented as a "capital recycling" plan by the Japanese government. As recounted by Barbara Stallings in her analysis of Latin American debt, Japan's large trade surpluses had become a U.S. irritant and thus, "A partial way out of this dilemma seemed to be through responding to calls for Japan to use its trade surplus to assist the Latin American debtors." 23 Though perhaps spurred on by U.S. interest, the recycling was a genuine Japanese concept—representing one of Japan's few major international initiatives in the post-World War II era. In May 1987, the Japanese government, through Prime Minister Yasuhiro Nakasone, committed itself to recycle $30 billion over the following three years to the largest debtor developing countries. Indications were that most of the funds would be directed toward Latin America. The channeling of financial flows to Latin America was designed to be handled by a number of different Japanese agencies in a variety of forms, including: • Direct loans byJEXIM, the leading government development bank • Joint or cofinancings between JEXIM and the multilateral development banks (MDBs—the World Bank and the InterAmerican Development Bank) and parallel financings with the IMF • Assistance through Japan's foreign aid agency, the Overseas Economic Cooperation Fund (OECF), which can provide low-cost or below-market loans to developing countries • Capital contributions and subscriptions by Japan to the World Bank, IMF, and other international agencies By early 1989, about 90 percent of the $30 billion was committed. Following the Brady bank debt reduction program announced by the United States in March 1989, which had antecedents in the Japanese Miyazawa debt relief proposals, another $35 billion was added to the recycling plan. This brought the total to $65 billion for a five-year commitment through Japan fiscal year

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1991, ending in March 1992. The outline and the components of the $65 billion recycling program are shown in Table 1.7. As indicated, of the $65 billion, a little over one-third is being channeled through JEXIM as loans for infrastructure development—electricity, transportation, and communications. Other JEXIM loans are in support of public sector reforms and of external debt reduction efforts through the Brady Plan. Some 45 percent of the funds are being channeled as Japan's contributions to the World Bank and regional development banks, and the balance is to be granted through concessional development loans by the OECF.

Table 1.7 Japan's $65 Billion Capital Recycling Program I. Overall Program

Institutions

Billion U.S.$ Overall Goal

Commitments Percent and Dates Committed

Export-Import Bank of Japan Overseas Economic Cooperation Fund Contributions & subscriptions to multilateral banks

23.5 12.5

18.2 (3/92) 11.6(3/91)

77 93

29.0

17.5 (3/91)

60

Total

65.0

47.3

73

II. Regional Commitments by Export-Import Bank (as of 3/92)

Region Latin America-Caribbean Asia Europe, Africa, Middle East IMF—Structural Lending Total

Amount (million U.S.$) 5,292" 6,706 3,114 3,040 18,152

Percent Share 29 37 17 17 100

Sources: Japan Ministry of Foreign Affairs and Export-Import Bank ofJapan 1992. Note: a. Includes $125 million for regional organizations.

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As of March 1992, some 73 percent of the $65 billion plan had been committed. With strong leadership and a pronounced interest in Latin America, JEXIM had the high commitment rate of 77 percent toward its overall goal of $23.5 billion. The OECF had a 93 percent commitment rate on its $12.5 billion, and contributions to the MDBs were 60 percent completed on the $29 billion for this type of support. Disbursements, however, have not been fully disclosed and there are various lags behind the commitment rate, depending on whether the loans are for policy reforms and can be disbursed quickly or whether they are for slower-disbursing project lending. A particularly relevant manner of assessing the facility is to examine the participation of JEXIM, because this governmentowned bank has made some very significant loans to Latin American countries in support of both the Baker "adjustment with growth" bank debt initiative of 1985 and the 1989 Brady debt reduction proposal. Even before the first $30 billion "recycling" plan to transfer some of Japan's large foreign exchange earnings to the developing countries was announced in May 1987, JEXIM had provided two large untied (not requiring the purchase of Japanese goods) loans to Latin American countries that were in effect recycling. These were $80 million for Colombia in 1985 and $740 million for Mexico in 1987. These two loans represented JEXIM's first untied direct loans and were specifically for the purpose of assisting the countries by means of recycling part of Japan's large trade surplus earnings to them. JEXIM credits are close to commercial bank interest rates and are not tied to Japanese direct exports within the recycling plan. (Some critics contend that engineering services associated with investment projects tend to favor Japanese consultants.) Further, JEXIM has pledged $8 billion to countries in support of the Brady initiative. Also, most of these loans are in cofinancing arrangements with the World Bank and the Inter-American Development Bank. The Latin American part of the JEXIM recycling plan is indicated in Table 1.8. Of the $18.2 billion of commitments made by JEXIM through March 1992, 29 percent have gone to Latin American countries. The larger share is to the Asian region, with 37 percent. But considering the much closer trade and investment ties with Asia, the Latin American region has received comparatively large support from Japan and is a notable expression of Japan's interest in the region. In terms of outstanding JEXIM loans for all purposes, the Asia region led with 35 percent in 1991 and the Latin America-Caribbean region was second with 19 percent. This Latin

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Table 1.8 Latin American Country Loan Commitments by Export-Import Bank ofJapan (million U.S.$, as of 3/92)

Country Argentina Barbados Chile

Borrower

Govt. Govt. Emp. Elect. Pehuenche Chile Govt. Chile Govt. Colombia Central Bank Finan. Elect. Colombia Ecuador Govt. Telmex Mexico Mexico Bancomext Mexico Nac. Financiera Mexico Nac. Financiera Mexico Govt. Mexico Nac. Financiera Trinidad & Tobago Govt. Trinidad & Tobago Govt. Trinidad & Tobago Govt. Uruguay Govt. Uruguay Govt. Venezuela CANTV Venezuela Bauxiven Venezuela Interalumina Venezuela Govt. Venezuela Govt. Total

Amount

Objective

370 Oil & gas dev. 40 Govt. dev. bonds 120 200 150 100 300 100 300 300 300 300 1000 315 60 40 40 74 20 148 110 180 300 300

Commit- Coment finance Date with 2/22/88 5/25/88

IBRD

Hydro power 6/10/88 Struct, adj. loan 11/14/88 Road project 3/5/89 Industrial loan 12/6/89 Electricity adj. 8/8/89 Financial adj. 10/31/89 Telephone project 11/17/88 Financial adj. 11/13/89 Pub. sect, reform 11/13/89 Industrial loan 11/13/89 IMF parallel loan 11/13/89 Unleaded gas proj. 6/24/91 Govt. dev. bonds 12/10/87 Struct, adj. loan 5/18/90 Sec. oil recovery 10/21/91 Transport sector 4/7/89 Govt, bonds 8/9/89 Telecommunications 2/16/90 4/7/88 Bauxite projects Aluminum expansion 1/16/90 IMF parallel loan 3/11/91 Public sector reform 3/11/91

IADB IBRD IBRD IADB IBRD IADB

—

—

IBRD IBRD IBRD IMF — —

IBRD IADB —

IBRD IADB IADB IMF IBRD

5,167

Source: Export-Import Bank of Japan. Note: IBRD is World Bank; IADB is Inter-American Development Bank.

A m e r i c a n interest reflects partly a direct manifestation of t h e J a p a n e s e g o v e r n m e n t ' s support of the Brady debt reduction a n d reform plan for such important countries as Mexico and Venezuela, and pardy a response to U.S. pressure to direct resources to Latin America. Also, JEXIM's l e n d i n g to Latin America, although untied,

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tends to enhance the creditworthiness of countries such as Mexico, Venezuela, Chile, Colombia, and Uruguay, and thus tends to boost the value of private Japanese bank loans to the region. Significantly, as of May 1992, Brazil—the largest Latin American economy and the site of Japan's largest investments in Latin America—was yet to receive aJEXIM recycling loan. The failure of Brazil to receive any loans through the recycling program is an indication of the conditions that Japan places on the transfer of its surpluses to the developing countries. If Brazil were to achieve a successful stabilization and structural reform program with international agencies, and complete debt negotiation with the commercial banks, sizeable JEXIM commitments could be expected. Essentially, the countries have to meet the condition of adhering to structural reform programs and meeting IMF-World Bank targets and criteria. The recycling program is thus neither a bank bailout nor a lender-of-last-resort facility for Japan. It could be better understood as an investment for the future of Japan in Latin America. The types of loans being made by JEXIM—for infrastructure such as roads, communications, and power and for public sector reforms—increase the potential for economic development and eventually could benefit Japanese trade and investment in the future. The specific Latin American country recipients of the JEXIM recycling funds are indicated in Table 1.8. As of March 31, 1992, JEXIM had approved twenty-four loans to nine Latin American and Caribbean countries. This amounted to $5.16 billion. Mexico, with six loans, received $2.5 billion, the 50 percent bulk of the commitments. Most of these were in support of the country's debt reduction and conversion program in 1989-1990. The other major recipients have been Venezuela, with over $1 billion, in support of bauxite, alumina, and telecommunications projects; Chile for structural adjustment and road-building purposes; and Colombia for electricity and industrial projects. Argentina and Ecuador have been smaller recipients, but for each country the JEXIM commitments have been crucial in support of their overall balance of payments financing programs. Most of the JEXIM loans to Latin America have been made in conjunction with the World Bank, Inter-American Development Bank, or the IMF. This underscores the Japanese desire, reflected both by the government and by the private commercial banks, to seek international agency support and comfort for lending to Latin America. The Japanese attitude, expressed often in bank debt

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advisory committees, is to seek the enforcement discipline of the international agencies for what is perceived to be an irresponsible Latin American attitude toward debt servicing. The Japanese authorities have been reluctant to impose their own conditionalities on the recycled loans, professing that their staff resources are inadequate for such a task; in reality they are reluctant to place Japan in a bilateral disciplinary role. 2 4 In the words of a J E X I M official, "When we offer financial cooperation to a certain country under the Recycling Program, we expect that country to have a solid program to deal with its basic problems. The type of program I am referring to here often takes the form of an agreement between the IMF and the country concerned regarding an appropriate economic program." 25 The outlook for continued Japanese recycling of funds beyond the $65 billion has not yet been determined. Although the Japanese trade surplus has fluctuated somewhat, it is still sizable, and for international reasons the use of these funds for overseas lending and assistance remains important to Japan. However, because of domestic fiscal restraints, and the $9 billion of commitments made to the United States in support of the Gulf War effort, it is doubtful that another recycling plan will be initiated when the $65 billion ends in 1992. One of the major motivations of this plan was debt reduction support of the Latin American countries, and with the indebtedness problems of this region sure to ease by 1992, one of its major purposes would have been achieved. In addition, some analysts believe that the Japanese surplus for recycling may decline in the future. William Emmott, for example, holds that Japan's capital surplus is a temporary phenomenon and may disappear by 1995 because of competing domestic needs in Japan for social and other investments. 26 Despite this, the role of JEXIM in Latin America is likely to remain large, because the bank sees itself as playing a catalytic function in the region to encourage private—and presumably Japanese—trade and investments. In this way, JEXIM—a governmental financial institution—is furthering the interests of Japan in Latin America.

JAPAN'S ECONOMIC ASSISTANCE TO LATIN AMERICA Japan has its own distinctive philosophy and justification for economic assistance to the developing countries. Latin America has never ranked high among the recipients of Japanese official

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development assistance (ODA), partly because of these different ideas. The composition of ODA includes bilateral grants and development loans to countries, plus grants, capital contributions, and loans to multilateral institutions. By definition, ODA represents bilateral economic assistance of a concessional nature from a developed to a developing country, with a grant or gift element of at least 25 percent. Japan differs from other major donors by stressing the value of loans versus grants in economic assistance. As an official assistance report expressed this idea, "Japan has some reservations about the prevailing belief in Europe and the United States that grants are better than loans. Japan's own experience of the development process leads it to believe that self-help efforts can be better motivated by a repayment obligation." 27 In fact, Japan had the lowest grant share (45 percent) in 1989/90 among the eighteen major d o n o r countries. 2 8 Latin America, as a higher-income developing region, was viewed as an area that would particularly benefit from the self-help implied by meeting repayment obligations. Yet, because of the 1980s debt crisis in the region, government loans assistance from Japan was not provided because of the poor credit standing of the potential borrowers. Further, the relatively high income levels in Latin America disqualified assistance of a highly concessional nature. All of these factors mitigated against large Japanese assistance to Latin America. Japan became the world's leading country in net ODA in 1989, providing $8.9 billion while U.S. assistance was $7.7 billion. This was accomplished despite an almost 2 percent cut of its own ODA; the United States' lead had been eroded as a consequence of a greater decline of U.S. assistance between 1988 and 1989. In 1990, the positions of the two countries reversed and the United States again took the lead in total ODA. Data from the Organization for Economic Cooperation and Development (OECD) indicate that the United States disbursed a net of $11.4 billion of ODA in 1990, including $1.2 billion of military debt relief, while Japan provided $9.07 billion. 29 Japan's contribution rose 6.2 percent in yen terms but the fall in the value of its currency resulted in only a 1.2 percent increase in U.S. dollar terms. Nevertheless, Japan continued in 1990 as a top-ranked rival of the United States in providing economic assistance to the developing countries and multilateral organizations. However, the latest available complete data, for 1989, indicate that Japan was the largest provider of total resource flow— ODA plus private finance and grants—with $24 billion compared with the $16 billion of the United States.

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Japanese justification for assistance has been couched either in terms that aid is an international good an economic superpower should provide, or in defensive terms to defuse international criticism of its large trade surplus. Predominance of aid to Asia is in line with the Japanese strategy of focusing assistance on the region with which it has the closest ties. But there has been some attempt to broaden the geographic scope of assistance because of fears that Japan may be too consciously trying to create an Asian zone bloc to compete with the seeming growth of the U.S. free trade area in the Americas. Regionally, 59 percent of the $6.9 billion of Japanese bilateral ODA was allocated to Asia in 1990. Africa was the second largest recipient at 11 percent, the Middle East third at 10 percent, and Latin America fourth at 8 percent. For Latin America, there was both a notable absolute and relative improvement from 1988 to 1989 as assistance rose from $399 million to $563 million—a 41 percent rise in one year, but in 1990 assistance to Latin America declined slightly as aid to the Middle East almost doubled (see Table 1.9 for regional breakdowns). As to the justification for the assistance that Japan has provided to Latin America, one important consideration has been the debt problems of the region. Japan has explicidy recognized the outward transfer of financial resources from Latin America to the developed creditor countries as a key problem that needs to be corrected. Accordingly, one reason for providing the assistance to Latin America has been to use governmental resources from Japan to partially compensate for the falloff in private financial flows to Latin America during the debt crisis years. But aid is not seen as a replacement for private capital—it is to be a catalyst for development. By helping Latin America overcome its debt problem, Japan believes it is promoting the region's development process. This is viewed by Japan as an international obligation to help the development of regions beyond Asia. But, more narrowly, as Latin America improves its development outlook, it becomes a healthier region for Japanese trade, finance, and investments. Thus, the flows of Japanese ODA to the region help to create closer bonds between the Japanese business community in Latin America and the various host countries. Indeed, one large Japanese trading company expressed this thought in its 1990 annual report: "We maintained our strategy of obtaining business involving ODA."30 Among the most important individual countries receiving Japanese bilateral assistance, Indonesia was the largest recipient, with $1.5 billion. In the list of the top ten country recipients, nine

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Table 1.9 Japan's Bilateral Overseas Development Assistance by Region (million U.S.$, net disbursements) Latin Middle America East

Year

Asia

Africa

1985

1,732 (68%)

252 (10%)

225 (9%)

201 (8%)

1986

2,494 (65%)

418 (11%)

317 (8%)

1987

3,416 (65%)

516 (10%)

1988

4,034 (63%)

1989

1990

Other and Europe4 Oceania Unallocated Total

_

(1%)

123 (4%)

2,557 (100%)

340 (9%)

55 (1%)

223 (6%)

3,846 (100%)

418 (8%)

526 (10%)

68 (1%)

304 (6%)

5,248 (100%)

884 (14%)

399 (6%)

583 (9%)

93 (1%)

429 (7%)

6,422 (100%)

4,240 (63%)

1,040 (15%)

563 (8%)

368 (5%)

98 (1%)

469 (8%)

6,779 (100%)

4,117 (59%)

792 (11%)

561 (8%)

705 (10%)

114 (2%)

494 (8%)

6,940 (100%)

158 (2%)

24

Source:Japan's ODA, 1990Annual Report, Japan Ministry of Foreign Affairs (1991), and Japan Economic Institute, Washington, D.C.,JEIReport, December 6,1991, "Japan's Foreign Aid Program: 1991 Update." Note: a. Europe represented less than 1% before 1990.

were Asian countries. But if the list is expanded to the top twentyfive recipients, we do find four Latin American countries—Brazil, Paraguay, Bolivia, and Honduras. Brazil and Paraguay each received over 1 percent of Japan's ODA while Honduras and Bolivia each received 0.6 percent. These Latin American countries' shares were far less than the Asian countries, and even Turkey, which received over 2 percent of Japan's ODA. By contrast, the U.S. ODA assistance went heavily to Egypt, Israel, Pakistan, and the Central American countries, which occupied places in the top ten of receivers. Despite protestations about the economic value of assistance, both Japan and the United States have obvious geopolitical pursuits among the countries in which they provide support. For example, the Middle East and Central America

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received 36 percent of total U.S. ODA flows. Similarly, of the countries receiving Japanese economic assistance, 49 percent was received by Asian countries. 31 These flows parallel what is, or was, generally perceived to be primary geostrategic areas—the Middle East and Central America for the United States and Asia for Japan. Another measure of ODA support is to look at the relative importance of the donor country to each aid recipient. Japan was the largest donor for twenty-six countries in 1989. Only two of these were in Latin America. Paraguay received 69 percent of its ODA from Japan, and Brazil received 35 percent. In both countries, Japanese interests are considerable, either in terms of a Japanese population or investment projects. Japanese investments have been made in Paraguayan agroindustries, while in Brazil large Japanese investors are important in steel, paper and cellulose, fertilizers, and petrochemicals. Through March 1991, the stock of Japanese investment in Brazil was over $6 billion. Excluding the special financial investments in Panama and the Cayman Islands, Brazil is the largest in Latin America for Japan. In Table 1.10, the major recipients of Japanese grants, technical assistance, or loans are ranked in terms of total expenditures. Brazil received the greatest amount, $124 million, followed by Paraguay at almost $93 million. These are quite small in relation to each country's GDP, but they do indicate a Japanese strategic involvement. In Brazil, as an example of how assistance leads to closer economic ties, a forestry research project led to the need for Japanese parts and machinery for lumber processing. In Paraguay, assistance has been provided for agriculture research to farmers of Japanese descent. The Annual Evaluation Report for 1990 on Japan's Economic Cooperation notes that "at present, the 7,500 farmers of Japanese descent produce 8 percent of the soybeans, 20 percent of the wheat and 12 percent of the tomatoes in the total agricultural production of Paraguay and they are highly valued." 32 In the Dominican Republic, assistance in the administration of the telecommunications system involved engineers trained in Japan. Other Japanese aid projects in Argentina, Chile, Colombia, Peru, Mexico, and Uruguay have had similar links with Japanese training or equipment. These should not necessarily be interpreted as commercial or export promotion measures, but they do indicate a Japanese involvement that could later lead to business ventures of interest to Japan. The relatively small amounts of assistance to other Latin American countries reflect the aid limits the Japanese impose according to a recipient country's threshold of income. The NIE

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Table 1.10 Top Latin American Country Recipients ofJapanese Overseas Development Assistance, 1989 (million U.S.$)

Country Brazil Bolivia Paraguay Honduras Argentina Peru Mexico Jamaica Dominican Republic Ecuador Total Percent

Grant Assistance

29.65 7.49 17.53 13.97 6.11 4.53 —

3.58 6.09 88.95 18%

Technical Assistance

Loans

Total

37.22 12.28 19.51 7.43 14.97 19.66 16.59 0.35

86.95 50.93 45.53 15.03 2.95 2.09 3.89 22.57

124.17 92.86 72.53 39.99 31.89 27.86 25.01 22.92

4.94 3.81 136.76 28%

14.04 14.47 258.45 54%

22.56 24.37 484.16 100%

Source: Japan's ODA, 1990 Annual Report, Japan Ministry of Foreign Affairs (1991).

countries as a group—a higher-income category—were the recipients of only 3.6 percent of total Japanese ODA. Argentina, Brazil, and Mexico are classified within the higher-income category, thereby explaining the low level of Japanese assistance. Overall, most of the Japanese assistance went to Asian countries with per capita incomes of about $1,000. Japan's official target is to increase the amount of ODA from $25 billion in 1983-1987 to over $50 billion in 1988-1992. The outlook for future Japanese overseas assistance is for some slowdown in the rate of growth. The increase in ODA has slowed, in yen terms, from a 5.8 percent increase in fiscal year 1990 to 5.5 percent in the 1991 fiscal year. For fiscal year 1992, a 7.8 percent increase is budgeted, but much of the rise is projected for contributions to international financial institutions. 33 Some factors could slow the rise of ODA. Appreciation of the yen contributed to larger U.S. dollar rises in ODA during the 1983-1987 period, and a similar exchange rate movement is not anticipated in the future. The slippage of Japan as number two to the United States in world aid during 1990 already reflects the weakening of the yen. Also, fiscal

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pressures on the Japanese government could slow spending for ODA. The government budget for fiscal year 1992 is under great pressures from the need to restrain expenditures and the need to generate larger revenues. These needs could conflict with spending for foreign assistance. Already, there has been domestic criticism on the level of assistance to the war-afflicted Persian Gulf economies. Former Prime Minister Kaifu had previously pledged $2.1 billion for countries affected by the Gulf War, and this was later increased by a $9 billion pledge to the United States for war assistance. The yen's decline between early 1991 and mid-1991 has also added an extra $500 million request by U.S. authorities to meet the original $9 billion pledge. Possible increases in Japanese environmental aid in the wake of the Rio de Janeiro Earth Summit will put more pressure on ODA spending. In this context there seems to be little prospect for a large increase in traditional economic assistance and certainly few prospects for sizable increases for Latin America. If anything, Japanese attention will surely turn more to Asia, to Eastern Europe and the republics of the former Soviet Union, especially Russia, and to economic assistance to the Gulf economies, a region that represents more important oil-strategic interests for Japan. Egypt, Jordan, and Turkey are receiving significantly greater aid to ease impact of the Gulf War. O n e special form of Japanese support for Latin America is possible through the U.S. Enterprise for the Americas Initiative. This calls upon Japan, Europe-Canada, and the United States to each contribute one-third toward a $1.5 billion Multilateral Investment Fund to support private sector development in Latin America and the Caribbean. Specifically, Central America and the Caribbean would receive the bulk of the grants. Japanese Finance Minister Ryutaro Hashimoto announced support for the fund at the InterAmerican Development Bank's annual meeting in Nagoya, Japan, on April 7-9, 1991. However, implementation of this contribution could be slow, as it depends on similar allocations by the United States and Europe. David C. Mulford, U.S. undersecretary of the treasury, has said that Japan will provide $100 million a year for five years, provided the U.S. Congress approves the U.S. share of $500 million. 34 Another measure of Japan's relative position toward Latin America is to compare the contributions of the leading donor countries. Within the set of countries providing international economic assistance to Latin America, the United States has retained a clear lead over Japan. In fact, Japan is in a distinct third

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position behind France. Table 1.11 shows net official development assistance disbursements for the period 1989-1990 and the origin of the aid donors. Japan, in providing only 11 percent of the total a m o u n t given by the country members of the Development Assistance Committee (DAC) of the OECD, was barely ahead of Germany and Italy in the volume of aid provided. Latin America is clearly not J a p a n ' s priority area for economic assistance. As was expected, the United States provided about 16 percent of its ODA to Latin America, more than doubling Japan's contribution of almost 8 percent. France and the Netherlands provided more than either the United States or Japan, contributing over 17 percent of their ODA to Latin America. Table 1.11 Latin America's Receipt of Overseas Development Assistance by Country of Origin Million U.S.$, 1989-1990 Net Disbursements

Percent

United States France Japan Germany Italy Netherlands Canada Britain Other DAC

1,415 1,364 636 579 448 380 223 157 493

25 24 11 10 8 7 4 3 8

Total DAC

5,695

100

Source: Tables 41 and 42 from Development Cooperation 1991 Annual Report. Note: DAC refers to the Development Assistance Committee of the Organization for Economic Cooperation and Development It includes eighteen countries and the European Community.

THE TRADING COMPANIES In contrast with the s u b d u e d interest in Latin America by private banks, the great Japanese trading companies are indicating

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a m o r e receptive attitude in their outlook for business in the region. J a p a n ' s e c o n o m i c interests abroad have been particularly p r o m o t e d t h r o u g h the country's unique sogo shosha, or general trading companies. Beginning in the m i d - n i n e t e e n t h century, a small g r o u p of import agents began to perform the essential task of bringing raw materials and machinery to a resource-poor a n d backward Japan. At the same time, these agents began to sell abroad the products, such as textiles, the industrializing Japanese economy was b e g i n n i n g to produce. These import and export f u n c t i o n s became incorporated within individual firms—beginning with Mitsui and Mitsubishi—that began to set up overseas offices. Eventually, the import-export networks evolved into general trading companies. T h e t r a n s f o r m a t i o n of J a p a n into an industrial processing country d e p e n d e d on the trading companies buying the raw materials, energy, m a c h i n e r y , a n d technology t h a t J a p a n n e e d e d to industrialize, and in turn being able to market new products being p r o d u c e d . As Japanese economic development progressed, these trading companies became more than importers and exporters. They began to finance trade and develop information on markets for the sale of the new products that Japan's industries were producing. T h e s e c o m p a n i e s e x p a n d e d the range of their activities to encompass market research, warehousing, and shipping—in effect, helping J a p a n survive and develop in the international economy. With the rapid development of the Japanese economy in the p o s t World War II period, the trading companies began to expand the scope of their activities beyond international trade and into the fields of joint ventures in the developing countries, with investments in raw materials and resources important to Japan. These ventures f u r t h e r increased the scope of the trading companies into project finance, industrial development, and technical consulting services. F u r t h e r , the c o m p a n i e s e x p a n d e d beyond J a p a n into o t h e r countries not necessarily linked to Japanese trade. This move into t h i r d - p a r t y t r a d e , known as t h e " d e p a r t u r e - f r o m - J a p a n " p h e n o m e n o n , began the evolution of the trading companies into global enterprises with interests in Latin America and o t h e r developing countries. 35 The reach of the trading companies has been aptly described by The Economist magazine: The sogo shosha have operations all around the world, ranging across finance, distribution, technology, mining, oil and gas

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exploration, and information. They are the spiders at the centre of Japan's global economic effort, acting as intermediaries for half the country's exports and two-thirds of its imports.36 T h e t r a d i n g c o m p a n i e s a r e generally r e c o g n i z e d as b e i n g c o m p o s e d of n i n e leading firms, of which the most i m p o r t a n t are t h e g r o u p of five, r a n k e d in o r d e r of sales—C. Itoh, Sumitomo, M a r u b e n i , Mitsui, a n d Mitsubishi. Although the c o m p a n i e s are a m o n g J a p a n ' s largest f o r e i g n investors a n d r e p r e s e n t a large p o r t i o n of J a p a n ' s foreign trade, the sogo shosha are not, of course, the only international J a p a n e s e companies. O t h e r major firms are J a p a n e s e multinationals such as Matsushita, Nissan, H o n d a , Sony, a n d Toyota t h a t have m a n u f a c t u r i n g facilities as well as their own direct e x p o r t - i m p o r t networks abroad. But the sogo shosha have b e c o m e ever m o r e innovative, transforming themselves into m a j o r world-spanning trading, investment, a n d f i n a n c e enterprises that have b e c o m e symbolic of J a p a n ' s international business reach into many c o u n t r i e s a n d regions. T h e sogo shoshas also have crosss h a r e h o l d i n g a n d f i n a n c i a l links with o t h e r m a j o r J a p a n e s e c o m p a n i e s a n d banks, known as the keiretsu system. This f u r t h e r extends the reach a n d influence of the trading companies overseas. The Trading Companies in Latin America T h e t r a d i n g c o m p a n i e s p e r f o r m e d very i m p o r t a n t f u n c t i o n s in J a p a n ' s post-World War II development by b e c o m i n g importers of raw materials a n d natural resources n e e d e d f o r the h o m e economy. This b r o u g h t the trading companies to Latin America f o r natural resource d e v e l o p m e n t s such as iron o r e in Brazil and c o p p e r in Chile. T h e c o m p a n i e s h e l p e d develop projects a n d then e x p o r t e d the p r o d u c t to J a p a n . Manufacturing and construction j o i n t ventures were also developed with several Latin American countries. But, as the 1980s d e b t crisis in Latin America d i m m e d investment and trade with J a p a n , o t h e r regions began to grow in i m p o r t a n c e f o r t h e t r a d i n g c o m p a n i e s . T r a d e a n d j o i n t v e n t u r e s with Asia, N o r t h A m e r i c a , a n d E u r o p e b e c a m e increasingly i m p o r t a n t f o r t h e companies. Quantitative measures of the importance of Latín America f o r the trading companies are only partially available. O n e measure that could b e used is the share of the companies' trading transactions— i m p o r t s plus e x p o r t s — r e p r e s e n t e d by Latin America. Some of the trading companies r e p o r t their sales by geographical segments, b u t Latin America is not usually identified. O n e major trading company

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that does report segment information indicates that North America and Europe represent over 80 percent of trading transactions, with other countries sharing the remaining 20 percent. In response to a specific query, the company indicated that trade with Latin America represents only 5 percent of its total trading transactions. Two other companies also estimate that the combined value of their Latin American exports and imports represents just 5 percent of their total world trading volume. But another company estimates Latin American transactions at only 2 percent of its total world turnover. The share of trading volume represented by these four companies is quite close to the 4 percent share of Japan's total international trade represented by Latin America. North America, Europe, and Asia clearly are more important for the trading companies. 37 T h e other measure that can be used to j u d g e regional importance is the location of the trading companies' subsidiaries and affiliates. An OECD study, using 1980 data, indicated the relative importance of Latin America for the trading companies as second only to Asia, using the measure of the number of overseas manufacturing subsidiaries. This study found that in 1980, about 80 percent of the trading companies'joint manufacturing ventures were in developing countries. Over 50 percent of the ventures were in Asia and 20 percent in Latin America, with Brazil alone having eighty-one ventures, the largest for any country. North America was the location of 11 percent of the ventures, and only 4 percent were located in Europe. 3 8 However, this 1980 survey is not currently representative because of the great number of new ventures that the trading companies have undertaken in North America, Europe, and Asia in the last decade. T h e establishment of new auto and parts assembly and manufacturing operations in the United States has especially expanded the number of subsidiaries. In an attempt to update the 1980 survey, interviews were scheduled with the five leading trading companies in New York during J u l y - S e p t e m b e r 1991. T h e companies' annual reports were also analyzed. From this partial sample, covering the top five of the nine trading companies, it appears that Latin America is less important than in the 1980 survey. T h e location o f the major trading companies' overseas subsidiaries and affiliates is shown in Table 1.12. Of the 413 overseas subsidiaries of the top five trading companies, forty-six ventures, or 11 percent of the total, are located in Latin America. The largest concentration of companies is in the United States and Canada, with 34 percent of the total. The Asian and European countries have the

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Table 1.12 Location of Top Five Trading Companies' Overseas Subsidiaries and Affiliates

Asia Latin America North America Europe Oceania Africa, Middle East Total

Number of Companies

Percent

117 46 142 67 34 7 413

28.3 11.2 34.3 16.2 8.2 1.8 100.0

Source: The top five trading companies are C. Itoh, Marubeni, Mitsui, Mitsubishi, and Sumitomo. The information was obtained from their 1990/91 annual reports.

next largest number of companies. Latin America thus ranks fourth, just ahead of Australia and New Zealand as the site of these companies' manufacturing and other types of subsidiaries. Comparing this 1991 survey with the 1980 survey of the OECD, it appears that Latin America has lost position in a relative sense because of the great number of new subsidiaries located in North America and Europe during the past decade. An indication of the recent activities by these five companies in Latin America can be discerned by analyzing their leading manufacturing, processing, marketing, or construction subsidiaries and affiliates in each country. The trading of commodities—buying and selling for foreign trade functions—is the historical mainstay of the trading companies. But as the companies are expanding their role into "globally-integrated enterprises" (as one company describes itself), it is the new ventures beyond trading, such as manufacturing and assembly, that offer a particularly good perspective on the specific activities and plans of the trading companies in Latin America. On a country-by-country basis, the following list indicates the leading ventures cited by the five trading companies from their latest annual reports and in interviews. The number (in parentheses) of subsidiaries and affiliates in each country is a good indicator of the country's relative importance for these companies. Brazil is by far the most important, with seventeen ventures, representing over onethird of the forty-six subsidiaries of these five companies in Latin

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America. In order of importance, Brazil is followed by Mexico, Chile, Colombia, Venezuela, and Peru. Although most trading companies maintain representative offices in Argentina, only one venture—the construction of a polypropylene plant—is shown for that country. 39 • Brazil Paper manufacturing—C. Itoh Fabric manufacturing—Marubeni Assembly and sale of copiers—Marubeni Twisted yarn and cotton spinning manufacturing (2)— Marubeni Office building rentals—Marubeni Coffee growing and instant coffee—Marubeni Steel mill and manufacturing (2)—Marubeni Agroindustrial operations—Marubeni Coffee processing and export—Mitsui Fertilizer manufacturing—Mitsui Telecommunications equipment manufacturing —Mitsui Steel sheet processing—Mitsubishi Ferrosilicon manufacturing—Mitsubishi Plywood doors manufacturing—Mitsubishi Footwear manufacturing—Sumitomo • Mexico Polyvinylbutyral sheet manufacturing—Marubeni Auto assembly and retail sales (2)—Marubeni Steel mill modernization—Mitsui Solar salt production—Mitsubishi Sheet metal processing—Mitsubishi Amino acid production—Sumitomo • Chile Construction of ethanol, methanol plant—Marubeni Auto and truck sales—Marubeni Sales and service of autos—Mitsui Wood chip production—Mitsubishi Copper mine investment—Mitsubishi Fiberboard manufacturing—Sumitomo • Colombia light truck manufacturing—Mitsui Auto manufacturing and sales—Mitsui Coffee extract production—Mitsubishi Auto manufacturing and sales—Sumitomo

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• Venezuela Alumina production—Marubeni Liquefied natural gas production, prefeasibility study— Mitsubishi Heavy oil emulsion marketing—Mitsubishi • Argentina Polypropylene plant construction—Mitsui • Peru Auto assembly and distribution—Marubeni Auto assembly and distribution—Mitsui • Panama and Central America Ownership, purchase, sale of boats—Mitsui (Panama) Polyester/cotton textile manufacturing and marketing (2)— Marubeni (Costa Rica) Synthetic yarn manufacturing—C. Itoh (El Salvador) Bus, vehicle, motorcycle manufacturing (2)—Marubeni (Guatemala) Road construction—Mitsui (Honduras)

Sales transactions and the location of trading companies' subsidiaries provide a guide as to the importance of Latin America for these Japanese companies. But, because of the subdued activity in Latin America during the debt crisis decade, this information may not be a fair assessment of current attitudes toward Latin America. In order to get a sense of the companies' views toward Latin America's oudook, officials of these companies were also asked in the interviews to describe their current attitudes toward Latin America and how they judged their business prospects in the region. A good indicator of the potential importance of Latin America can be gathered from the attitudes or plans of the trading companies in Latin America and the new projects they are undertaking. The opinions gathered from among the five largest trading companies— C. Itoh, Sumitomo, Marubeni, Mitsui, and Mitsubishi—permit a number of observations. 40 There is a decidedly favorable attitude among the trading companies in terms of their business outlook for Latin America. Most officials cite the easing of the external debt problem as one factor making for a better oudook. However, the leading factor cited by all companies is the possibility of regional economic integration in Latin America. This includes the emerging MERCOSUR group of

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Brazil, Argentina, Uruguay, and Paraguay, as well as possible future links with the evolving NAFTA group in North America. As one company official expressed it, all Latin American countries are now looking for ties with the United States and this makes the region more interesting for the trading companies. Another official said he was quite optimistic toward Latin America and is trying to persuade his company to be more aggressive in the region, particularly as economic integration proceeds. T h e integration movement also offers opportunities for j o i n t ventures that would have access to the U.S. market. A high local content, however, would be a deterrent to Japanese companies. A second leading factor mentioned by trading companies is the import liberalization trend in Latin America. This is of obvious interest, as the trading companies earn much of their income from export and import transactions. One company officer emphasized the prospects of greater world trade liberalization and cited the trade of his firm in Brazil, which exports to Europe, the United States, and Japan. A third trend cited is that of privatization of state-owned enterprises, which would give Japanese companies the chance to acquire properties using debt to equity financing. Firms from Japan are important in Brazil's steel, metal, machinery, and textile industries. T h e easing of foreign investment rules and the better access to international finance are further reasons why trading company officials are looking at Latin America in a better light. In general, all companies interviewed expressed a surprisingly favorable view o f Latin America. This attitude has the potential for being expressed in terms of better business opportunities for the trading companies in Latin America and thereby the possibility of new investments. Among specific countries, Brazil is by far the country most often cited as having the best outlook for the trading companies. T h e country has a large industrial sector well positioned for exports, and J a p a n is the third largest investor after the United States and Germany. T h e current inflation and stabilization problems of Brazil are obviously recognized by these officials. But from a long-term perspective, the trading companies consider Brazil quite attractive for its basic resources, capital, and human endowments. T h e trading companies view Brazil favorably for its large population, its abundant natural resources, and its position as the largest economy of Latin America. As one official expressed his views on Brazil, the country is an excellent base for exports and manufacturing: "If wellmanaged, Brazil has the strongest potential in Latin America."

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Brazil's standby arrangement with the IMF, signed on January 29, 1992, and a possible conclusion of basic debt negotiations in 1992, could be signs of the country's improving prospects. Brazil's foreign investment inflows doubled in 1991—a possible indicator of improving business sentiment. Mexico is also well regarded by the trading companies, but its potendal is viewed more as a conduit to the U.S. market in a North American free trade zone. The other countries receiving favorable indications in these interviews are Chile, Colombia, and Venezuela. Argentina was discussed by several officials, but there seems to be an ambivalence as to the long-term sustainability of good performance in this country. Outlook for the Trading Companies From the interviews with the officials and their discussion of some of the ventures listed above, the outlook for the trading companies in Latin America appears to be favorable. Each company, in its own way, is reassessing the Latin American economic outlook for its corporate planning purposes. Although there is some caution toward countries that still have to take measures to improve their economic policies, the region as a whole is being viewed with more promise than in the past. As one trading company assessed the region's outlook in its 1991 annual report: Although per capita GNP for Latin America declined, the region is showing some promising signs. Mexico, Venezuela, and other countries are liberalizing their trade policies, and the idea of a free trade zone is taking hold. In this environment, Mitsui Brasileira Importagáo e Exportagáo Ltda. achieved good results in machinery and Mitsui de México, S.A. de C.V., in machinery and chemicals, and Mitsui managed to exceed its annual business targets for the region. Further liberalization should promote gradual economic recovery, and Mitsui will maintain its efforts to expand exports from the region and develop new business, including opportunities provided by ODA projects and intraregional trade. 41

This assessment by Mitsui is generally representative of the enure group of the five trading companies interviewed. Whether favorable attitudes will be translated into investments will depend on the sustainability of the improvements several countries have demonstrated.

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CONCLUSIONS

The evidence gathered from this study of Japan and Latin America suggests a considerable asymmetry in their economic relations. How important is Japan to Latin America, and how important is Latin America to Japan? Assessing the overall intensity of foreign trade, finance, and investment relationships between Japan and Latin America, the region is not as important to Japan as the United States, Asia, or the European Community. Trade, investment, and overall economic geopolitical interests are simply far more important to Japan in these other regions. In Asia, Japan's influence has, except for security matters, eclipsed that of the United States. A 1990 Congressional Research Service report pointed out that Japan surpassed the United States as the leading source of Asia's direct investment and as the principal supplier of technology and economic aid. 42 For Latin America, while the emergence of Japan's economic power has received a greater appreciation since the onset of the debt crisis, the region is still oriented toward the United States, especially in trade and investment. But there is a dramatic contrast between the psychological attitude in Japan—and perhaps in Latin America—that neither side is that important to the other, and the objective reality that Japan has the potential to become Latin America's leading source of external economic and financial resources, vying with the United States in these terms. Japan is not neglecting Latin America. The capital recycling program—although apparently a one-time policy effort—has been an important adjunct to the region's debt reduction efforts. The potential for closer Latin American economic relationships exists, but this will have to await the evolving improvements in the Latin economies as they emerge from the past decade of debt and stagnation. Japanese business and financial leaders insist that the Latin American countries will have to demonstrate economic discipline and good policies to merit support. A receptive attitude toward Latin America is already evident, particularly among the trading companies, but it will take some time for attitudes to turn into investments. On a larger scale, the creation of regional integration pacts— such as the MERCOSUR of Brazil, Argentina, Uruguay, and Paraguay; the Andean market; and a new triad group of Chile, Mexico, and Venezuela—could appeal to Japanese investors seeking wider markets. The possible North American free trade agreement

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and, by extension, an eventual Western Hemisphere trading and investing arrangement could considerably enhance the potential o f Latin A m e r i c a for J a p a n e s e business and finance. T i m e will be n e e d e d f o r the potential o f these regional arrangements to be realized in terms o f trade and investments, but this will permit J a p a n e s e trading companies and other international firms the time to plan their participation in these areas. Already, Japanese trading companies are indicating that regional integration represents the most important reason for their possibly renewed interest in Latin America. A m o n g individual countries, a more discernible J a p a n e s e interest can be seen in a few locations. Brazil, with its more than 1 million J a p a n e s e ethnic population, successful export industries, and a resources base attractive to J a p a n , is a leading locus o f Japanese attention. Mexico, emerging as a possible affiliate with the United States in a free trade area, is also an obvious priority country for J a p a n . Although there are areas of trade or investment potential for J a p a n among the other countries, none appears to match the i m p o r t a n c e of Brazil or Mexico. Venezuela is rising in J a p a n e s e investor appeal, but this appears to be limited to minerals and energy ventures. If Argentina were to finally stabilize and reform its economy, and if a wider free trade area agreement were reached with Chile as well as Brazil, then such an expanded M E R C O S U R Southern Cone market would have a top potential for Japanese trade and investment. A Japanese Policy Toward Latin America? From the analysis of the structure of trade, investment, lending, and e c o n o m i c assistance, the question may be raised: Is there an a r t i c u l a t e d J a p a n e s e e c o n o m i c policy toward Latin America? C o m p a r e d to what can be clearly described as Japanese policies toward the United States, the European Community, or Asia, few well-defined and comprehensive policies can be discerned toward Latin America. It is possible, o f course, to sew together the threads of Japanese economic reladonships with Latin America and finally see a pattern. But, with the possible exception of the trade surplus recycling loan program directed toward the debt reduction countries in Latin America, and a few strategic trade or investment objectives in Brazil and Mexico, there does not appear to be a unique "Latin" aspect in J a p a n e s e foreign e c o n o m i c policy. What J a p a n e s e policy can b e

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discerned could be interpreted as the outcome of commercial or financial ventures in selected countries that fit into a pattern of Japanese global relationships. T h e reasons Japan has not developed a special policy toward Latin America—as it has for the United States and the European Community—are somewhat speculative. At the crudest, it could be said that Latin A m e r i c a is in the h e g e m o n i c sphere of the United States and Japan does not care to challenge U.S. influence in this area. Peter H. Smith argues that "Latin America holds relatively little interest for the Japanese. T h e highest priority for official policy toward the region is to find ways of supporting the United States." 43 But at a subtler level, it may well be that Japan has had difficulties in interpreting Latin American culture and institutions and has not been able to launch special initiatives in trade, finance, or investment. Yet, even if Japan were to mount its own initiative for Latin America, there are probably constraints—human resources and management and possibly financial capital—to the reach of J a p a n in Latin America. Japan has already e x p e r i e n c e d , and continues to experience, a considerable stretch of its private and public managerial resources while establishing greater presence in the United States, Europe, and Asia. It may well be that adding Latín America to the top tier of economic policy interests for Japan is not possible within the span of the next few years. Instead, one could argue that there is no "need" for a special policy toward Latin America, such as the economic and political cooperation agreements that Japan has negotiated to allay problems with the United States, Canada, and the European Community. Perhaps the reason for a Japanese nonpolicy toward Latin America could be simply that the region is not viewed as a serious problem comparable to trade conflicts with the United States and Europe. It c o u l d be that a bit of this—some t r a d e — a n d a bit of t h a t — investments, e c o n o m i c assistance—adds up to Japanese policy toward Latin America. A combination of investments in some countries, assistance to others, and more trade with a few more could in reality be sufficient to define the scope f o r Japanese economic policies toward Latin America. Conflict or Cooperation? T h e implication of these possibilities is that it may be more productive for Latin American policymakers to seek and cultivate

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J a p a n e s e finance a n d investment relationships than to wait f o r expressions of interest to flow spontaneously f r o m J a p a n . T h e r e appears to be a reluctance among Japanese policy officials to take a strong lead in promoting Latin American economic development for fear of encroaching too much on a region perceived to be within the U.S. strategic orbit. Indeed, Japan seems ready to follow the U.S. lead in Latin America. But if the initiative were taken up directly by the Latin Americans, the United States would surely not object to greater J a p a n e s e assistance or investment in the region if it is perceived to be for purposes of longer-term economic development. Nevertheless, a potential for U.S.-Japanese conflict exists in Latin America. T h e sources of conflict could center not on an official Japanese policy initiative but more on a strong threat by Japanese trading companies and multinational enterprises in securing larger market positions in Latin America. As DeAnne Julius, f o r m e r director of economics at the Royal Institute of International Affairs, has observed, J a p a n ' s policy of coordinating foreign investment "often appears from outside to be a sinister plan by the Ministry of T r a d e a n d Industry (MITI) to target aid and investment for the strategic global advantage of Japanese companies." 44 Whether real or imagined, the greater activity of Japanese companies in Latin America could lead to increased tensions with the United States. O r conflict could arise from the challenge to U.S. interests and foreign policy that would be implied by greater Latin American dependence on J a p a n e s e financial resources. With European foreign investors increasingly concerned with the European Economic Community, the field in Latin America could be left to U.S. and J a p a n e s e companies. A conflict over investment policies in a free trade area could pose problems if rules of origin were so restrictive as to keep out Japanese companies. Finally, U.S. suspicions could be provoked if J a p a n were seen to benefit by reaping business gains f r o m its overseas development assistance to Latin America. Some hints of conflict have already been provided by J a p a n ' s vice minister of finance, T a d a o Chino. In a New York Times interview, C h i n o said that J a p a n would be more assertive in p r o m o t i n g its world financial objectives. Specifically, J a p a n e s e foreign investments abroad should "contribute to the Government's policy goals and strengthen J a p a n ' s economy." T h e article noted that "although it may take years to see the changes, Mr. Chino's aim of using Japan's aid to attract private investment could both increase the competitiveness of J a p a n e s e industry and extend J a p a n ' s influence abroad." Speaking of the capital recycling program, Chino

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said: "The purpose of recycling is to stimulate and assist private capital flows."45 These expressions of Japanese policy by a high Finance Ministry official clearly signal that Japan does have objectives of enhancing its economic position abroad. This is not necessarily a policy of conflict or challenge to U.S. interests. But the pursuit of aggressive policies indirectly linking economic aid, recycling, and private investment to Japanese economic influence could in effect represent a challenge to U.S. interests and policy, especially in Latin America. The potential for inadvertent conflict with the United States in Latin America does exist. An intriguing test of conflict or cooperation will be how Japan will react to a well-integrated free trade and investment agreement linking the Latin American region with U.S. and Canadian markets. President Bush's Enterprise for the Americas Initiative, "A New Partnership for Trade, Investment and Growth," could eventually produce far-reaching changes in economic relations in Latin America. Such a regional grouping could present benefits as well as costs to Japan. It could provide the catalyst for new Japanese initiatives toward Latin America. A vigorous Japanese participation in the Enterprise for the Americas Initiative would greatly increase Japan's trade, investment, and economic assistance in the region. Will Japan react strongly to challenge a U.S.-led regional group? Or will Japan passively seek to find a place for trade and investment under the umbrella of the wider Latin American market? Will Japan be an equal "partner" of the United States in Latin America, or will each country pursue its own interests in a competitive manner? Answering these questions could well define the future shape of Japanese relations with Latin America and, in the process, the nature of Japanese relations with the United States in Latin America.

NOTES 1. Throughout this chapter, reference to Latin America includes the countries of the Caribbean. 2.

Marcus

Noland,

The

Pacific

Basin

Developing

Countries

(Washington, D.C.: The Institute of International Economics, 1990), p. 153. 3. The Export-Import Bank of Japan, News Release, December 5, 1991. 4. Information from the Japan Ministry of Finance; and The LongTerm Credit Bank of Japan, Ltd., "Questionnaire Survey on Direct Overseas Investments," LTCB Economic Analysis, March 1992.

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5. Leon Hollerman, Japan's Economic Strategy in Brazil: Challenge Jor the United States (Lexington, Mass.: Lexington Books, 1988). 6. Information from Japan External Trade Organization (JETRO), New York, and Financial Times, December 19, 1990. 7. Louis T. Wells, Jr., and Alvin G. Wint, Marketing a Country: Promotion as a Tool Jor Attracting Foreign Investment (Washington, D.C.: International Finance Corporation, 1990), p.45-49. This is also supported in a study by DeAnne Julius for the Group of Thirty, "Both Lenders and Investors Come to Countries with Sound Economic Policies, While Problem Debtors Attract Little FDI," in Foreign Direct Investment: The Neglected Twin oj Trade (Washington, D.C.: Group of Thirty, 1991), p. 3. 8. Wells and Wint, Marketing a Country, p. 49. 9. Barbara Stallings, "The Reluctant Giant: Japan and the Latin American Debt Crisis," Journal of Latin American Studies, February 1990, pp. 2-9. 10. United Nations Economic Commission for Latin America and the Caribbean, Transnational Bank Behaviour and the International Debt Crisis, New York, March 27, 1989, p. 30. 11. Japan Inc. in Latin America: A Status Report on Aid, Trade, Investment and Debt, Latin American Information Services, New York, 1989, p. 56. 12. Stallings, "Reluctant Giant," Table 2, pp. 6-10. 13. United Nations, Transnational Bank Behaviour, pp. 46-47. H . J o n a t h a n Hay and Michel H. Bouchet, The Tax, Accounting and Regulatory Treatment oj Sovereign Debt (Washington, D.C.: The World Bank, 1989), p.75. 15. Stallings, "Reluctant Giant," p. 24. 16. Interview by A. Blake Friscia with officials of the Bank of Japan, Tokyo, September 26, 1988. 17. Reported in The Fourth Symposium on Financial and Business Cooperation Between Latin America and Japan, The Inter-American Development Bank and The Export-Import Bank of Japan, November 12-14, Nagoya, Japan, p. 151. 18. Steven Murphy, "The Purge Is On," in a special section on Japanese banks and less developed country debt, Latin Finance, March 1991. This article presents some informal evidence that the Japanese banks elected to convert most of their debt at a 35 percent discount for bonds in the Mexico agreement. In the Venezuela financial arrangements of 1990, the Japanese banks elected all options—debt reduction bonds, par conversion bonds, lower interest rates, cash buybacks—all options except the new money bonds. The sale of Argentina and Brazil loans is reported in "Financial Flows to Developing Countries," World Bank Quarterly Review, June 1991, p. 11.

19. The discussion of capital ratios and data is from the World Bank, Financial Flows to Developing Countries, issues of June 1992, p. 18, and December 1991, p. 15. 20. See the articles, "Japan Banks Face Up to Capital Reality," Wall Street Journal, April 6, 1992; and "Drop in Japan Stocks Stirs Fear," New York Times, April 9, 1992. 21. The talk by Mr. Yamaguchi was at the panel discussion, "Monetary

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Linkages Between America, Japan and Europe: Crisis and Challenge," New York University, February 25, 1992. 22. The aspect of bankruptcies and debt is from The Economist, "Japanese Banks: Bad-debt troubles," September 14, 1991, p. 97. See also the analysis on the prospects for Japan's banks, "Thumbs down in Tokyo." "Investors have delivered their belated judgement on the prospects for Japan's banks. It is crushing," The Economist, April 17, 1991, p. 77. 23. Stailings, "Reluctant Giant," p. 22. 24. Interviews by A. Blake Friscia with officials of the Japan ExportImport Bank, Tokyo, September 26, 1988. 25. Remarks by Mr. Kazuhuru Nogami, chief New York representative of the Japan Export-Import Bank, at the Latin American Debt Conference, November 9-11, 1989, held at Texas A&M University. 26. William Emmott, "The Limits to Japanese Power," in International Economics and Financial Markets: The Amex Bank Review Prize Essays, edited by Richard O'Brien and Tapan Datta (Oxford: Amex Bank Review, 1989). 27.Japan's Official Development Assistance, 1989 Annual Report, Ministry of Foreign Affairs, p. 14. 28. Development Cooperation, 1991 Report, Paris, Organization for Economic Cooperation and Development, p. 176. 29. Development Cooperation, 1991 Report, p. 125. 30. Mitsui & Co., Ltd., Annual Report, 1990, p. 23. 31. Development Cooperation, 1991 Report, pp. 222-225. 32. Annual Evaluation Report on Japan's Economic Cooperation, March 1990, Japan Ministry of Foreign Affairs, pp. 59-71. 33. Monthly Finance Review, Japan Ministry of Finance, February 1982. 34. The reference to Japan by Mr. Mulford is found in "U.S. and Chile in Pact to Trim Debt," New York Times, June 27, 1991. 35. This section is from the study by Kiyoshi Kojima and Terutomo Ozawa, Japan's General Trading Companies: Merchants oj Economic Development (Paris: Organization for Economic Cooperation and Development, 1984), Chapter 2. Another comprehensive analysis of the trading companies is M. Y. Yoshino and Thomas B. Lifson, The Invisible Link: Japan's Sogo Shosha and the Organization of Trade (Cambridge: MIT Press, 1986). A good history of a trading company is found in John G. Roberts, Mitsui: Three Centuries of Japanese Business (New York and Tokyo: Weatherhill, 1989). 36. "Japanese Trading Companies: The Giants That Refused to Die," The Economist, June 1, 1991. 37. Interviews by A. Blake Friscia with trading company officials in New York, July-September 1991. 38. Kojima and Ozawa, Japan's Trading Companies, Table 5e. 39. A. Blake Friscia interviews, plus annual reports of the five trading companies. 40. A. Blake Friscia interviews with trading companies. 41. Mitsui & Co., Ltd., Annual Report, 1991, p. 9. 42. Richard P. Cronin, Japan's Expanding Role and Influence in the AsiaPacific Region: Implications for U.S. Interests and Policy, CRS (Congressional

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Research Service) Report for Congress, Congressional Research Service, Library of Congress, September 7 and 19, 1990. 43. Peter H. Smith, Japan, Latin America, and the New International Order, Visiting Research Fellows Series, no. 179 (Tokyo: Institute of Developing Economies, 1990). 44. Julius, Foreign Direct Investment, p.14. 45. "Japan's New Finance Official Plots an Independent Course," New York Times, August 5, 1991.

Chapter 2

Japan in Mexico: A Changing Pattern

Luis Rubio

Japan and Mexico have a long history of economic interaction that goes as far back as the sixteenth century. Despite the myths that surround today's relationship, however, the fact is that there is no such thing as a "Japanese strategy" vis-a-vis Mexico. Like the companies of many other nations, Japanese firms make individual decisions, but herd instinct is as pervasive as it is elsewhere. Furthermore, Japanese firms' view of Mexico, though in varying degrees, is one of wait and see. Hence, few have a clear-cut and decisive strategy for Mexico or their Mexican operations. It is these realities that make the JapanMexico relationship such an interesting one. Though there is a significant presence of Japanese firms in Mexico, trade has dominated the relationship and, historically, Mexico has generally enjoyed a small surplus in that exchange. But the size o f the trading relationship is nonetheless relatively small: total trade in 1990, for instance, was less than $4 billion. Over the last three decades, however, Japanese direct investment and lending have steadily increased, strengthening the overall economic relationship. But the nature of the relationship has changed dramatically over the last two decades. This chapter analyzes how the Mexico-Japan e c o n o m i c relationship has evolved over time and what has been the rationale behind the changes that have taken place over the last twenty years. T h e information is based on four types of sources: (1) official Japanese statistics; 1 (2) interviews with representatives of Japanese firms and banks; (3) interviews with Japanese government officials; and (4) interviews with Western consultants and foreign diplomats residing in Japan. Each of these tells a different story about the aims of Japan and Japanese firms in Mexico. Mexicans, for their part, know little about Japan. For years,

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particularly during the 1970s and 1980s, the prevailing attitude in Mexico was that Japan could help Mexico break its economic impasse by investing in Mexico and thus helping the country diversify its economic and trading relationships. Japan (and its economic success) was seen as the solution to Mexico's problems: the easy way out. The myth had it that the United States did not want to help Mexico's development, particularly when confronting the debt crisis of the 1980s, while Japan offered an extraordinary promise. The myth was finally terminated when Mexico began to confront its own problems, with the economic reform of 1985 and after. But Mexicans have had very little exposure to Japan. Few Japanese goods are imported from Japan and there is relatively little Japanese investment in Mexico. The little experience that Mexicans have had in dealing with Japanese firms has not been extraordinarily successful. The Mexican partners have often not enjoyed the relationship and, as in the case of joint ventures with the government, these have not ended well. Most Mexicans, however, have a very positive opinion of the Japanese, and there is no history of Japan bashing in Mexico. THE HISTORY OF AN ECONOMIC RELATIONSHIP

Japan's economic presence in, and relationship with, Mexico is in flux. Trade patterns are being altered in size and structure primarily as a result of the evolution of the U.S. economy and the ongoing economic reform in Mexico. Historically, the economic relationship has had five clearly demarcated stages. Each responded more to Mexican circumstances than to any Japanese grand design. 1. 1550-1950. For several centuries, the relationship was one based on trade. Spanish merchants inaugurated a trans-Pacific trading business that covered primarily the Philippines, China, Japan, Mexico, and Peru. Though highly irregular and miniature in size, this trade flourished until Mexican independence in 1821. During the nineteenth century, trade continued, but very few regular exchanges developed. Lack of statistics makes it impossible to determine the size of these exchanges, but historical accounts indicate that luxury goods crossed the Pacific in both directions, making a remarkable impression on both countries' history. 2. 1950-1970. As Japan's economy recovered from World War II, Japanese firms began to expand into other markets. In some

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cases, the existence of o p e n trading regimes led them to export finished goods a n d develop a market in each of them. The United States has been, f o r the Japanese, the prototype of the open trading regime where one country exports to the other. However, the case of Mexico, as of most of Latin America, was different, for the domestic industry was heavily protected and few consumer goods could be i m p o r t e d . Thus, c o u n t e r to the U.S. experience, p e n e t r a t i n g protected economies required a different strategy. Late in the 1950s and early 1960s, Japanese firms began to have a modest participation in Mexican manufacturing, primarily in automobiles (e.g., Nissan, then known as Datsun) and in electronics (e.g., Panasonic). As late arrivals, the Japanese found themselves relatively isolated in a market largely dominated by Mexican, U.S., and European firms. They also faced p r o f o u n d problems of adaptation to the norms, traditions, a n d rules—written and unwritten—of operation. O n e example of the latter is the fact that labor relations were typically much more complex, explosive, and unmanageable in Japanese-run firms than in other firms in the same area of industry, largely as a result of the clash of cultures. 3. 1975-1982: The oil era. The 1970s was a period of dramatic change in J a p a n . T h e Arab oil embargo of 1973 led a p r o f o u n d transformation of Japanese industry and, above all, of the main driving strategies of Japanese development. Up to then, trade across nations consisted largely of finished goods. In order to increase economies of scale, lower costs, and reduce energy consumption, J a p a n e s e firms inaugurated a new way to produce goods and to organize production. Plants were geared u p to manufacture much larger q u a n t i t i e s of goods, while i n c o r p o r a t i n g extraordinary flexibility into the production lines through just-in-time delivery of parts and components, production sharing across nations, and so on. By the mid-1980s, the changes introduced by Japanese firms a decade before had transformed trading patterns in the world. By 1985, more than half of all trade was no longer of finished goods, b u t of parts and components. Although Mexico was not in that market at all (because of its policy of import substitution, i.e., fostering domestic manufacturing rather than an o p e n trading regime), for both the Japanese government and for Japanese firms, Mexico had one major attraction: the recently discovered large oil reserves. J a p a n rapidly b e c a m e the second-largest oil customer of Mexico's PEMEX. Like in many other cases around the world, the Japanese began purchasing a critical raw material in Mexico and

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were willing to bargain a larger relationship in order to secure that commodity. Mexico's reluctance to liberalize its economy and actively participate in world trade, however, made it an unattractive foreign investment target. In other countries, large Japanese constituencies had made it very attractive for Japanese firms to invest there, as in Brazil, but direct investment was nonetheless low in most of Latin America. Japanese firms tended to concentrate in trade, although a few did develop an additional source of business with Mexico, albeit with mixed results. Some Japanese firms entered into joint ventures with the Mexican government as minority partners, as in the cases of NKS (steel) and PMT (oil-related equipment). In these ventures, the Japanese assumed that they would have a significant say in decisions; over the years, they realized they would have no influence on those firms' development and, also, they were appalled at the way their operations were managed, particularly what they regarded as rampant corruption. Not surprisingly, they lost interest and left those partnerships with very sour thoughts of the whole venture. Much of that experience still haunts Japanese firms today. 4. 1982-1988. The Mexican debt crisis confirmed to the Japanese what they already knew about Mexico: a closed and protected economy had no future in the modern world. The Japanese had a relatively small foreign investment presence in Mexico (about one-fifth of its investment in Brazil) and saw no reason to change that. But the decade of the 1980s was one of enormous—and contradictory—change for Japanese investors in Mexico. On the one hand, Japanese wealth became critical for Western banks in dealing with the debt crisis. Hence, even though Japanese banks accounted for about 12 percent of total debt in 1982, forced lending—largely imposed upon them by large U.S. banks, the IMF and World Bank, and the U.S. government—increased their relative position to 18 percent of total lending in 1988. Needless to say, probably not much of this additional lending was voluntary or the result of new confidence of Japanese banks in Mexico; the latter notwithstanding, it would not be plausible to say that the Japanese banks acted against their own interests in the debt financing package. The Japanese government and banks responded to U.S. pressures in order to maintain what they perceived to be their most critical political relationship. Much more important, however, was the growth of Japanese maquiladora (or in-bond) plants along the Mexican-U.S. border. These plants can import parts and components duty free to be processed or assembled in Mexico for

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reexport to the United States, where a tariff only on the value added (labor mostly) is paid. This thrust had little to do with Mexico and was essentially related to the Japanese firms' manufacturing strategy in the United States. Yet, more than fifty Japanese firms were established d u r i n g the 1980s to serve the U.S. market, typically p r o c e s s i n g various J a p a n e s e parts f o r appliances, cars, a n d electronic equipment, thus saving on labor and becoming more competitive vis-à-vis U.S. firms. Some Japanese firms used the maquiladora vehicle to avoid adding to the U.S. trade deficit with Japan, since those exports would be recorded as Mexican. Although few, if any, of the maquiladoras were conceived to supply the Mexican market, the ongoing economic reform in Mexico has altered their original goal, for now it is possible to import virtually any good into Mexico, a circumstance for which the legal regime of the maquiladoras is not the most propitious. 5. Toward the 1990s. T h e Mexican e c o n o m i c r e f o r m has radically transformed the views Japanese firms hold about Mexico. Yet, only a small n u m b e r have decided to develop a new strategy. The few that have are indicative of what may be in the offing for the next decade. In general, those Japanese firms that have decided to launch a major investment drive are doing so because of their belief that Mexico's geographic location plus labor costs, in the context of an open economy, and the potential for a rapidly growing domestic market (of more than 80 million people, more than half of which are u n d e r fifteen years of age), make it very competitive vis-à-vis other potential investment targets. The largest and most remarkable example of this new stage is the $1.2 billion investment being made by Nissan in Aguascalientes, geared to manufacturing cars for export back to Japan.

T H E GENERAL VIEW

The first approach to the economic relationship has to do with the volume and structure of trade and investment and how these have changed over time. Although the first Japanese enterprise in Mexico was established in 1938 2 and trade commenced much earlier, the late 1960s and early 1970s can accurately be termed the "infant" stage of MexicanJapanese economic relations. Direct investment was miniscule; a handful of pioneering Japanese ventures constituted less than 1 percent of total foreign direct investment (FDI) until as late as 1967 3

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(see Table 2.1). As Table 2.2 attests, this t^ny piece of the pie became progressively more industrially oriented, 4 owing primarily to new investments in the automotive and chemical industries. 5 Japanese investment has typically been much smaller, overall, than U.S. or European investment in most sectors of industry, but their patterns of investment have been similar. Table 2.1 Foreign Direct Investment in Mexico by Country of Origin, 1960-1978 Total

Percent U.S. 1960 1965 1970 1973 1976 1978

83.2 83.5 79.4 76.4 71.1 68.8

Germany U.K. 0.6 1.8 3.4 4.2 2.2 4.3

Japan Switzerland Other (million U.S.$)

5.1 3.2 3.3 4.1 7.0 5.7

0.5 0.7 0.8 1.5 3.2 3.2

1.3 1.8 2.8 3.9 3.2 4.0

1,081.3 1,744.7 2,822.2 3,622.6 3,277.9 4,743.6

9.3 9.0 10.3 9.9 13.3 14.0

Source: Banco d e México, SA., Subdirección de Investigación Económica y Bancaria, Información Económica, Sector Externo.

Table 2.2 Japanese Foreign Direct Investment by Sector, 1965-1974

Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

Total (million U.S.$) Mining 11.4 9.7 22.2 17.9 17.3 22.0 22.1 38.1 56.0 67.4

%

—

—

—

—

—

—

—

—

—

—

—

—

—

7 5.7

—

12.5 8.5

Industry 6.3 5.5 11.0 12.5 12.5 16.3 15.8 31.8 39.3 56.7

% Commercial 55.3 56.7 49.5 69.8 72.3 74.1 71.3 83.5 70.2 84.1

5.0 4.1 11.2 5.2 4.8 5.5 6.2 6.1 9.5 4.8

% 43.9 42.3 50.5 29.1 27.5 25.0 27.9 16.0 17.0 7.1

Source: Secretaría de Programación y Presupuesto, Información sobre ¡as relaciones económicas de México con el exterior.

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Like investment, trade during this period was quantitatively insignificant but remarkably changed in composition. As Mexican society grew and diversified, Japanese investors, like their U.S. and European counterparts, diversified their investments and went on to produce more sophisticated and complex goods. In 1965, unprocessed cotton accounted for 86.5 percent of Mexican export sales to Japan. By 1975, due to increased sales of salt, manganese, copper, and coffee and foodstuffs, cotton exports represented just over 50 percent of exports to Japan. 6 This diversification was generally hailed as a positive feat, though a growing trade deficit pointed out the obvious—that even a diversified basket of primary product and agricultural exports could not compete or keep pace with the high-value-added commodities traded in the reverse direction. The latter enjoyed an inherent advantage as well as 25 percent annual increase during the 1970s.7 According to Mexican government sources, this resulted in a trade deficit with Japan every year from 1970 to 1980 (comparable data for 1965-1970 are unavailable). But if we are to believe Japanese sources equally, we must accept that in 1971 both Japan and Mexico suffered trade deficits of $68.5 and $25.7 million respectively, 8 and that for 1972 both were simultaneously in the black—Mexico by $4.1 million and Japan by $51.1 million (see Tables 2.3 and 2.4). 9 Obviously there is a divergence in accounting procedures. Nonetheless, given that the Japanese statistics do admit a surplus beginning in 1975 and that official and nonofficial Mexican sources concur on trade statistics previously, the Mexican statistics are more plausible. The eventual winner of the trade balance discrepancy is not of the utmost importance, since at the time, this account represented such a minute part of the whole for both parties. Despite the fact that bilateral trade expanded by 7.3 percent annually in the 1970s,10 volume at the end of the decade was a mere $1.3 million. 11 In 1979, Mexico bought 0.82 percent of total Japanese exports and provided 0.44 percent of imports. 12 Japan purchased 3.3 percent of Mexican exports and provided 6.6 percent of total Mexican imports. 13 While Japan was relatively more important to Mexico than Mexico was to Japan, neither was a significant trade partner for the other until the 1980s. The beginning of the 1970s, however, saw the status quo destroyed. Mexico found her long-awaited trump card: vast reserves of oil, potentially second only to Saudi Arabia. Mexico's significance

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Table 2.3 Trade Balance, Mexico (million U.S.$)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1979 (Jan.-Nov.) 1980 (Jan.-Nov.)

Exports to Japan

Imports from Japan

68.8 64.1 111.2 146.5 142.4 130.9 174.2 128.8 199.5 283.5 252.9 517.5

86.0 89.9 115.4 177.8 223.6 298.4 306.3 312.5 589.8 790.2 663.5 922.8

Balance -17.1 -25.7 -31.3 -81.2 -167.5 -12.1 -183.7 -390.3 -506.7 -410.6 -405.3

Sources: Secretaría de Programación y Presupuesto, Información sobre las relaciones económicas de México con el exterior, Mexico, 1979; IMCE, Resumen de comercio exterior 1978-1979, Mexico, 1980 (mimeo); and IMCE, Resumen de comercio exterior, January-November 1979-1980, Mexico, 1981 (mimeo). Note: - indicates deficit for Mexico.

Table 2.4 Trade Balance, Japan (million U.S.$)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 (Jan-Apr.)

Exports to Mexico

Imports from Mexico

Balance

151.2 170.5 201.8 275.4 308.4 211.7 248.0 300.9 356.0 483.1 252.3

93.9 102.0 150.6 190.6 305.2 347.8 385.9 451.0 638.7 841.0 292.4

-57.3 -68.5 -51.1 -84.8 -3.1 136.1 137.8 150.1 282.7 357.8 40.1

Source:Japan Exports and Imports, Japan's Ministry of the Treasury. Note: - indicates deficit for Japan.

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to Japan instantly skyrocketed, for since the 197S Arab oil embargo, resource-dependent Japan had intensified its quest for alternative petroleum sources. In August 1979, the Japanese signed an agreement with PEMEX stipulating that 100,000 barrels per day (compared with about 400,000 for the United States) would be shipped to Japan for ten years commencing in June 1980.14 Mexico leapt from the rank of a peripheral trade partner to a major supplier of oil. The introduction of oil exports was, of course, immediately apparent in the balance of trade statistics—Mexico recorded a $62 million surplus with Japan in 1981.15 In that year, oil comprised 80 percent of Mexican sales to Japan. 1 6 The figure would hover right around that percentage until peaking at 88.3 percent in 1984 and declining to 69.7 percent by 198717 (see Table 2.A at the end of this c h a p t e r ) . The Mexican surplus with J a p a n in these years corresponds: $1,411 million in 1984, declining to $553 million in 1987 1 8 (see Table 2.B). The surplus for the 1980s rested upon a precarious base. The effect was by no means limited to trade, however. The introduction of oil into the Mexicojapan relationship had vast repercussions for investment and the financial sector as well. Loans from Japanese banks had poured into Mexico even prior to the latest discovery of oil as a result of Mexican demand and excess liquidity deriving from petrodollar deposits 19 (Table 2.5a and b). Japanese exposure was increased when Mexico's government demanded two additional credits to secure the oil agreement. The first was to be a $500 million, ten-year dollar-denominated loan to improve harbor facilities and build a floating pipeline at Salina Cruz, Oaxaca, a major oil port in the Pacific Ocean. 2 0 Seventy percent of this loan would be provided by Japan's ImportExport Bank, while twenty-two private banks would provide the r e m a i n i n g 30 percent. 2 1 The second loan was to be a yendenominated soft loan of $150 million extended by Japan's Overseas Economic Cooperation Fund (OECF) to help finance the Sicartsa steel mill project at Lazaro Cárdenas. 22 Both loans were extended at extremely favorable interest rates. Oil afforded Mexican government leverage to exact loans; otherwise Mexico would have been a less desirable client. At a time when expectations of future oil prices ran wild and the Japanese government perceived a need to secure a reliable source of crude, the Mexican government was able to obtain loans not only for it to develop the port facilities that would be necessary to export oil to Japan, but also to finance the Mexican

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Table 2.5a Direct Eximbank Loans Agreement of December 1979 Date of Agreement 12/9/66 4/28/69 2/15/71 5/25/73 5/25/73 10/17/73 12/12/73 12/24/74 12/30/74 8/7/75 12/1/75 6/18/76 6/18/76 9/29/76 9/29/76 6/8/77 8/4/78 10/31/78 11/1/78 9/19/79

Project Hydroelectricity 1 Hydroelectricity 2 Hydroelectricity 3 Las Truchas steel mill 1 General 1 Hydroelectricity 4 Nuclear energy 1 Steel Steel Port of Manzanillo Nuclear energy 2 Las Truchas steel mill 2 General 2 Nuclear energy 3-1 Nuclear energy 3-2 Hydroelectricity 5-1 Hydroelectricity 5-2 Modernization of Pacific Ocean ports General 3 Hydroelectricity 6

Mexican Amount Interest Institution (million yen) Rate NAFIN NAFIN NAFIN NAFIN NAFIN NAFIN CFE AHMSA NAFIN NAFIN CFE NAFIN NAFIN CFE CFE CFE CFE NAFIN NAFIN CFE

3,600 4,180 9,637 21,000 4,500 10,000 6,000 2,231 4,267 6,642 6,000 (90,000) 5,000 2,600 3,000 38,450 18,000

6.00 6.75 7.00 7.00 7.00 7.00 6.75 7.00 7.00 4.25 6.75 8.00 8.00 8.00 8.00 8.00 8.00

6,358 10,000 11,274

4.25 7.50 7.75

Maturity (grace period) 15(3)

15(4) 12(3) 19(4) 14(2) 14(2) 20(5) 13 1/2 16(1) 17(2) 14(4) 20(2) 5-10 5-10

Source: Based on Miguel S. Wionczek, and Miyokei Shinohara, editores. Las relaciones económicas entre México y Japón, influencia del desarrollo petrolero mexicano (México: El Colegio d e México, 1982), pp. 82-83. Note: Mexican Institutions: NAFIN — Nacional Financiera CFE — Comisión Federal de Electricidad AHMSA — Altos Hornos de México

g o v e r n m e n t ' s p e t projects, s u c h as steel. By 1982, J a p a n e s e banks w e r e o w e d 12 p e r c e n t of the M e x i c a n g o v e r n m e n t ' s $ 5 8 . 9 b i l l i o n debt. Investment was also i n f l u e n c e d by the oil discovery, t h o u g h to a lesser e x t e n t than lending. A trend toward increased investment i n m i n i n g , extracting, a n d exploration dates back to 1973. Previously,

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Table 2.5b Direct Eximbank Loans Agreement of December 1990 Date of Agreement 1/31/79 5/29/80 6/1/81 7/14/81 12/21/81 2/10/82 3/17/82 3/17/82 4/23/82 7/13/82 7/13/82 10/13/82 10/13/82 10/18/82 2/7/83 2/7/83 10/27/83 5/4/84 6/8/84 7/2/84 3/6/87 7/27/87 7/27/87 10/8/87 3/29/88 7/12/88 3/31/89 11/9/89 11/9/89 11/9/89 11/13/89 9/10/90

Mexican Institution PEMEX CFE AHMSA BANAMEX CFE NAFIN BANOBRAS BANOBRAS PEMEX SICARTSA SICARTSA NAFIN NAFIN NAFIN NAFIN NAFIN NAFIN NAFIN NAFIN BANCOMEXT PEMEX SICARTSA SICARTSA BANCOMEXT BANAMEX BANCOMEXT TELEMEX NAFIN NAFIN BANCOMEXT MEXICO NAFIN

Amount (million yen) 25,000 50,000 3,350 2,000 100,000 2,510 12,804 12,804 25,000 36,037 35,858 5,885 5,885 2,582 2,448 1,872 5,868 7,000 11,000 11,000 100,000 22,198 29,802 48,000 3,000 8,000 31,500 48,000 48,000 48,000 180,000 51,789

Interest Rate

Untied Untied" Untied' Untied' Untied'

Source: Yukinori Ito, "Opportunities for Trilateral Cooperation," Eximbank ofJapan, 1991. Notes: a. Industrial Sector Policy Loan. b. Public Enterprise Reform Loan. c. Financial Sector Adjustment Loan. d. International Monetary Fund cofinancing.

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the Japanese had invested only an insignificant proportion of their capital in this area (Table 2.6). Direct investment by the Japanese had been generally low, probably largely as a result of their perception of a poor investment climate and economic conditions in Mexico (see Table 2 B at the end of this chapter).

Table 2.6 Value ofJapanese Investment in Mexico by Sector (thousand U.S.$) Mining

_ 1972 1973 6,995 1974 5,700 1975 3,336 1976 2,277 1977 7,856 1978 11,336

%

Industry

_ 31,849 12.5 39,325 8.5 56,713 3.6 80,372 2.1 35,727 7.3 98,763 7.5 135,121

%

83.7 70.2 81.1 87.2 90.3 91.0 89.5

Commerce % Transport %

6,059 9,551 4,807 8,392 7,572 1,891 5,123

15.9 17.0 7.1 9.1 7.1 1.7 3.0

46 46 46 46 29 26 26

Total

0.1 38,049 — 56,026 — 67,411 — 92,190 — 105,950 — 10,862 — 150,957

%

100 100 100 100 100 100 100

Source: Banco de México, S.A., Subdirección de Investigación Económica y Bancaria, Información Económica. Sector Externo.

Mexico had enacted in 1973 the Law to Promote Mexican Investment and Regulate Foreign Investment. The law was contrived by the Echeverría administration to deter and control FDI, which it blamed for many of Mexico's economic woes.23 Article 4 identified petroleum, basic petrochemicals, and certain types of mining as economic and industrial activities reserved for the state.24 Article 5 of that law specified that foreign capital participation in Mexico may not exceed 49 percent and is limited to 34 percent in mining and 40 percent in secondary petrochemicals and automobile components. 25 Largely because of Article 5, new Japanese investment in the following years was a paltry $5.4 million (see Table 2 A at the end of this chapter). Echeverría appeared victorious, as 1975 saw only a cautious recovery of foreign investment and 1976 witnessed another drop due to crisis in the economy (i.e., inflation near 20 percent, accelerating capital flight, and the overdue devaluation of the peso). 2 6 The dearth of foreign investment was short-lived, however, and as Mexico recovered so did investment; modest sums of

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Japanese capital soon began to claim a larger piece of the pie. By 1979, the Japanese had graduated to fourth position among Mexico's contributors of FDI (after the United States, the United Kingdom, and Germany), providing 5.3 percent. 27 Expanding Japanese investment was soon checked, however, by the collapse of the Mexican economy in 1982 (see Table 2.7). Persistent deficit financing had lead to the doubling of the external debt in the previous year. This, combined with inflation up to 100 percent and negative rates of growth, lead to drastic measures such as Lopez Portillo's expropriation of the domestic private banks and a default on the country's debt, both in 1982.28 Consequently, new Japanese investment during de la Madrid's first year (1983) was $3.8 million—the same as it had been in 1961. 29 Though austerity programs looked promising, the Japanese—like most foreign investors—remained extremely cautious until the mid-1980s.

Table 2.7 Japanese Investment in Mexico (thousand U.S.$)

Year 1983 1984 1985 1986 1987 1988 1989 1990

Accumulated Japanese FDI Accumulated FDI 11,470.1 12,899.9 14,628.9 17,053.1 20,930.3 24,087.4 26,587.1 30,309.5

780.4 816.0 895.3 1,037.5 1,170.3 1,319.1

Share

(%) 6.8 6.3 6.1 6.1 5.6 5.5

Total New Japanese Total Investment New Investment 683.7 1,442.2 1,871.0 2,424.2 3,877.2 3,157.1 2,499.7 3,722.4

3.8 35.7 79.3 142.2 132.8 148.8

Share

(%) 0.6 2.5 4.6 5.9 3.4 4.7

Source: Secretaría Ej ecutiva de la Comisión Nacional de Inversiones Extranjeras y los Inscritos en el Registro Nacional de Inversión Extranjera. Dirección General de Inversiones Extranjeras, SECOFI. Note: FDI = Foreign direct investment.

While investors disappeared in the immediate postcrisis era, Japanese banks could not escape increasing involvement. At the IMF's ultimatum and their own government's behest, twenty-eight Japanese banks increased their exposure to Mexican debt in 1982-

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1983. 30 Disappointing results lead to the formulation of the Baker Plan of 1985, which again required Japanese and other banks to provide new money to stimulate Latin America's growth. 3 1 According to some analysts, at this time Japanese banks were among the most cooperative creditors, remaining in the rescheduling process while others dropped out and committing themselves first to new loans. 32 Enthusiasm waned, however, as the process lengthened and even more was expected. Unlike their U.S. or European counterparts, Japanese banks were not allowed tax breaks for increased exposure to Third World debt. This became an issue during the fourth round of Latin American debt negotiations, as Japanese banks struggled with their own Ministry of Finance and Tax Bureau for a compromise. The issue was resolved by the formation of a factoring company (that funds operations by discounting paper) in the Cayman Islands, and the banks' cooperation was once again assured for the Brady Plan, announced in December 1988. By this time, Japanese banks' share of Mexico's foreign commercial debt had increased to 18 percent—or $16 billion.33 Thus, we arrive at the present stage of Mexican-Japanese economic relations—a stage undoubtedly still in progress but nonetheless evidencing dynamic and encouraging changes. The most promising has been the recovery of FDI: new Japanese investments during the period 1985-1990 nearly equaled those of the previous ten years. Japan's Ministry of Finance estimates that accumulated Japanese investment in Mexico totaled $1,849 million to June 1990.34 This 5.2 percent of total FDI establishes Japan as the third major source behind the United States and Germany. 35 Regarding the nature and strategy of the Japanese investment in Mexico, myths and half-truths have come to abound. Foremost among them is the contention that Japanese investment consists mainly of maquiladoras. As the premier misconception, it merits closer inspection. As of 1988, there were 164 firms with Japanese participation in Mexico (out of more than 2 million total and about 1,300 with foreign equity). Of these, fifty-eight were registered maquiladoras (out of a total of 2,033). These numbers, however, neglect to relate the amount of investment and thereby exaggerate the presence of the in-bond firms. One characteristic of Japanese investment in Mexico is that the bulk of it is concentrated within a very few firms. Nissan, for example, comprises 54.8 percent of all Japanese investment in Mexico. 3 6 As the remaining 163 firms must together comprise no

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more than 55.2 percent, it is highly unlikely that fifty-eight maquiladoras would command a large percentage of Japanese capital invested in Mexico. In fact, although maquiladora operations comprise 34 percent of Japanese firms in Mexico, they account for only about 14 percent of total Japanese FDI.37 Virtually all Japanese exports from Mexico (mostly from maquiladora plants) are directed to the United States, though the new Nissan plant was originally conceived to export mostly back to Japan. At present, therefore, Japan cannot be criticized for using Mexico as an export platform only. This is not to assert, however, that such a strategy will never prevail. Japanese maquiladora activity did, in fact, triple between December 1987 and mid-1989, though— as stated—it continues to comprise only a small portion of investment. Moreover, since 91 percent of Japanese investment in Mexico 38 is concentrated in eleven firms (see Table 2.8), it would be more productive to analyze those big nonmaquiladora firms rather than to concentrate on the multitude of tiny maquiladoras that set up each year, typically with very little capital and only a fraction of the market of the large firms. Consistent with earlier trends, Japanese investment continues to be concentrated in manufacturing, and as Table 2.9 relates, the sector gained fourteen new firms in 1986-1988 to comprise 61 percent of total investment in the latter year. Electronics firms especially proliferated, as did automobile-related ventures. Services

Table 2.8 Top Eleven Japanese Firms in Mexico 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Nissan Honda de México Hotel Nikko Dina Komatsu Fementaciones Mexicanas Video Tec de México Exportadora de Sal Axa Yazaki Matsushita Industrial de Baja California Shizuki Electrónica Panasonic de México

Source: Based 011 Antonio Ocarranza Fernández, "Las relaciones financieras entre Japón y México en los ochenta: Deuda e inversión," Comercio Exterior, June 1990, p. 505.

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Table 2.9 Sectoral Distribution of Firms with Japanese Investment in Mexico

Sector Mining Industry Commerce Services Total

1986 Number of Firms 4 86 22 30 142

Share

(%) 2.82 60.56 15.49 21.13 100.00

1988 Number of Firms 2 100 23 39 164

Share

(%) 1.21 61.00 14.01 23.78 100.00

Source: Dirección General de Inversiones Extranjeras, SECOFI.

comprise the second largest block (24 percent), followed by commercial activities (14 percent) and mining (1.2 percent). This pattern of evolution and diversification is totally coincident with the development of the Mexican economy at large and with other foreign investors, and—with the exception of maquiladora plants— was solely directed to the domestic market. Finally, one more characteristic of recent Japanese investment deserves mention. New Japanese ventures in Mexico tend to be established with a greater percentage of Japanese capital control than in the past. This is especially true in the electronics industry. For example, in 1986, eight of twenty-three electronics operations (34.8 percent) had at least 49.01 percent Japanese capital. 39 By 1988, eighteen of thirty-one (58.1 percent) had majority Japanese participation. 4 0 This change is directly related to the process of liberalization and deregulation that the Mexican economy has been experiencing since 1985. Although a North American Free Trade Agreement (NAFTA) could further alter this trend, so far there has been virtually no new Japanese investment that is explicitly related to a radically different trading environment in the region. The fact that a NAFTA could become a reality, however, suggests that the past will have very little to do with decisions that are made today or in the future. As Mexico consolidates its own economic reform and becomes a fullfledged member of the North American economic zone that Canada and the United States have created, Japanese firms will radically alter their perceptions of Mexico. This can already be seen,

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incipiently, in the Nissan investment, which is discussed in the following section.

CHANGES IN JAPANESE PERCEPTIONS OF MEXICO There is a clear and direct linkage between government policy in Mexico and Japanese firms' decisions about investment in Mexico. The statistical evidence indicates that there is a significant change in trade and investment patterns, suggesting that a new stage in this relationship may be about to develop. Whether Japanese firms' decisions are related to, or are influenced by, the Japanese government is impossible to tell. They do, clearly, respond to policy decisions and actions in Mexico. Undoubtedly, Japanese banks have borne an extraordinary—and disproportionate—share of the costs of debt rescheduling, and that may be the result more of Japan's government prodding to satisfy the United States than of voluntary decisions by Japanese banks. But investment decisions such as Nissan's, although within the scope of the maquiladora regulations, would have been unthinkable in the absence of import liberalization. The Nissan decision to invest in Mexico, for example, would not have been possible without the economic reform that the Mexican government has been developing. But its rationale has to do with Nissan's own global strategy. Nissan is the only Japanese automaker with presence in Mexico. The company knows the country well and, despite earlier labor conflicts, has become extraordinarily successful in the domestic market. In its global strategy, it lags behind its foremost competitor, Toyota, particularly in the U.S. market. Nissan probably sees Mexico as a competitive export base to both the United States and Japan and is more confident about investing in Mexico, where it is much more familiar with procedures, government policy, and so on, than in any other Latin American country. Everything seems to indicate that Nissan's original rationale for its new plant had less to do with the U.S. market than with the global arena at large. But as NAFTA has become a major feature in Mexican policy, Nissan has modified its strategy to take advantage of this unique development. Today, Nissan is undoubtedly creating a fact that NAFTA negotiations will have to consider as such: the Nissan plant will be in operation before NAFTA is implemented and thus will have to be part of the deal, whether U.S. automakers like it or not.

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The figures indicate that Japanese decisionmaking about investment has been highly rational. Interpreting the figures, however, is a complex business. In spite of the fact that the general trend appears to be fairly clear, each Japanese firm that was interviewed offered a different rationale for its own behavior and evidenced fundamentally different criteria in specific decisions. Some companies are interested in particular resources, while others follow their conglomerate's thrust. One auto parts company, for instance, had made the conscious decision not to increase their operations in Mexico until the permanence of the economic reform had been proven. Three months after that decision was made, however, Nissan—the conglomerate's head company—decided to establish its new plant in Aguascalientes. The auto parts supplier immediately reversed its previous decision and followed Nissan. For most Japanese firms, the maquiladora plants are not part of their Mexico-related decisions, but of their U.S. market and political strategy. Most of them have seen the maquiladoras as a temporary stopgap measure because of growing anti-Japanese feelings in the United States, but know such a course would become unsustainable in the context of a free trade agreement, where rules of origin would effectively marginalize them. Rules of origin would exclude from the benefits of the agreement (duty-free access) all companies that did not comply; to the extent that Japanese maquiladoras typically assemble Japanese parts and components, they will clearly be incapable of competing in price with U.S. companies that assemble mostly U.S. components. All the companies that were interviewed claim that a United States-Mexico free trade agreement would radically alter Mexico's place in their development and investment plans, because the size of the market would become much bigger, but particularly because Mexico would have privileged access to the U.S. market. They, however, are skeptical about what a NAFTA would mean for them, for they perceive that the United States will do everything possible to avoid giving Japanese direct or indirect exporters (as opposed to Japanese firms' "truly-Mexican" products, i.e., rules of origin) privileged access through Mexico. But not all of them have a clear idea of what they would (or could) do as a result of a NAFTA, or whether Mexico would be more attractive in itself or only because of its privileged access to the U.S. market. There is still too little certain in NAFTA for Japanese firms to react with anything other than concern for further protectionism. Mexico is perceived by Japanese firms and government in terms of the triangle Japan-United States-Mexico. Mexico is not seen in an

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independent context, but rather as a component of a global view of the world. The latter notwithstanding, the Japanese government's view is clearly distinct from the average Japanese firm. Ministry of Trade and Industry (MITI) officials see Mexico's economic reform as crucial for the region's stability as well as in terms of the example it sets for the rest of the underdeveloped world. As they see it, to the extent that Mexico succeeds, other countries would follow suit, enhancing the world's economic potential. From this point of view, the Japanese government has a clear long-term vision of Mexico that does not seem apparent in any private sector firm in Japan.

MEXICAN PERCEPTIONS OF JAPAN It is difficult to pinpoint what Mexicans think of Japan and the Japanese because there is and has been very litde actual contact between the two societies. Japan nonetheless is seen very favorably by most Mexicans, 20 percent of whom have repeatedly said in polls that they would like Mexico to be like Japan. There are two general impressions that Mexicans hold about Japan and one very specific one held by some Mexicans who have had to deal with Japan and Japanese firms. First of all, Mexicans at large are extraordinarily impressed by the Japanese's economic success and look up to Japan as an example of what Mexico should do. In the 1970s, when Mexico discovered vast oil resources, for instance, many foreign observes (rightly) criticized the Mexican government for the misuse of resources and for the array of (white elephant) investment projects that were being conceived, such as ports, highways, steel mills, and so on. Though the criticism was well founded, as later events proved, the interesting thing was how the then president of Mexico responded: Mexico wanted to be like Japan and not like Saudi Arabia and, therefore, all that investment was necessary to build a strong industrial base. This anecdote exemplifies the positive perception most Mexicans have about Japan and the Japanese. The second view that tended to pervade the Mexican policy community for many years was the idea that Mexico's future lay not in the North American region (i.e., close to the United States), but in the Pacific Basin, where, of course, Japan is a major player. What was little understood at the time, when Mexico was undergoing a profound economic crisis (1982 in particular) and no economic reform was yet in sight, was that the United States was (and is) the

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largest player in the Pacific Basin and that, therefore, the Pacific region was not an alternative, but a complementary perspective to closer ties with the United States. The myth about the Pacific Basin, however, shows two sides of Mexicans' historical memory: a profound desire to diversify the country's relationship relative to the United States and an appreciation for the Japanese's economic success. T h e g e n e r a l p e r c e p t i o n of Mexicans about J a p a n is extraordinarily positive largely because there has been so little contact. Mexico still imports very few Japanese goods, and these are n o t associated (at least not yet) with plant closures or unemployment. Also, there is still too little Japanese investment to make a fundamental difference in perceptions. Those Mexicans who have a very clear and direct perception of the Japanese are much less positive about Japan, perceiving the Japanese as inflexible and self-righteous. This perception stems largely from actual dealings with Japanese firms and the Japanese government in matters of trade and, particularly, in j o i n t ventures. T h e affected population, however, is too small to make any noticeable difference.

STRATEGIC APPROACH

For Japanese firms, the 1980s was a decade of reassessment of their interest in Mexico. Though maturing, this stage does not appear to have reached a definite conclusion. In the 1950s and 1960s, Japanese firms had been followers and not market leaders. They had gone to Mexico for the same reasons big U.S. companies had gone—to develop a market through import substitution—but they had arrived late and had decided to invest largely because the others had done so. During the 1970s, the Japanese were too concerned with their own survival in an era of high energy prices and had no strategy visà-vis Mexico other than, in the late 1970s,41 to secure oil deliveries. All the investment that took place during those years followed a historical trend of ups and downs in new investments, but the general thrust was a declining one: there was no definitive trend in Japanese new interest in Mexico; rather, firms invested as they found opportunities in the Mexican market, but overall interest was low. For most Japanese firms, it made little sense to continue investing exclusively for the Mexican domestic market, both because of its relatively small size (in a world that was rapidly becoming

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"global" for trade and manufacturing purposes) and because of the ups and downs that the Mexican economy began to experience during the 1970s, after decades of stability. Their conception about the United States was not fundamentally different, but their actions were. Though often irrational in industrial terms, many Japanese firms decided to invest in the United States for political reasons during that period; it was important to be seen as creating jobs, not just stealing them away from Detroit. As it pertains to Mexico, for the reasons stated before, the Japanese saw the Mexican market as irrelevant in size, therefore warranting no "polidcal considerations." Japanese firms were changing dramatically in the way they produced (after the 1973 oil shock); they conceived Mexico's inward-looking policies as inappropriate for attaining high levels of growth and thus found no reason to further invest. In fact, most Japanese investments in the late 1970s were related to oil, and most (if not all) were induced by the Japanese government. Once it began to liberalize its economy in the mid-1980s, Mexico again became interesting to the Japanese. The debt restructuring that took place during the 1980s soured the perceptions of many Japanese banks about Mexico, for they were forced to increase their exposure more than any other. The fact that Japanese banks are closely intertwined with their industrial firms led to a much cooler reception by Japanese firms of the Mexican economic reform. Though logical, this reaction has led to a much lower rate of recovery of Japanese investment rates when compared with their European and U.S. counterparts. While total foreign investment has been increasing by an average of $2.5 billion per year since 1985, Japanese investment remained virtually flat until 1990. The Japanese banks were the hardest hit by the debt agreements because many of them were not only compelled to write off as much as 35 percent of their assets, but were also forced to make additional loans—not a promising way to build confidence. And, as a result, the banks' industrial allies have been among the most conservative and reluctant potential foreign investors. Nissan's investments, however, may change that. In fact, Nissan's investment would represent 75 percent of all Japanese direct investment in Mexico by the end of 1991; what they do will obviously matter much more than the 150 other little Japanese firms with presence in Mexico. This fact notwithstanding, as a global competitor in the auto industry, Nissan is following the logic of a global firm that is behind its foremost rival in the international arena, Toyota. It is not at all clear how the Aguascalientes plant fits the Nissan strategy.

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Some Japanese observers believe the Nissan strategy has been changing as Mexico's policies have changed, the investment becoming ever more relevant to the firm's global strategy as time goes by. The original Nissan conception fitted their traditional Southeast Asian strategy, i.e., production sharing, where part of their production would be located in Mexico, typically the more labor-intensive parts of it, and Japanese components and parts would be used. In this context, Mexico would have duplicated in North America the role that Indonesia, Thailand, or Malaysia play for Japanese firms in Asia. In the context of a NAFTA, however, the new plant could be a major component of a new, North American strategy. This could well imply integrated production across the United States-CanadaMexico borders for the region only. In fact, Mexico has rapidly become one of the largest manufacturers of cars and auto parts and components in the world, relative to its GDP. Most recent investments follow a North American strategy, in the sense that they conceive the region as a whole rather than as three individual and independent nations. U.S. and European firms have become very active in this process and it is only natural that Nissan, which has long been in Mexico, would pursue a similar strategy. Once the NAFTA is in place, the process will most likely accelerate and, most probably, those already in the region will be grandfathered, a circumstance that further explains the rush to invest by firms such as Nissan and Mercedes-Benz. Japanese firms have responded to Mexico's economic reform with caution, but with much interest. Though most of their investment decisions in Mexico since 1985 have been related to U.S. tax and customs laws and regulations (i.e., maquiladoras), more recent discussions within Japanese companies about f u t u r e investments appear to be directly related to those reforms. Everything seems to indicate that a NAFTA would constitute a dramatic break with the past. T h e r e ' s no doubt that each Japanese company makes independent decisions in matters of investment. The Japanese government apparently did wage much pressure upon its banks to support (i.e., subsidize) the Brady Plan for debt relief under the guise of national security considerations (i.e., relations with the United States). Investment decisions, however, seem to follow a pattern that is not unlike their counterparts in Europe or the United States. Japanese firms claim they have invested in Mexico as a result of one or more of the following strategic considerations: (a) they had a need for a natural resource available in Mexico or found an

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attractive market for their goods; (b) their global competitors— typically U.S. or European—were already in Mexico or planning to develop a market there; a n d / o r (c) other Japanese firms were entering the Mexican market and, either because they were part of the same conglomerate or because they were competitors, decided to j o i n in. None of these considerations could be constructed as alien to U.S. or European firms' decisionmaking processes, and none shows exceptional wisdom or vision. In fact, the third reason sounds much more like herd instinct than strategic planning and is also nothing exceptional for Western firms. In any event, most, if not all, investment decisions that were analyzed could be explained by individual, unrelated decisions. Still, the strategic approach taken by most Japanese firms has followed a similar pattern over the years, at least as it relates to Mexico. The same, of course, could be said about U.S. or European firms; but the Japanese patterns do appear to be distinct, in some fundamental ways. Some Japanese government analysts speculate that the uniqueness of the Japanese approach is a consequence of the Japanese being latecomers into most markets. They then had to work harder to develop a deeper strategic conception, the argument goes, to have a chance to succeed. This type of argument goes too far; but many Japanese firms do in fact appear to hold a clear strategic vision that outranks many, if not most, Western firms. T h e overriding strategy that all but one of the companies that were interviewed subscribe to contemplates the world as integrated by three critical markets—Europe, North America, and Japan—each with the market equivalent of a sphere of influence. Some countries within (and even outside) a sphere of influence may be relevant on their own because they are actual or potential attractive markets (e.g., India and Brazil), because they have valuable resources (e.g., Saudi Arabia), a n d / o r because their cost of labor is low (e.g., Malaysia and Haiti). In this context, from the Japanese vantage point, Mexico is a little bit of all of the above: it is a potentially large market, a resource-rich country, and, for some time now, a lowwage export base. Plus, it is next to the United States and may soon enjoy privileged market access. A few Japanese companies have investments in the extraction of raw materials, mostly mining, but the largest representation of Japanese firms in Mexico today is in manufacturing. Even in the case of maquiladoras, the trend is toward capital-intensive operations in an industry segment with rapidly growing salaries. Something that distinguishes the Japanese firms from Western

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entities is that they appear to have a global view of markets and that most Japanese firms, while holding their own views, seem to share that very basic trait. In other words, Japanese firms seldom look (for investment opportunities) at countries outside the three market centers, and everything they do appears to be anchored in that triad conception. If this is in fact the case, it would constitute a major difference between most U.S. and Japanese firms.42 In the case of Mexico, Japanese firms perceive the maquiladoras to be a useful political tool to reduce Japan bashing in the United States, but they realize labor costs tend to increase much faster in these types of industries. Hence, their interest appears to be to guarantee market access rather than to exploit cheap labor only. The Japanese realize, and have seen in Asia, that salaries in maquiladora-type operations tend to increase rapidly as the country where they are located becomes more competitive and that, therefore, a low-wage strategy is shortsighted. In this, too, Japanese firms do seem to be playing one step ahead of U.S. and European firms, which usually see the maquiladora industry as a low-wage advantage only. From the point of view of the Japanese, however, Mexico still presents two big drawbacks. First and foremost is the pervasive belief within many of its firms that a NAFTA will be specifically designed to keep Japanese firms out and, furthermore, that the main reason such an agreement is being sought, from a regional point of view, is to enhance the U.S. and Canadian companies' competitiveness to "beat" the Japanese firms. A second reason Mexico appears to be less attractive to the Japanese is that they doubt the long-term viability of the economic reform. In their view, previous experience, mostly the 1970s, shows the Mexican government to be unreliable. Many Japanese firms share a similar (and negative) perception of the Mexican government. But their perceptions of Mexico and of its industrial potential vary a great deal. These have largely been shaped by their encounters with Mexican firms—whether as partners in joint ventures, as customers, as suppliers, or as competitors. Thus, while their views about the government in general and government-owned firms in particular tend to be similar and very negative, their views about Mexican private firms and of Mexico's industry vary widely and are generally much more positive. A Japanese partner of one of the big Monterrey conglomerates, for example, has blind faith in their Mexican partner's ability to work and compete globally; a member of the same J a p a n e s e conglomerate has nothing but scorn for his firm's partnership with the Mexican government. These are two unrelated examples of how

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past experience still haunts many Japanese firms and has hindered many from viewing Mexico in the light of a potential NAFTA. A few examples of this nature can convince even the most skeptical that there is no such thing as a "Japanese strategy"; rather, it is a matter of a lot of individual firm strategies, many of which share similar premises. However, after listening to Japanese private sector leaders, one wonders whether very influential Japanese business gurus on globalization, triads, and a borderless world (such as Kenichi Ohmae) do not have more bearing on the shaping of these premises than MITI or the Japanese government at large.

CONCLUSION

Japanese firms clearly do not look at Latin America as a single unit, though they do have a clear concept of where the region fits in their overall strategy. Japanese firms have a long history of economic relations with several Latin American countries and have a large stake in several of them, relative to total investment and to the size of each one of those economies. In absolute numbers, Brazil historically has been the largest recipient of Japanese investment in the region and Japan's largest trading partner in Latin America. In relative numbers, however, Japanese investment is unrivaled in Peru and is very significant in Chile. In both Peru and Brazil, large Japanese communities are one reason investment is very important, though it is significant in dollar terms in Brazil only. Despite its long history as a trading partner, Mexico does not enjoy such a privileged economic relationship, but it does appear to be up and coming as a potential future major player in Japanese interests. A hardheaded analysis of Japan's presence in, and trade with, Mexico reveals that these are largely concentrated in two very specific areas: oil exports to Japan and maquiladoras on the U.S.Mexican border. Though very active in the financial arena for exceptional reasons (the Brady Plan), Japanese banks have been very passive bankers in their relationship with Mexico, particularly in private sector lending. For reasons discussed before, their very significant financial assets in the country are totally unrelated to their financial or business strategy. Nissan's recent investment may be either an exception to this pattern or the beginning of a new one, for it breaks all previous examples, traditions, and Japanese patterns of investment. While the odds are that Nissan's decision to virtually double 43 all

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previous accumulated Japanese investment in Mexico will signal a change in strategy by Japanese firms in Mexico, all the interviews that were conducted indicate that, at least until today, Mexico is not seen as a significant player in the Japanese firms' global strategies. They do not have a particular strategy regarding Mexico and, where they do—in the maquiladoras—their plans are part of their U.S., not Mexican, strategy. One Japanese government official indicated that the maquiladoras "happen to be located in Mexico" only. Up to now, Mexico itself (maquiladoras aside) has been seen as a trading partner, maybe an important one because of its oil. The last decade appears to have convinced many Japanese that Latin Americans lack the ability to face up to their problems. As such, the Japanese have confirmed their overall premises of a triad (the three industrial power blocs and market centers of the world), 44 in which Latin Americans play but a marginal role. Mexico constitutes an odd case because its economic reform threatens to undo the Japanese's general and well-accepted view of the region. But, in general, they do not have much more than doubts about where Mexico is going at this stage. The proposed North American Free Trade Area poses both a threat and an opportunity for Japan's firms. Mexico would suddenly become an important player in the eyes of the Japanese, but, by the same token, they may find themselves barred for all practical purposes from the region. Some Japanese perceive that a NAFTA would open a unique market opportunity for them (free access to the United States and Canada) but would also undo the advantages enjoyed through their maquiladora operations (because of rules of origin that will make them uncompetitive vis-à-vis U.S. and Canadian firms). At this point, however, all they have are speculations. This dilemma has led many Japanese to think of alternative strategies for the eventual launching of a NAFTA. But their preferred óptions—at this speculative stage—vary widely. Some believe they have to abandon the maquiladora concept, at least as it relates to Mexico. Others, the majority of those interviewed, are taking their cue from companies such as Nissan and IBM: Why not develop Mexican suppliers so that they can qualify under the rules of origin that end up being incorporated into the NAFTA? In other words, the purpose of having rules of origin is precisely that a large part of the production takes place in the region. To the extent that a company imports most parts and components, it cannot comply with relatively high rules of origin, which in the U.S.-Canadian FTA require 50 percent local content. Nissan, IBM, and other firms have

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created programs aimed at developing local high-quality suppliers to be able to comply with rules of origin without sacrificing quality, cost advantage, or timeliness. These firms thus perceive the potential opportunity of developing Mexican suppliers to replace the Japanese parts and components that are currently used in their maquiladora operations. This, of course, is also the preferred view of Mexican government officials, who see in this the opportunity to attract billions of dollars in new investment without altering the likely rules that would govern the NAFTA. But many Japanese perceive that the NAFTA is more than anything else an attempt to put together the resources, entrepreneurship, technology, and low wages of the region to compete against the production and the market strategy that they have painstakingly assembled over the last fifteen years in Southeast Asia. From their point of view, the NAFTA may prove to be the most successful competitive barrier to the entry of Japanese goods into the North American region—all of that without imposing restrictions, voluntary or otherwise. Furthermore, Japanese firms are concerned that they may be faced with the same problem they are experiencing in Europe: When is a British car a British car for European (e.g., French) purposes, if the manufacturer happens to be Japanese? In the light of these considerations, the Nissan investment may be seen—politically at least—as much more than it appears at first sight. Should the trade negotiations succeed, Nissan will have as much legitimate claim to be a "Mexican" firm as will any of the big Detroit automakers located in Mexico, in the context of the NAFTA. It will also be in a position to test the viability of the Mexicansuppliers strategy before it can conclude whether the NAFTA has been tailored to fend them off—and whether, if so, the fence can be bridged. From this perspective, Nissan may in fact be the test case the Japanese are looking for. T h e Nissan plant was conceived and designed long before a NAFTA was on the agenda. As such, its strategic importance may have changed over the years. It has obviously always been part of the Nissan global strategy and has to do with how its competitors are b e h a v i n g , b u t a NAFTA may c o n f e r u p o n t h e m as m u c h competitiveness and market access to the United States as a so-called transplant (Japanese auto plant located in the United States) at much lower costs. From this point of view, Nissan may end up being much more competitive in the United States than its Japanese rivals because of its investment in Mexico. Therefore, their stakes in the NAFTA negotiations are extraordinary—not only to test the rules of

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origin regulations and the hypothesis that NAFTA will exclude Japanese companies only, but also to successfully compete head-on with other Japanese firms in the U.S. market. Many other Japanese firms are said to be wondering whether they should be involved in one way or another in Mexico today—to have a stake in time for the NAFTA, much like U.S. firms are doing in Europe in 1992. No actual evidence of this was found through the interviews, except for a passing remark made by a MITI official. In fact, if it were true, then Mexico would have already changed in the view of those companies. The one remaining piece of the Japanese strategic puzzle has to do with firms being privatized in Mexico. Will the Japanese attempt to buy into some of the remaining firms being privatized in order to have a stake before the NAFTA? So far, the Japanese have been conspicuous by their absence, and the longer they take, the less relevant their options. In fact, other than the steel complexes and the banks (where, at least until now, foreign participation is limited to 30 percent), there are not many more companies that could constitute a credible stake. One possible explanation for their absence is that their views of Mexico are still related to the past and thus warrant no new action. In conclusion, the Japanese strategic vision of Mexico has been shaped by Japan's global view of the world, in which Mexico is not a relevant player. Though there is evidence that Japan's perception of Mexico is changing, the complexities posed by the proposed NAFTA have not led to a clear-cut definition of a Japanese strategy that is discernible and that can be attributed to several firms. Everything seems to indicate, however, that the past may not be very useful to predict Japanese firms' behavior in Mexico in the future. There has been so much change in Mexico, and there is so much that the Japanese are beginning to look into in Mexico, that it is impossible to say what exactly they will do. There is little doubt that, to the extent that Mexico remains a lonely reformer among Latin American nations, Mexico will become a much more important location for Japanese investment in the future. The Japanese are beginning to realize that their previous assessments and experiences in and about Mexico—good and bad—are becoming less and less relevant for their current and future decisions; but at present, very few decisions about direct investment are being made. The Japanese view of Mexico is in flux; they have adopted a policy of "wait and see."

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Table 2 A Mexico-OECD Trade, 1980-1987 (million U.S.$) Trade with OECD World Total

OECD U.S. Canada Japan Europe France U.K.

1980 Balance Exports Non-oil Oil Imports

-2,963 -1,885 -818 15,570 13,296 10,072 5,168 3,942 2,886 10,042 9,354 7,186 18,533 15,181 10,890

1981 Balance Exports Non-oil Oil Imports

-3,342 19,646 5,072 14,574 22,988

Spain

-204 117 66 51 321

-228 671 262 409 899

-594 2,426 718 1,708 3,020

94 567 77 490 473

-325 43 43 368

922 1,238 88 1,150 316

-3,020 3,282 16,224 10,716 3,968 3,149 12,256 7,567 19,244 13,988

256 661 104 557 405

62 1,157 234 923 1,095

-7 3,674 465 3,209 3,681

366 900 16 884 534

-148 242 33 209 390

1,492 1,921 14 1,907 429

1982 Balance Exports Non-oil Oil Imports

6,710 5,740 2,941 21,214 17,804 11,129 4,736 4,482 3,269 16,478 13,322 7,860 14,504 12,062 8,188

293 584 83 501 291

673 1,450 300 1,150 777

1,871 4,626 566 4,060 2,755

613 931 33 898 318

660 913 37 876 253

1,479 1,815 26 1,789 336

1983 Balance Exports Non-oil Oil Imports

14,200 12,284 8,076 21,819 19,182 13,034 5,654 5,031 4,079 16,165 14,151 8,955 7,619 6,898 4,958

261 467 83 384 206

1,192 1,512 247 1,265 320

2,767 4,160 713 3,447 1,393

505 832 37 795 327

761 916 113 803 155

1,465 1,617 12 1,605 152

1984 Balance Exports Non-oil Oil Imports

13,135 12,208 7,690 24,407 21,084 14,130 7,941 6,371 5,533 16,466 14,713 8,597 11,257 8,876 6,440

288 495 67 428 207

1,411 1,868 219 1,649 457

2,877 4,577 540 4,037 1,700

698 928 27 901 230

829 1,020 39 981 191

1,524 1,703 37 1,666 179

1985 Balance Exports Non-oil Oil Imports

8,665 22,108 7,341 14,767 13,443

7,472 4,387 19,577 13,341 6,405 5,569 13,172 7,772 12,105 8,954

158 393 106 287 235

986 1,709 248 1,461 723

2,033 4,113 763 3,350 2,080

541 816 13 803 275

394 678 66 612 284

1,486 1,700 30 1,670 214

—

(continues)

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Table 2 A (continued) Trade with OECD World Total

OECD Canada Japan Europe France

U.S.

U.K.

Spain

1986 Balance Exports Non-oil Oil Imports

3,917 3,282 2,891 16,237 14,741 11,163 10,104 9,077 7,593 6,133 5,664 3,570 12,320 11,459 8,272

75 302 54 248 227

294 1,065 272 793 771

45 2,184 812 1,372 2,139

142 382 125 257 240

-43 174 74 100 217

601 791 30 761 190

8,433 7,331 5,448 20,656 18,877 13,326 12,026 11,780 9,814 8,630 7,097 3,512 12,623 11,546 7,878

488 886 886 na 398

553 1,348 413 935 795

842 3,317 667 2,650 2,475

259 612 na na 353

34 361 na na 327

1,130 1,306 204 1,102 176

1987 Balance Exports Non-oil Oil Imports

Sources: Banco de Mexico, Informe Anual, Mexico City (various years); Banco Nacional de Comercio Exterior, ComercioExterior (various issues) ; SECOFI, Mexico en elComercio Internacional, Mexico City, 1990.

Table 2 B Evolution o f j a p a n e s e Investment in Mexico (million U.S.$)

Year 1951-1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Accumulated Investment 65.4 7.08 100.3 106.3 237.0 289.2 376.0 499.1 711.2 776.4

New Investment

5.4 29.5 6.0 130.7 52.2 86.8 123.1 212.1 65.4

Total Value of FDI 3,339.4 3,359.3 5,016.7 5,315.8 5,642.9 6,026.2 6,836.2 8,458.8 10,159.9 10,786.4

Share ( percent) 1.5 1.5 2.0 2.0 4.2 4.8 5.3 5.9 7.0 7.2

Source: Secretaría Ejecutiva de la Comisión Nacional de Inversiones Extranjeras, SECOFI. Note: FDI = Foreign direct investment.

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NOTES I wish to thank Kimberly Sayers for her research assistance and Acciones y Valores for the generous support they provided to carry out the interviews for this chapter. 1. Ministry of Foreign Affairs and Jetro. 2. Maria Elena Ora Mishima, Siete Migraciones Japonesas en México (Mexico: El Colegio de México, 1982), pp.111-112. 3. Government of Mexico, Secretaría de Programación y Presupuesto (SPP), Información sobre las relaciones económicas de México con el exterior (Mexico: Secretaría de Programación y Presupuesto, Coordinación General del Sistema Nacional de Información, 1979), p. 312. 4. Ibid., p. 312. 5. Miguel S. Wionczek and Miyohei Shinohara, eds., Las relaciones económicas entre México y Japón: Influencia del desarrollo petrolero mexicano (Mexico: El Colegio de México, 1982), p. 71. 6. Andrés Canalizo H., "El Comercio México-Japón: Retrospectiva, actualidad y perspectivas a mediano plazo," in Martínez Legorreta Omar and Akio Hosono, Relaciones México-Japón: Nuevas dimensiones y perspectivas (Mexico: El Colegio de México, 1985), p. 328. 7. Wionczek and Shinohara, Las relaciones, p. 61. 8. Ibid. 9. Ibid. 10. Ibid. 11. Ibid., p. 215. 12. Ibid., p. 60. 13. Ibid. 14. Ibid., p. 107. 15. Gabriel Székely, "Japan, Mexico and the United States: An Unusual Trilateral Relationship," Appendix Table C, to be published in Living Together with Latin America: Perspectives from Japan, the United States, and the Region, edited by Barbara Stallings, Gabriel Székely, and Kotaro Horizaka (Tokyo: Doubunkan Shuppan, forthcoming). 16. Ibid. 17. Ibid. 18. Barbara Stallings, "The Reluctant Giant: Japan and the Latin American Debt Crisis," Journal of Latin American Studies, February 1990, p. 2. 19. J. Andrew Spindler, The Politics of International Credit (Washington, D.C.: Brookings Institution, 1984), p. 182. 20.Ibid. 21.Ibid. 22. Stallings, "Reluctant Giant," p. 2. 23. Daniel Levy and Gabriel Székely, Mexico: Paradoxes of Stability and Change (Boulder, Colo.: Westview Press, 1987), p. 157. 24. Comisión Nacional de Inversiones Extranjeras, Marco Jurídico y Administrativo de la inversión extranjera directa en México (Mexico: CNIE, 1988), p. 20. 25.Ibid. 26. Levy and Székely, Mexico, p. 155 27. Antonio Ocarranza Fernández, "Las relaciones financieras entre

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Japón y México en los ochenta: Deuda e inversión," Comeráo Exterior 40, no. 6, June 1970, p. 503, table. 28. Levy and Székely, Mexico, pp. 158-164. 29. SPP, Relaciones económicas, p. 319. 30. Stailings, "Reluctant Giant," p. 11. 31. Ibid., pp. 11-14. 32. Ibid., p. 20. 33. "Japan's Investment Penetrates Deeply in Latin America," Euromoney, March 1989, pp. 88-89. 34. Ibid., p. 88. 35. Ocarranza Fernández, "Relaciones financieras," p. 505. 36. Ibid., p. 506. 37. Ibid., p. 505. 38. Ibid. 39. Ibid. 40. Ibid. 41. The first major agreement, government to government, to export Mexican oil to Japan was signed in 1979. 42. Japanese firms have a similar approach to U.S. companies in that they see regions rather than countries. Japanese and U.S. firms, for instance, talk of a "European strategy." European firms, on the contrary, have more of a "mosaic" approach that stems from their own reality. Over the years, U.S. firms have tended to develop country-specific strategies. It is conceivable that Japanese firms will do exactly the same, in which case there would be no uniqueness. 43. Nissan's investment is estimated to reach $1.2 billion. Total accumulated investment in 1990 was estimated to be $1.8 billion. 44. Kenichi Ohmae, Triad Power (New York: Free Press, 1985).

Chapter 3

Brazil and Japan: Potential Versus Reality Riordan

Roett

Japan's economic and financial interest in Brazil is real. That country has been an important recipient of direct investment for a n u m b e r of decades; Japanese commercial banks provided substantial lending prior to the 1982 debt crisis. The attraction of Brazil to the Japanese, in terms of a potential relationship, is obvious: The appeal of Brazil is different from that of other newly industrializing countries, and lies in its extensive and ferule landscape, its abundant underground resources, and its diverse make-up of racial and ethnic groups. The source of Brazil's vitality lies in its diversity and creativity.1

But it is the reality that dominates the current discussion in Tokyo regarding an appropriate relationship with Brazil: The balance of international payments crisis which had its origin in the oil crises of the mid 1970s, however, engulfed Brazil in a host of problems: burgeoning foreign debts, expanding public sector deficits and galloping inflation. In recent years, policies have been put in place to tighten money, restrict aggregate demand, and eliminate public deficits, but the results can hardly be termed satisfactory^2

Macroeconomic uncertainty is one aspect of the reality. Social and political instability is the other that most concerns policymakers in Japan. The failure of Brazil to develop a coherent social development strategy, to the degree that it may create societal turmoil, inhibits a deeper relationship. And the continued

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political instability in Brazilian institutions makes it difficult for the Japanese to imagine that the government will soon be in a position to address either the outstanding economic or social agendas. The potential for a stronger relationship exists—and has existed for some time. But it will require demonstrable progress by some Brazilian government to introduce policies that will both encourage private direct investment and support political and social reforms that offer a strong possibility of societal stability in the medium and long term. The Japanese have been "burnt" by the years of uncertainty in Brazil. They will seek relatively clear assurances from Brazil before undertaking major new commitments. This does not preclude continued, low-level engagement. The Japanese banks remain committed to a solution to the foreign debt issue. Japan will continue to seek ways to encourage needed reforms through bilateral development loan agreements. The Japanese will be supportive of multilateral institutional efforts to provide incentives for reform. But it is unlikely that the Japanese alone will take a leadership role in Brazil. While that country is important to Japan in the context of Latin America, the region itself is not of highest priority; East Asia is, relations with the European Community are, and ties to the emerging North American Free Trade Area will be. Japan is increasingly sensitive to the emerging, new role of the United States through the Enterprise for the Americas Initiative and will be supportive and seek to play a complementary role. While Japan will pursue its own interests in Latin America and the Caribbean, this will not likely result in Japan replacing the United States in the foreseeable future. In the case of Brazil, the lure of the internal market and the natural resource base remain very attractive to both the United States and Japan. Renewed growth in Brazil may well engender stiffer competition for market share for industrial goods, technology, and consumer products. But U.S. firms are well placed competitively, when growth recurs, and it will be some years before the Japanese challenge in Latin America is seen as threatening to U.S. firms. In sum, trade and investment, not broader political strategic ties, will define the relationship in the future. But those areas will grow only with a wide-ranging set of internal reforms in Brazil that appear unlikely in the short term. If—and when—they become

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feasible, Japan can be expected to be a significant but not dominant player.

HISTORICAL BACKGROUND

Much is made of the large Japanese-Brazilian population. The growth of this population began in the first decade of this century, and there are now about 1.2 million Brazilians of Japanese descent. Many, if not most, have prospered in all fields of endeavor. And the Japanese government is aware of the potential contribution of that community in the future: When one traces the history of cooperation and exchange between Japan and Brazil, and considers the future, it is of great significance that Brazil has had an historic presence of a community of Brazilians of Japanese ancestry, who are well-established and widely active in contemporary Brazilian society. In future cooperation with Brazil, it will be important—from the point of view of expediting an understanding of Brazil and achieving more effective cooperation— to learn from the knowledge and experience of these Japanese Brazilians.3

But the study then continues to identify a rather limited role for Brazilians of Japanese background—as technicians and specialists in future technology transfer projects. The Brazilian-Japanese community has been reluctant to be viewed as a "stalking horse" for Tokyo in Brazilian society. The melting pot process, which has worked very well in Brazil for all immigrant groups, has created a penchant for integration among the Brazilian-Japanese. They think of themselves as Brazilian first and foremost. It is fair to summarize the historical factor as relevant but not dominant in the calculations of either country regarding the other. Brazil admires the skills and determination with which its Japanese settlers have matured and become Brazilian. For Tokyo, the presence of the community was helpful as a bridge during the early stages of economic penetration. It continues to serve as a residual factor for ongoing engagement. And the community may offer further bridging roles as technicians and specialists in the transfer of technology and other collaborative ventures in the future. But the importance of the community is not a high priority in Tokyo's strategy in Brazil today.

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GEOPOLITIC AND STRATEGIC CONSIDERATIONS

It is difficult to give geopolitical and strategic reasons a very high priority in evaluating the relations between Japan and Brazil. A recent set of studies attempting to evaluate Japan's security interests in the post-Cold War period set forth that country's priorities: Security in the proximity of Japan . . . is still crucial; peace and stability in Asia and the Pacific are clearly Japan's most important security interest. The Japan-U.S. alliance, among other factors, is basic to almost all important international relations in the area; without it the foundations of the current economic growth of the Asian Pacific region would be extremely fragile. Also important are Japan's good relations with its neighbors. 4

Elsewhere in the background papers it is stated that Japan can and should augment and complement U.S. leadership. Japan can buttress U.S. leadership with financial resources, at least in the next decade. Japan can play a leading role in the coordination of macroeconomic policies, economic aid, environmental protection, high-technology developments, etc. 5

Another background comments that

paper for the Trilateral

Commission

at the beginning of the 1990s, Japan stands at a strategic crossroads. In one direction lies increasing global involvement as "a member of the West," that is, a full trilateral partner. Another possible route is to emphasize Japan's leadership in an Asian community above its trilateral role. A third route is the one of political-security isolationism. 6

Naturally, the choice of the report is for the trilateral partnership. What is striking about both background papers is the absence of any mention of the Third World or the South and specifically of Latin America. There is a great deal of discussion about linking Japan to global issues. Indirectly, of course, Japan's greater involvement in solving global issues will impact on Brazil and other Third World states, it is presumed. But the working assumption of those analyzing Japan's strategic and security role in the 1990s basically assigns the Third World to a relatively residual role—and implicitedly complementary to that of the United States.

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This conclusion is supported by Peter Smith in his recent study "Japan, Latin America and the New International Order": The most striking element in the Japanese outlook on Latin America is not the region's subordination to Asia, which complies with dictates of geography and history, but the subordination of Japan's relationship with Latin America to the United States.7

And in his summary, "Synthesis: Becoming the World's NumberOne Number-Two," Smith states that Latin America holds relatively litde interest for the Japanese. The highest priority for official policy toward the region is to find ways of supporting the United States. There are some specific interests in some specific countries—from natural resources in Brazil to the fate of Fujimori in Peru—but these are not of overriding importance. Certainly they are not so compelling as to tempt Japanese leaders to challenge or antagonize the United States.8

THE PRIORITY OF ECONOMICS—THE EARLY YEARS

It is, of course, in the area of trade and investment that Brazil has occupied an intermediate priority in Japanese global policy—and will continue to do so. Prior to World War II, Japan had little involvement in Latin America, with the exception of the BrazilianJapanese community, which we have examined. Following World War II, Japanese business concerns began to take an interest in Brazil, sending a trade mission in 1949 under the auspices of the Supreme Command of the Allied Powers.9 In the years that followed, the Japanese would make their mark in Brazil first with direct investments. 10 By 1955, the Toyoto Company had established a manufacturing operation in Brazil—leading a wave of Japanese firms to do the same. Most firms were interested in cotton spinning, fisheries, and machinery production. The government of President Juscelino Kubitschek (1956-1961), advancing a program of import-substitution-industrialization, encouraged Japanese investment. In 1958, USIMINAS, a joint steel venture was established. 1 1 The following year, Ishibras—a shipbuilding company—was created. By 1961, Japanese companies had invested a total of $158 million in Brazil.12 Japanese investment picked up in the years subsequent to the military takeover of 1964. A second rush of Japanese business interests descended on Brazil in 1967, following the conclusion of a

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tax treaty between the two countries and the establishment of the Manaus Free Trade Zone. Major names in Japanese manufacturing—Toshiba and Nippon Electric—subsequently established Brazilian operations. During the 1970s, Japanese and Brazilian leaders exchanged regular state visits, and Japanese investors committed to major projects in paper pulp and steel. 13 By the early 1980s, Japanese interest in Brazil included a $1 billion stake (49 percent) in Alunorte, an aluminum refining concern in the Amazon, and a $550 million slice (49 percent) of Cerrado, a major agricultural development scheme in Minas Gerais. By the early 1990s, Japanese direct investment in Brazil had reached $6.56 billion (total for 19511991), over half of Japan's $10 billion investment in Latin America as a whole, not including the Bahamas, the Cayman Islands, and Panama. Still, as a fraction of Japan's total overseas direct investment of $310 billion during the same period, Brazil's share was tiny.14

CURRENT ECONOMIC AND FINANCIAL TIES BETWEEN JAPAN AND BRAZIL

Current economic and financial ties between Japan and Brazil have reached a "steady state." While there is not disinvestment, there is relatively little interest on the part of the Japanese private sector in expanding their exposure in Brazil. Private commercial bank lending ended with the debt crisis of the 1980s. Trade flows continue to be reasonable although not of the magnitude of past decades. And Japanese public sector support for Brazil has been substantial as the government in Tokyo has responded to U.S. and international criticism that it needs to do more to use its trade surplus to support international development goals and reduce the burden of debt for the poorer developing states. It is fair to state that what Japan does in Brazil, as in the rest of Latin America, is viewed as part of its complex relationship with the United States. Yes, Brazil is a large and significant Third World country. But it also happens to be in the backyard of Japan's key security partner. Therefore, a number of motivations drive Japanese decisionmaking in the economic and financial area with regard to Latin America. In the case of Brazil, it is the attraction of natural resources, a large internal consumer market, a potential Third World "influential" that requires development assistance, and a

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desire to be viewed in Washington, D.C., as supportive of overall development and modernization efforts in the Western Hemisphere. An examination of key areas of interaction—trade, finance, and Japanese development aid—will provide a better overall view of the bilateral relationship. TRADE Despite its longstanding economic involvement with Brazil and the fact that Brazil is Japan's largest trading partner in Latin America, Japan's share of Brazilian trade is relatively modest. Historically, Japan has imported primarily agricultural products and raw materials, though in recent years it has absorbed an increasing share of Brazilian manufactures—$1.3 billion in 1988 (see Table 3.1). On the export side, the Japanese ship machine equipment and electronics to Brazil—$981 million in 1989—along with some metal products ($62 million) and chemicals ($86 million). Japan's overall share of Brazilian trade remains small. In 1988, of all Brazil's exports, the Japanese share constituted but 6.7 percent (Table 3.1). Of all Brazil's imports, Japanese products constituted but 6.6 percent. Brazil consistendy registered a trade surplus with Japan in the 1980s—$1.9 billion in 1990—though it may now be slipping. One recent report out of Brazil maintains that the market in Japan for Brazilian manufactures has been shrinking, down 7.1 percent from $604.1 million in 1988 to $561.5 million in 1989. The drop is said to have accelerated last year, with manufactured exports to Japan falling another 16.2 percent to $470.5 million in 1990. The figures, released in April 1991 by the Japan External Trade Organization in Sao Paulo (see Table 3.3), conflict with official Japanese figures released by the Ministry of Trade and Industry (MITI) and cited above (see also Tables 3.2 and 3.1). The discrepancy highlights the ongoing difficulty in monitoring Japanese-Brazilian economic relations given differing accounting measures and practices. 15 However, given the fact that manufactures now constitute the single largest sector in Brazil's export portfolio to Japan (41.7 percent in 1989), a deterioration in Japanese demand for Brazilian manufactures could shrink Brazil's traditional trade surplus considerably. And the future? As Barbara Stallings has written, "trade has been the lagging sector in Japanese economic relations with the region." 16

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Table 3.1 Brazilian Exports to Japan 1975

1980

1985

1986

1987

1988

1989

Million U.S.$ Food Coffee Raw materials Iron ore Manufactures Machinery Steel

338 (27) 445 (394) 96 (48) (12)

288 (169) 972 (800) 298 (122) (50)

383 (233) 935 (752) 512 (83) (224)

436 (287) 825 (673) 597 (92) (258)

365 (210) 876 (655) 780 (48) (265)

474 (249) 1,115 (686) 1,352 (52) (530)

496 (248) 1,246 (787) 1,250 (47) (631)

883

1,561

1,840

1,874

2,032

2,950

2,999

Total

Percent of Total Brazilian Exports to Japan Food Coffee Raw materials Iron ore Manufactures Machinery Steel

38.2 (3.1) 50.4 (44.6) 10.9 (5.5) (1.4)

18.5 (10.8) 62.3 (51.3) 19.1 (7.8) (3.2)

20.8 (12.6) 50.8 (40.9) 27.8 (4.5) (12.1)

23.2 (15.3) 44.0 (35.9) 31.8 (4.9) (13.8)

18.0 (10.4) 43.1 (32.2) 38.4 (2.3) (13.1)

16.1 (8.4) 37.8 (23.2) 45.8 (1.8) (18.0)

16.5 (8.3) 41.5 (26.2) 41.7 (1.6) (21.)

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

6.7

NA

Percent of Total Brazilian Exports 6.1

5.4

6.8

6.4

Source: MITI, 1990.

And, she continues, "trade between Japan and Latin America has never been of major importance for either side."17 We can expect, in the case of Brazil, that both countries will seek expanded trade opportunities in the future. But we should not expect a dramatic shift in trade flows in either direction. And the flows will be influenced by the outcome of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), whether or not major trading blocs emerge, and the outcome

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Table 3.2 Japanese Exports to Brazil 1975

1980

1985

1986

1987

1988

1989

Million U.S.$ Machines General Electronic Metal products Chemicals Total (including other)

445 (246) (139) 370 49

749 (337) (314) 181 84

478 (162) (251) 34 51

772 (216) (416) 37 81

646 (195) (330) 49 69

756 (237) (390) 58 71

981 (275) (516) 62 86

927

1,125

615

973

879

998

1,310

Percent of Total Japanese Exports to Brazil Machines 48.0 General (26.5) Electronic (15.0) 40.0 Metal Products 5.2 Chemicals

67.2 (30.2) (28.2) 16.2 7.5

77.9 (26.3) (40.8) 5.6 8.2

79.4 (22.2) (42.8) 3.8 8.3

73.5 (22.2) (37.5) 5.6 7.8

75.7 (23.7) (39.1) 5.8 7.1

74.9 (21.0) (39.4) 4.7 6.6

Total

100.0

100.0

100.0

100.0

100.0

100.0

6.6

NA

100.0

Japanese Share of Brazilian Imports (percent) 4.8

4.4

6.3

5.7

Source: MITI, 1990

of regional integration efforts such as MERCOSUR and related issues.

FINANCIAL TIES The best-known, and perhaps most controversial, of the financial links between the two countries is the outstanding debt, due primarily to private commercial bank lending in the 1970s. Japanese private commercial banks were not different from their counterparts in Europe and the United States following the first oil price shock in

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Table 3.3 Bilateral Trade (million U.S.$) Exports to Japan

1988

1989

1990

% change (1989-90)

Manufactures Raw materials Foodstuffs Fuels Others

604.1 1,831.9 499.9 5.7 8.7

561.5 1,925.1 504.3 1.5 6.9

470.5 2,237.1 439.9 2.0 23.7

-16.2 +16.2 -12.8 +33.0 +243.5

Total

2,950.3

2,999.3

3,173.2

+5.8

Imports from Japan

1988

1989

1990

% change (1989-90)

Manufactures Raw materials Foodstuffs Fuels Others

941.7 6.1 4.1 38.6 7.6

1,193.5 5.8 5.1 49.4 56.3

1,193.0 4.7 2.6 9.2 15.6

-0.0 -19.7 -48.6 -81.3 -72.3

Total

998.1

1,310.1

1,225.1

-6.5

Sour«:Jetro, Gazeta Mercantil, April 29,1991.

1973. Petrodollars were readily available and needed to be recycled. Latin America, which opted for continued growth rather than fiscal retrenchment, was an obvious client. The Japanese portfolio expanded rapidly in the 1970s. According to statistics published by the Japanese Ministry of Finance, bank loans to Brazil in the period 1951-1988 totaled $1.7 billion, with annual new loan commitments averaging a meager $117 million in the period 1980-1988. Loan commitments to Latin America as a whole during the 1951-1988 period totaled $18.5 billion. By comparison, Argentina received only $74 million and Mexico garnered but $716 million during the same period. With the onset of the debt crisis in 1982, the process of

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renegotiating Latin America's debt began. The advisory committees of private commercial banks that were established to carry out the negotiations always included one or two representatives of the Japanese banking community. But it is notable that the Japanese rarely, if ever, participated in identifying options or strategies in the meetings of the advisory committees. They normally followed the lead of the United States in setting the terms for the renegotiation. In the case of Brazil, the Japanese were particularly disturbed by the unilateral moratorium announced by the government of President J o s é Sarney in 1987. The J a p a n e s e position on debt has not been linked to other lines of funding. As part of its attempt to recycle its trade surplus, the J a p a n e s e have provided ongoing support for other Brazilian projects, as discussed elsewhere in this chapter. But the continuing arrears on the Brazilian debt, the one-year 1987 moratorium, and Brazil's slow and tedious progress in seeking a Brady Plan resolution of the stock of outstanding debt has been a matter of annoyance and concern to Tokyo.

DEVELOPMENT AID The Fund Recycling Program In May 1987, in response to growing criticism of its modest commitment to resolving the debt crisis, the Japanese government established its Fund Recycling Program. The objective of the program was to support the efforts of developing countries to effect economic restructuring programs as part of medium- and long-term development strategies. Of the $30 billion appropriated for the program, $10 billion was allocated to the Export-Import Bank of J a p a n (JEXIM) to use for untied direct loans; $5.5 billion was allotted to the Overseas Economic Cooperation Fund (OECF)—an aid agency roughly c o m p a r a b l e to the U.S. Agency for International Development (USAID); and $14.5 billion was allocated to contributions and subscriptions to multilateral organizations. In 1989, the Fund Recycling Program fund was enlarged to $65 billion over the five-year period 1987-1992 (including the original $30 billion). Of the additional $35 billion, $13.5 billion was allocated to the JEXIM bank for untied direct loans; $7 billion was allotted to the OECF; and $14.5 billion was made available for contributions to multilateral development banks (MDBs).

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A complete assessment of the degree to which Brazil will be able to take advantage of the financing available through the Fund Recycling Program is difficult, given the ongoing frictions between the Japanese and Brazilian governments. However, it is clear that to date Brazil has received funds under several of the categories for which Japanese funds were earmarked. In 1990-1991, however, Brazil's access to funds has been frozen (with as much as $4 billion reportedly in the pipeline), given Japanese displeasure with the Brazilian stance in debt negotiations prior to the March 1991 agreement on $8 billion in interest arrears and other Brazilian actions (see below). Brazil and the Japanese Export-Import Bank Prior to the current freeze on Japanese loans through the JEXIM bank, lending proceeded along the following lines: Export

Credit

During the 1970s, the JEXIM bank was active in providing export credit for large projects. This lending included loans to CSN, COSIPA, and USIMINAS in the steel sector; FURNAS and CHESF received funds for power projects; the National Development Bank (BNDES) and the Banco do Brasil (BB) received credit lines to finance the import of plants and equipment. The last loans to BNDES and BB were made in 1985; in 1989, though, the JEXIM bank pledged another $200 million credit line. 18 Direct

Investment

During the 1960s and 1970s, the JEXIM bank was active in lending f o r J a p a n e s e direct investment in Brazil—chiefly in steel, shipbuilding, paper pulp, and textiles. Since the onset of the debt crisis in 1982, however, there has been less Japanese direct investment in Brazil. Thus, JEXIM lending in this area is currently limited. Untied Direct

Loans

In 1989, at the same time the JEXIM bank pledged $200 million for a credit line to the BNDES and Banco do Brasil, it also pledged in untied loans $585 million for Paulinia, a thermal power project mounted in Sao Paulo by CESP. The pledge of both the $200 million credit line and the $765 million in untied loans was contingent on (1) Brazil's signing a restructuring agreement with the IMF and securing an IMF standby

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credit line and (2) resolving its arrears to the JEXIM bank itself through agreement at the Paris Club. Once those two negotiations were finalized, the JEXIM bank pledged to move ahead with financing for the projects to which it had agreed, as well as for other projects. In total, according to press reports, Brazil was in line to receive up to $4 billion in credits from the JEXIM bank during 1991 for projects in "petroleum exploration in the Campos basin, electricity transmission, as well as aluminum and cellulose production." 19 The Overseas Economic Cooperation Fund Brazil has also been the beneficiary of funds through the OECF. As recently as February 1991, the OECF pledged $112.5 million to the Jaiba II irrigation project in the northern part of Minas Gerais—a project said to be the biggest irrigation program in Latin America. Another $220.6 million has been pledged for the modernization of the Port of Santos, $98 million for rural electrification in Goias, and $58.2 million for a group of irrigation projects in the northeast. 20 Ironically, most of the funds now pledged to Brazil through the various channels of the Fund Recycling Program have been available for some time, were it not for the failure of Brazilian legislators to approve the necessary documents. The bulk of the loans and credits were negotiated during the Sarney administration by former Finance Minister Mailson da Nobrega, after Brazil's first moratorium on debt payments ended. The vagaries of the Brazilian presidential race postponed congressional action until October 1989, by which time Brazil had begun its second moratorium on debt payments and its agreement with the IMF had been suspended. We can expect that Japan will continue to provide public funding for Brazil as part of its worldwide effort to demonstrate its newfound mission to support development in the Third World. But Brazil should not expect to receive any larger share than it is currently receiving—unless there is a sharp improvement in economic management and performance. There is little reason for Japan to either increase or decrease the current flow of public funds. An increase would signal that Japan is not deeply concerned about the lack of progress in restructuring the Brazilian economy. A decrease would possibly open Japan to criticism from the United States and other industrial countries for not taking the sort of risk they are having to carry in Eastern Europe and the former Soviet Union.

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FUTURE ECONOMIC RELATIONS

New economic cooperation between Japan and Brazil looks particularly unlikely in the early 1990s given Brazil's macroeconomic outlook and pugnacious attitude toward its foreign creditors— including the Japanese. Indeed, relations between the Japanese and Brazilian governments have been particularly strained in recent years, for a variety of reasons. In November 1990, amid the turbulent atmosphere surrounding Brazil's relationship with creditor banks and its continuing unwillingness to settle the matter of interest arrears, Secretary of Political Economy Antonio Kandir canceled a visit to Tokyo with just forty-eight hours notice. Japanese authorities were seeking clarification on the status of Japanese investments in the shipping and metallurgy sectors following the liquidation of Portobras and Siderbras (the government-owned holding companies responsible for those investments) under the Collor Plan; the two holding companies had affiliate Japanese companies. The sudden cancellation of the Kandir visit was interpreted in Tokyo as a snub by the Brazilian government. In February, after yet another postponement of the meeting, the Economy Ministry sent lowerranking Marcos Fonseca—the ministry's international secretary—in Kandir's stead. Fonseca was received coldly. Meanwhile, Undersecretary of the U.S. Treasury David Mulford had little difficulty ensuring Japanese support for a freeze in loans to Brazil from the Inter-American Development Bank (IADB). Subsequently, Japanese officials communicated formally their desire to treat the presence of Economy Minister Zelia Cardoso de Mello at the IADB annual meeting in Nagoya in April solely within the limits of her official duties there; a bilateral session was out of the question even as she was in transit. It was only through the combined good graces of former Japanese Prime Minister Noburo Takeshita, former president of Companhia Vale do Rio Doce Eliezer Batista, and the Brazilian ambassador to Japan, Carlos Bueno, that the minister was able to arrange a meeting with her Japanese counterpart, Ryutaro Hashimoto. 21 In a separate matter, contacts between the two governments have been haunted by questions as to which part of the Brazilian bureaucracy will take the lead in contacts with the Japanese. There was some controversy surrounding the planned trip of BNDES President Eduardo Modiano to Japan—given the expectation that Modiano would be expected to play the diplomat as well as the

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Japan

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banker. Officials within the bank as well as the Economy Ministry were concerned that the question of privatization of state-owned enterprises (a business endeavor with which the bank is directly concerned) not be confused with Brazil's external relations with J a p a n (matters normally handled by cabinet-level officers and the Brazilian Foreign Ministry). "This type of improvised negotiation stands to obstruct the channels of understanding with some of the countries which hold great commercial important for Brazil—notably Japan," a BNDES executive told the Relatorio Reservado. 22 An official of the Brazilian Foreign Ministry expressed concern that Modiano's trip might unnecessarily complicate Brazilian relations with Japan, since the abrupt introduction of privatization within broader discussions might be interpreted as an indicator of instability in the government. "How does one explain such a radical change of interlocutors" as well as the ignorance of the expectations that other countries have of Brazil, the official queried. 2 3 If the estimates of the Japan External Trade Organization are to be believed and Brazilian manufactured exports to J a p a n are fast shrinking, Brazil could soon lose its trade surplus and foreign exchange earnings—one of the few clear benefits still accruing to it from its relations with Japan. In regard to debt, it is unlikely that J a p a n e s e private or government leaders will make any new major financial commitments in the short term, even though it signed a standby accord with the IMF in January 1992. This was made clear during a visit by Economics Minister Marcilio Marques Moreira to Tokyo in September 1992. Japan's Finance Minister Ryutaro Hashimoto "was unequivocal in his statement to Marques Moreira that an IMF agreement was a sine qua non for Brazil to gain access to J a p a n foreign trade financing."24 Hashimoto also made the case that Brazil will not succeed in its negotiations with foreign private sector creditor banks unless it has settled its accounts with the International Monetary Fund. Even then, however, J a p a n e s e pessimism with the way the Brazilians have been handling their domestic economy and their relations with the Japanese government will discourage any new lending—official or private. As Barbara Stallings has pointed out, "Japan's relations with Latin America have been investment and finance-dominated."25 But on the debt front, she continues, following the implementation of the Brady Plan for Mexico and Venezuela, "the Japanese banks have elected to take write-downs on their loans rather than provide new

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money to those countries. The implication is that they, too, want out of the Latin American market." 26 And the Japanese private sector has made it clear to Brazil that it will need to do a great deal more than setde its debt to Japan if it wants to be in a position to compete with an emerging Eastern European market for Japanese capital. 27 That theme was captured in a recent comment in Tokyo by the director of the Economic Cooperations Department of Keidanren, the Japanese federadon of private-sector companies: Despite overall positive signs in the economy, institutional investors recall the dramatic about-turn in policies that churned the economy recently and require more assurances from the government that the rules will not change overnight, before they come back in. 28

Finally, only in the event of a significant improvement in Brazilian macroeconomic indicators—particularly a signal that inflation is under control—is the Japanese appetite for business and direct investment in Brazil likely to improve. The Japanese motivation for its diverse economic and financial ties with Brazil are part of its overall strategy of seeking a compatible role with the United States in world affairs. Brazil has been an important country for trade and investment, in the context of Latin America. But it has not been seen as a replacement for Tokyo's neighbors in East Asia. Nor has Japan viewed its presence in the hemisphere, generally or in Brazil specifically, as an opening for a massive expansion of its interests. THE LIMITS OF THE RELATIONSHIP Will Japan emerge as a rival to the United States in the hemisphere generally in the post-Cold War period—and in Brazil specifically? The Inter-American Dialogue believes that in the 1990s, Japanese firms may expand their presence in Mexico and in the Caribbean nations to take advantage of their special market access to the U.S. With its immense resources, large internal markets, and substantial nisei population, Brazil could also be an area of special interest to Japan, if and when it resumes economic growth. But Tokyo is not likely to have much direct economic involvement elsewhere until the region resumes a high rate of growth.29

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"If and when" will determine, then, the depths of the relationship between Brazil and Japan in the next decade. That point has been made in all of the public statements, and private comments, of the Japanese during the last few years. Leon Hollerman has argued the thesis that the United States will be replaced in Brazil by Japan. He states that the United States and Brazil are basically economic competitors, while Japan and Brazil have complementary economies. The United States, he continues, has alienated Brazil on a number of trade and investment issues; in contrast, Japan is seen as a more cooperative partner. Hollerman describes a "headquarters" strategy in which Tokyo will increase its ties with Brazil at the expense of Washington. He sees the United States being outflanked by Japan in Brazil. This is an exciting thesis but somewhat farfetched. As Stallings has commented recently about the Hollerman argument, "I also find this scenario unlikely." She continues: "My own interviews in Japan over the past three years find little interest in Latin America. Most of Japan's official activity in the region is to protect its relationship with the United States."30 And Peter Smith concludes from his study that "a recurrent theme focuses on a tacit division of labor. Just as Japan should take care of Asia, the U.S. should assume responsibility for Latin America."31 He continues: Ultimately, Japanese leaders tend to see assistance to Latin America as a favor to (and for) the United States. . . . In general, Japanese assistance to Latin America—especially ODA—has come to be seen as a "tax" on the maintenance of Japan's relationship with the U.S. It is a carrying cost, or surcharge, for good standing with American authorities.32

Brazil looms large as a market, as a supplier of raw materials, and as an arena for buttressing its key strategic ties with the United States. At the firm level, there is and will be competition in Brazil between Japanese and U.S. companies. It is difficult to envision in the coming decade competition at the policy level between the United States and Japan in Brazil—or in Latin America. Can Japanese economic and investment aggressiveness overstep acceptable boundaries to negate the last assertion? It could, but given the present constellation of post-Cold War forces, it is unlikely. The critical variable is Brazil. The government will need to do a great deal more to convince Tokyo that its current efforts at liberalization have sufficient political support to work. And Brazil

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needs to make a more compelling case that investor stability is guaranteed by clear rules of the game and Brazil's adherence to international standards for critical issues such as intellectual property rights. Brazil, in the context of Latin America, is significant for Tokyo policymakers. But only when it has identified an appropriate growth strategy will the relationship become more dynamic. Brazil, in the broader context of Japanese security interest, plays—and will play—a less important role as the priority of East Asia and that of the U.S.Japanese security relationship continues. As the early fascination for Brazil has diminished in Japan, Japan's interest in Mexico has sharply increased. Is Mexico a rival of Brazil for Japan's attention? To the degree that Mexico continues to modernize its internal economy and to further insert itself into the global economy, the answer is yes. The attraction of the North American Free Trade Area for Japan is obvious. A partnership with the United States to support Mexican development is appealing to Japan given the priority of the security dependence among the states of North America. As has been pointed out, "Mexico has become the most important country in all of Latin America for Japanese economic interests, including loans, trade, and investment." 33 And as Gabriel Szekely continues, "A unique trilateral relationship is taking shape between Mexico and these two industrial powers that has created new opportunities—and raised some concerns." 34 The continued modernization of Mexico (when compared with the lack of progress in Brazil), the skill of Mexican policymakers, and the proximity of the United States are all convincing arguments to the private and public sectors in Japan. A growing interest in Mexico does not preclude continued interest in Brazil. But it does mean that there is an important rival in the Americas for Japanese support for the first time in the postwar period. That fact should serve as an additional incentive to Brazil to hasten its commitment to liberalization and modernization. While Japan's resources are sufficient to support both countries, it may happen in the 1990s that Mexico will become primus inter pares among the countries in the region for Japanese assistance. Once that decision is taken in Tokyo, it will not be lightly overturned. And the unassailable appeal of working in tandem with the United States in Mexico is obvious. Clearly, added exposure for Japan in Mexico runs the risk of a strong reaction from U.S. companies that have been predominant in Mexico for decades. That challenge is one that Japan will need to be sensitive to as its sorts out its strategies and its priorities in North

Brazil (s? Japan

A m e r i c a in t h e c o m i n g years. But the o p p o r t u n i t y exists, resources are plentiful, and the right partners are in place.

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the

NOTES This chapter was originally prepared as a paper for The Americas Society study group on Japanese policies toward Latin America, fall 1991. I am indebted to Thomas Schierholz for research and editorial assistance. 1. "Basic Strategy for Development Assistance," Country Study for Development Assistance to The Federative Republic of Brazil, Japan International Cooperation Agency (JICA), February 1991, p. 1. 2. Ibid., Foreword. 3. Ibid., p. 24. 4. See Akihiko Tanaka, "Japan's Security Policy in the 1990s," one of the background papers of the Trilateral Commission Tokyo Plenary Meeting, April 20-22,1991, p. 26. 5. See Yoichi Funabashi, "Japan's International Agenda for the 1990s," in background papers of the Trilateral Commission Tokyo Plenary Meeting, April 20-22, 1991, p. 8. 6. See Joseph S. Nye, Jr., Kurt Biedenkopf, and Motoo Shiina, "Global Cooperation After the Cold War: A Reassessment of Trilateralism," a draft report to the Trilateral Commission, March 1991, pp. 24-25. 7. Peter H. Smith, "Japan, Latin America, and the New International Order," University of California, San Diego, September/October 1990. 8. Ibid., p. 40. 9. For a complete history of Japanese economic relations with Brazil, see Leon Hollerman, Japan's Economic Strategy in Brazil: Challenge for the United States (Lexington, Mass.: Lexington Books, 1988). 10. Although Japan's financial presence in Brazil has been mainly in direct investments, the Japanese have also made sizable investments in Brazilian securities. In the years 1951-1988, Japanese investments in Brazilian securities totaled $3.85 billion, a large chuck of Japan's $13 billion commitment to securities in the whole of Latin America. During the same period, the Japanese purchased $954 million in Mexican and $134 million in Argentine securities. Data are from Japanese government statistics provided by the J a p a n Center for International Finance (JCIF), 2001 L Street NW, Suite 904, Washington, D.C. 20036. 11. The current Japanese stake in USIMINAS is estimated to be $1.1 billion, or about 45 percent. 12. Hollerman, Japan's Economic Strategy, p. 94. 13. Japanese interest in the Cenibras paper pulp complex in Minas Gerais stands at $204 million. Japanese interest in the Tuberao steel complex began in 1978 with a loan of $700 million. It currently holds a $790 million equity share, somewhat less than 30 percent. 14. See Table 1.4a. 15. Hollerman notes this problem in Japan's Economic Strategy, p. 96. 16. Barbara Stallings, "Latin American Trade Relations with Japan: New Opportunities in the 1990s?" in Mark B. Rosenberg, editor, The Changing

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Hemispheric Trade Environment: Opportunities and Obstacles (Miami: Florida International University Press, 1991), p. 1. 17. Ibid., p. 5. 18. The $200 million credit is still pending, according to O Estado de Säo Paulo, April 13, 1991, p. 3. See also Yukinori Ito, "The Role and Lending Activities of the Export-Import Bank of Japan," paper presented at the conference "Financing Alternative for Brazilian Entities" of the Council of the Americas and Socimer International Corporation, Säo Paulo, December 3,1990. 19. Relatorio Reservado 1255, March 18-24, 1991, p. 8. 20. Gazeta Mercantil (International Weekly Edition), February 25, 1991, p. 11. 21. See "Takeshita preparou o caminho para Zelia," in O Estado de Säo Paulo, April 13, 1991. 22. Relatorio Reservado 1254, March 11-17, 1991, p. 7. 23. Ibid. 24. Gazeta Mercantil (International Weekly Edition), September 9, 1991, p. 4. 25. Stallings, "Latin American Trade Relations," p. 1. 26. Ibid., p. 3. 27. Gazeta Mercantil (International Weekly Edition), September 9, 1991, p. 4. 28. Ibid. 29. "The Americas in a New World," in The 1990 Report of the InterAmerican Dialogue (Washington, D.C.: The Aspen Institute, 1990), p. 11. 30. Stallings, "Latin American Trade Relations," p. 15. 31. Smith, "Japan, Latin America," p. 29. 32. Ibid., pp. 31-32. 33. Gabriel Szekely, "In Search of Globalization: J a p a n e s e Manufacturing in Mexico and the United States," in Gabriel Szekely, ed., Manufacturing Across Borders and Oceans: Japan, the United States, and Mexico, Monograph Series 36 (San Diego: Center for U.S.-Mexican Studies, University of California, 1991), p. 1. 34. Ibid., p. 2.

Chapter 4

Japan, Latin America, and the United States: Prospects for Cooperation and Conflict

Susan Kaufman Purcell Robert M. Immerman

Since Japan regained its independence in 1952, the policies of the Government of Japan (GOJ) toward the nations of Latin America must be understood in the context of its most important bilateral relationship—its ties to the United States. This United States-Japan relationship is currently undergoing its most significant change in three decades. Japan has emerged as an economic superpower and—for 1989 at least—as the world's largest aid donor. 1 T h e relative e c o n o m i c standing o f the United States internationally has decreased dramatically, with the United States now the world's largest debtor nation. The end of the Cold War with the former Soviet Union has led to a growing "revisionist" view in the United States that Japan is a potential adversary rather than ally, and to a still somewhat muted call in Japan for less reliance on, or support of, U.S. policy initiatives in other regions of the world. Particularly as conveyed by the media of both nations, mutual recrimination rather than global partnership seems to characterize current U.S.Japanese ties. Despite this change in the mood underlying Japan's most important international relationship, the GOJ still continues to regard Latin America as a region that, because it is so much more important economically and strategically to the United States than to Japan, should remain an area of minimum rivalry and maximum cooperation. Put another way, the GOJ, while taking into account its steadily increasing economic interests in the region, hopes to use its policies toward Latin American nations to offset some of the serious bilateral tensions between Tokyo and Washington. It seems more determined than ever to prevent the emergence of major differences between the two nations over Latin America, because it understands that these differences would seriously exacerbate the bilateral

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relationship. The GOJ, therefore, is unlikely to initiate policies toward the region opposed by the United States Government (USG) and will probably condnue quietly to caution Japan's major private enterprises against challenging U.S. firms too directly in Latin American markets. One consequence, however, of Japan's growing sense of equality with the United States is that the Japanese government's support of U.S. policy toward Latin America will no longer be offered automatically. The Foreign Ministry's emphasis on political and economic cooperation with the United States in the region, which up to now has prevailed within the GOJ, is increasingly being challenged by other ministries eager to expand Japan's economic influence in Latin America as well as by nations of the region hoping to benefit from increased competition for influence between the two economic superpowers. To strengthen the Foreign Ministry's position, Washington will have to give at least the appearance of advance consultation with Tokyo on political and economic initiatives, refrain to the greatest extent possible from military action in the region, justify any use of force on the basis of international law a n d / o r the United Nations Charter, and make sure that its major European allies are also "on board." Otherwise, less sympathetic elements in the GOJ, angered by bilateral frictions, convinced of declining U.S. influence internationally, and espousing a more independent foreign policy for Japan, may win approval of a more aggressive Japanese approach to Latin America on the grounds that such a shift in GOJ policy will enable it to achieve significant potential leverage over the United States.

THE FIRST PHASE (1952-1974): MARGINAL INTEREST BY JAPAN SINCE WASHINGTON KNOWS BEST

Upon regaining its independence in 1952, the GOJ in formulating foreign policy quite naturally paid less attention to Latin America than to any other independent region of the world (Africa was still almost completely under colonial domination). In addition to firming up Japan's new alliance relationship with the United States, the GOJ's major priorities were to (1) negotiate a peace treaty with the former Soviet Union, (2) balance its formal ties to the Republic of China with unofficial trade links to the People's Republic of China, (3) explore the possibility of a relationship with the Westernaligned southern half of its former Korean colony while resisting the

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intervention of the North Koreans in its own domestic politics, (4) negotiate reparations agreements with the newly independent nations of Southeast Asia and, (5) repair economic as well as political relations with the major nations of Western Europe that were disrupted by World War II. Although occasionally uttering muffled criticism of the confrontational tone of U.S. policy, the GOJ generally shared the USG's concern with the international threat posed by the former Soviet Union and was more than content to have Washington exercise strong influence over Latin America in this period. It welcomed Washington's efforts to prevent the spread of communism in the region and accepted the rationale that the installation of communist governments there would endanger U.S. investments in and trade with Latin America, as well as upset the global balance of power between the United States and the former Soviet Union. Unilateral military action and minimal consultation on the part of the United States, while often resented, did not upset the Japanese political establishment in the 1950s and 1960s; displays of U.S. incompetence, such as the Bay of Pigs, did. On the other hand, the efforts of both the Kennedy and Johnson administrations to pursue a multifaceted approach to the region, including policies intended to bring about social, economic, and political reform, were greeted even more warmly by Japan. It helped, of course, that Japan was expected to do little more than give verbal support to these initiatives. Japan's calculations regarding its earliest postwar interests in Latin America were threefold. First, it wished to restore diplomatic relations ruptured by World War II, when most Latin American nations had joined the United States in declaring war on Japan and, following the U.S. example, several Central American and Andean states had interned their own citizens of Japanese origin as well as Japanese nationals. There were domestic pressures to facilitate links to the large colonies of immigrants in Brazil and Peru. Second, preoccupied by what it regarded as a surplus agricultural population, the Japanese government actively promoted emigration to those few nations—such as Brazil, Bolivia, and Paraguay—willing to accept large numbers of Japanese immigrants in the 1950s. Third, Latin America attracted Japan economically from the very beginning of the postwar period. It offered raw materials, markets for Japanese-made consumer goods, and, once it adopted import substitution economic policies in the 1960s, desirable sites for largescale investment in such industries as textiles, shipbuilding, and consumer electronics. Until the mid-1970s, U.S. policy toward Latin

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America did not hamper Japan from developing its economic relations with the region; instead, U.S. efforts to stabilize the region politically found favor in Japanese business circles. And because its own agenda regarding Latin America was so limited, the GOJ found it in its own interest to go along with just about every U.S. political or military action in Latin America, even those that some Japanese officials privately questioned.

THE SECOND PHASE (1976-1988): INCREASING INVOLVEMENT IN THE REGION AND DECREASING FAITH IN U.S. POLICY

In 1973, three major international events, coming rapidly in succession and catching the Japanese totally by surprise, suddenly made the Japanese government aware of the strategic as well as economic importance of Latin America. The United States' decision to renegotiate the Panama Canal Treaty with Panama created considerable unease by reminding Japan that it, more than any other major trading nation, depended on the canal when shipping its exports to markets in the eastern United States and Europe. The Nixon administration's unexpected decision to impose an embargo on the export of soybeans (the single most important source of protein for the average Japanese household) in order to stabilize agricultural prices sent the Japanese on a frantic search for alternative sources in the hemisphere, eventually finding Brazil willing and able to supply the Japanese market. The October 1973 Yom Kippur War in the Middle East, the threat of an Arab oil boycott, and the U.S. decision to develop Alaskan oil reserves only for the domestic market put petroleum diplomacy at the top of Japan's foreign policy agenda, with Mexico becoming one of its prime targets. Heightened awareness of the significance of the region was soon a c c o m p a n i e d by increasing difficulty in a c c o m m o d a t i n g Washington's policies toward Latin America. With no formal advance notification to the Japanese (who viewed the fall 1976 presidential campaign rhetoric as just that), the Carter administration almost immediately after taking office initiated a human rights offensive against the numerous right-wing military dictatorships in the hemisphere, attempted to normalize relations with Cuba, and supported legislation curbing the business practices of U.S. firms in the region. Without a human rights constituency at

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home, and desiring most of all to protect its burgeoning trade and investment with the region, Japan tried to distance itself from the more extreme manifestations of these policies. It should be noted, nonetheless, that during the Carter administration the USG for the first time recognized Japan as a major player in the region. It actively supported the inclusion in the revised Panama Canal Treaty of a provision whereby Japan would join the governments of the United States and Panama in forming a commission to explore the feasibility of constructing a second canal. It also initiated periodic assistant secretary-level consultations on Latin American issues between the Department of State and the Foreign Ministry. Just as Japan was adjusting to the Carter approach, the Reagan administration totally reversed USG policy toward the region. President Reagan's all-out support for the contras in Nicaragua, stepped-up confrontation with Castro, and friendly attitudes toward the Pinochet dictatorship in Chile were quickly noted by the Japanese government. During the Reagan administration, Tokyo did a better j o b than the major European allies of the United States in not differing publicly with Washington over its Latin American policies. Japan expressed understanding of the U.S. "rescue mission" in Grenada and carefully avoided extending government aid to Nicaragua. O n e exception was the Falklands (Malvinas) conflict. During the crisis, the GOJ did draw a line between Japanese and U.S. policies by supporting the pro-Argentine position of the Organization of American States and declining to endorse the British military response. This unusual public difference with the United States was produced in large part, however, by the GOJ's difficulty in determining just what USG policy was in the early stages of the conflict. The Japanese observed Secretary of State Alexander Haig openly advocating U.S. support for the United Kingdom against Argentina's aggression while, at the same time, U.S. Permanent Representative to the United Nations Jeane Kirkpatrick argued publicly in favor of Argentina's position. This initial USG indecisiveness, coupled with an inept presentation of the U.K. position by the British Embassy in Tokyo, helped to strengthen the hand of the Foreign Ministry's Latin American experts who argued that the USG was not convinced of the merits of the U.K. case. These zigs and zags in USG policy toward Latin America during the Carter and Reagan administrations were not without their costs to the U.S.-Japanese relationship. They made the GOJ wary of

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identifying its Latin American policy too closely or precipitously with those of any particular U.S. administration and gave Tokyo justification for acting somewhat more independently in support of its growing economic interests in the region. Moreover, while scrupulously supporting the letter of USG policies toward Communist governments in the region (such as Cuba and Nicaragua) by not extending official aid to them, the GOJ's support for the spirit of these policies was somewhat more ambiguous. In spite of constant U.S. entreaties to do so, the GOJ never moved to limit—much less cut off—private sector trade with these nations. Japan remained the principal purchaser of Cuban sugar throughout the Reagan years. The only Latin American issue confronting the Reagan administration that had the potential for affecting Japan as seriously as the United States was the debt crisis. Japan's relative economic stake in the region increased dramatically after the mid-1970s, when both the GOJ and private financial institutions began lending heavily to several Latin American nations. The GOJ shared with the USG a strong interest in resolving the debt crisis resulting from these loans in a manner that would not undermine their respective financial institutions or the international financial system. Therefore, because the USG approach coincided with its own thinking, Japan supported the Baker Plan. Nevertheless, the Finance Ministry's advice was not sought in the formulation or implementation of the Baker Plan (in spite of the Reagan administration's constant repetition of the need for close and continuous consultations with the United States' "most important ally" on all aspects of international economic policy). T h e GOJ had consistently opposed debt reduction and welcomed the Baker Plan's rejection of this approach. The GOJ also approved of the plan's conditioning new money for the region on good-faith efforts by Latin American debtor governments to restructure their economies in order to make them more efficient, open, and competitive. The GOJ actively participated in the financial recycling provisions of the Baker Plan, not only to help its strategic ally but also, more importantly, to protect domestic financial institutions that were as directly threatened as those of the United States by the debt crisis. Another motive for active GOJ participation was a desire to lessen the problems created by Japan's enormous current account surplus with the United States in the mid-1980s. GOJ officials hoped that the recycling of Japanese capital to Latin America would assist the nations of the region to resume their traditional role as a major market for the United

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States, thereby contributing to a lessening of the overall U.S. trade deficit. At the same time, Japan had become, in Latin American as well as U.S. eyes, an economic superpower. The 1985 Plaza Accords appreciated the value of the yen and dramatically depreciated the dollar. Liberalization of Japanese financial markets led to internationalization of the yen. The concomitant sharp decline in the U.S. economy, particularly in the manufacturing sector, further narrowed the gap between the world's two largest economies and led to calls within the United States for greater burden sharing on the part of the Japanese. Under the Reagan administration, the United States generally succeeded in pressuring Japan, on the grounds that it was an alliance partner, to use its new wealth as "strategic aid" to help solve problems threatening Western interests and global stability.

THE END OF THE COLD WAR AND THE NEW GLOBAL PARTNERSHIP (1989-?)

The congruence of GOJ and USG interests in Latin America that first became evident during the debt crisis became more pronounced once the Cold War ended. With the collapse of communism in Eastern Europe, growing worldwide cooperation with the former Soviet Union to resolve regional conflicts, and successful negotiation of a settlement of the Nicaraguan civil war, Washington reoriented its policy toward Latin America away from a preoccupation with security concerns. Instead, USG policy began to reemphasize economic issues, specifically the need to assist Latin America in moving beyond temporary resolution of the debt crisis and toward renewed, sustainable economic growth. In contrast to previous administrations' emphasis on government-to-government aid, the Bush administration clearly linked Latin America's economic development to the region's adoption of freer trade and investment policies. The huge U.S. budget deficit made it both economically and politically infeasible for Washington to commit large amounts of economic aid to Latin America. The Bush administration also stressed that even though it could afford to do so, it would refrain from providing large amounts of aid worldwide. It argued that widespread corruption and the USG's excessive generosity in the past had encouraged developing countries in Latin America as well as in other regions of the world

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to postpone the implementation of economic reforms required to make them more economically self-sufficient. This new USG emphasis on trade and investment coincides with, and to a certain degree reflects, a radical shift in the prevailing development strategy in Latin America. The debt crisis has made it impossible for the major nadons of Latin America to maintain their costly and inefficient development strategy based on import substitution. Instead, they are now obliged to emphasize exports and to attract foreign investment in order to obtain needed capital. Protectionism is being replaced by more open economies. Chile and Mexico took the lead in the early and mid-1980s, respectively. Most of Ladn America has now begun to follow suit. Even more so than during the Reagan years, the USG since 1989 has looked to the GOJ to play a major role in fostering this new approach to Latin America and has encountered a sympathetic response from Tokyo. Stated differendy, the USG has invited the GOJ to cooperate with it in reshaping Latin America's economic structure as part of a worldwide partnership intended to manage the emerging new international order. Latin America has quickly become an important focus of this new global partnership. The Bush administration has lost no dme in conveying clearly to the GOJ that the USG attaches great importance to the reemergence of democratic governments in Latin America and the need to support their economic reform policies through the commitment of resources to the region. The GOJ has received the message that cooperation with the USG in Latin America can help to offset problems in the bilateral relationship. Also important, however, is the recognidon by GOJ officials that "Latin America has been the safest region" for U.S.Japanese cooperation, since "there are no real political problems or economic rivalries" between the two countries in the region. Reinforcing this disposition to cooperate actively in the region is the widespread view within the GOJ that President Bush's policies toward Latin America are more pragmatic, less ideological, and generally more in line with Japan's preferred approach to the region than were the policies of his two immediate predecessors. The Brady Plan to deal with Third World debt, announced soon after the Bush administration took office, marks the USG's first allout effort to secure a high level of visible Japanese economic cooperation in the region. Ironically, by offering developing nadons the option of debt reduction for the first time, the Bush administradon has embraced a Japanese proposal—made by then

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Finance Minister Miyazawa—that the Reagan administration had dismissed out of hand less than a year earlier. (It did so presumably because a proposal made in the middle of the U.S. presidential campaign that appeared to require increased U.S. foreign aid would not attract voters to Mr. Bush's candidacy.) The GOJ was irritated that no acknowledgment was given to the Brady Plan's Japanese origins. Furthermore, noting that Japan, as a former debtor nation, had endured considerable domestic hardship in order to pay off its own postwar debt, many in the Japanese establishment resented the fact that less was now expected from other countries. Particularly difficult for many in the GOJ to swallow was the Brady Plan's key provision that nations such as Japan should both embrace debt reduction and provide new money to the same Latin American governments that were reneging on their earlier commitments. The GOJ nevertheless cooperated with the new U.S. debt strategy. It increased the Nakasone capital recycling fund, first established in the mid-1980s, from $30 to $65 billion and expanded its life from three to five years. It established a special $8 billion account within this fund to support debt and debt service reduction and, in this connection, provided $2 billion through the Japanese Export-Import Bank to Mexico for debt reduction, the first loan u n d e r the Brady Plan. The Foreign Ministry succeeded in persuading the GOJ to liberalize its economic aid guidelines in order to authorize for the first time the use of foreign aid funds for balance of payments support in developing nations. At the same time, the GOJ announced that aid funds could henceforth be used not only for concrete projects but also for so-called sectoral or program loans to nations engaged in economic restructuring. The GOJ also has increased both the amount and geographic range of its aid. Total Japanese bilateral ODA went from nearly $2 billion in 1980 to nearly $7 billion in 1989. By 1989, ODA to Asia had decreased to 62.5 percent. Over the same period, the share allotted to Latin America increased from 6 to 8.3 percent of the total amount, or from $118 million to $563 million.2 Some of these funds have been provided to Honduras, Costa Rica, and, more recendy, Guatemala in order to demonstrate Japan's desire to contribute to the political stabilization of Central America. In practice, Tokyo now uses its foreign economic aid programs to help its ally, the United States, strengthen friendly governments against external security threats in areas such as Central America, where Japan's political and economic interests had previously been marginal. However, the GOJ is still unable to officially acknowledge

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that it pursues a polity of strategic aid. When then Prime Minister Nakasone attempted to do so in the mid-1980s, the hue and cry raised by the left-wing media and most of the opposition parties forced a GOJ spokesman in the Diet debate to deny officially the existence of such a motive in its Central American aid. Nevertheless, numerous GOJ officials confirm in private discussions that the GOJ's primary motive for extending aid to Central America is to demonstrate cooperation with the USG in an area that the latter considers to be strategically important. In tandem with the Bush administration's basic policy decision to strongly encourage democratically elected governments in Latin America, the GOJ has begun to expand its own foreign policy agenda in the region by including a concern with the development of democratic institutions there. In the past, Tokyo was interested more in political stability than in the development of democratic institutions, paying little attention to the nature of the government so long as that government was not in political confrontation with Washington. Japan has now joined with the United States in a "Partnership for Democracy and Development" in Central America, thus explicitly linking its economic assistance to democratic development for the first time. For example, immediately after Violeta Barrios de Chamorro's victory in the February 1990 Nicaraguan presidential election, Japan decided to extend economic aid to the new democratically elected government, even though it had refrained from offering such aid throughout the period of Sandinista rule. As it generally has done when adopting a new policy course, the GOJ has edged cautiously into this new realm of democratic development. With USG encouragement, it decided to send election observers to El Salvador (at the request of the Salvadoran government) as well as to Nicaragua and Haiti (as part of United Nations teams). As one official in the Ministry of Foreign Affairs noted, "Japan is the only Asian country that is sending observers to Latin American elections." However, Tokyo has resisted Washington's efforts to involve it more deeply in the Nicaraguan democratization process by declining to provide logistical support, such as vehicles and computers, for the elections. As the same official noted, "Since Japan's defeat in World War II, it has not wanted to be involved in the internal affairs of other countries. But with the Nicaraguan elections, Japan was forced to discuss its aid policy with the people. Japan ultimately decided not to provide logistical support, but did decide to participate with the dispatch of

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election observers." Subsequently, the GOJ moved slightly further into the area of democratization by persuading the private sector to donate vehicles and computer equipment to the Haitian election. At least in Latin America, if not yet elsewhere, Japan is now explicidy linking its provision of government aid to democratic development. Immediately after Violeta Barrios de Chamorro's victory in the Nicaraguan presidential election of February 1990, Japan launched an economic aid program to help the new democracy. Throughout the period of Sandinista rule, in contrast, Tokyo refrained f r o m providing Nicaragua with economic assistance. The GOJ's decision to include the fostering of democracy in its foreign policy toward Latin America, while inspired in large part by Tokyo's desire to respond positively to the Bush administration, has a growing domestic constituency within Japan. The Japanese public was profoundly influenced in 1989 by the television images of the democratic revolutions in Eastern Europe. The Japanese have also recently engaged in a considerable amount of reflection on the reasons for their own postwar success. There is now widespread recognition that two major factors—a democratic political system as well as a free market economy—helped ensure this success. GOJ officials, like their U.S. counterparts, are increasingly becoming persuaded that in many areas of the Third World, "democracy is necessary for political stability." While the Japanese have long regarded political stability as a necessary precondition for successful economic development and have generally refrained from significant private investment in—or official aid to—unstable nations, they are just now beginning to make the connection between democracy and development. It is true, however, that this linkage is publicly expressed most frequently with respect to the nations of Latin America. In spite of Prime Minister Kaifu's statement in the spring of 1991 that "democratization" henceforth would be one of the four criteria for determining aid disbursement worldwide, this consideration seems notably absent from the GOJ's decision to extend aid to Asian neighbors such as the People's Republic of China, Burma, and Vietnam. The conclusion is therefore inescapable that, by insisting on democratization in connection with Latin America, the GOJ believes it is giving important support to USG policy toward the region in order to relieve strains in the bilateral relationship. Another new item on Japan's global policy agenda—drugs—also directly impacts on its approach to Latin America. Pardy in response

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to Washington's urging and partly because of fear that the Latin American drug cartels are beginning to target the Japanese market, the GOJ has initiated aid to some Latin American nations in order to cut drug production and trafficking in the region. For the time being, the GOJ is approaching the drug issue cautiously and tentatively. Multilaterally, it is contributing financially to the drug control program of the Organization of American States and has established a center in Costa Rica to train Latin American officials in this program. In bilateral aid programs, the GOJ has decided to approach the drug problem indirectly, by assisting growers to switch to legal crops rather than by providing antitrafficking equipment to the police forces of nations such as Colombia, for example. (Tokyo declined this suggestion from the USG, fearing that the Medellin cartel might retaliate against GOJ officials or business executives living in Colombia. As one Japanese official noted, "Japanese government employees and businessmen living in Latin America do not enjoy the protection that their U.S. counterparts do.") There is evidence that Japan is attempting to condition its overall aid to countries such as Colombia, Peru, and Bolivia on good-faith efforts by the recipients to curb cultivation and trafficking. As in the case of democratization, however, these efforts seem limited so far to Latin America. Tokyo's desire to cooperate with Washington on the drug issue made it easier for the GOJ to justify its defense of the U.S. invasion of Panama. In spite of privately expressed concern on the part of some members of the ruling Liberal Democratic Party that the United States had violated international law, as well as heavy opposition party and media criticism of the intervention, GOJ spokespersons stated publicly that Japan "understood the reasons behind the invasion." Moreover, in the United Nations General Assembly, Japan voted against the resolution sponsored by the NonAligned Movement condemning the U.S. action.

LIMITS TO THE GLOBAL PARTNERSHIP IN LATIN AMERICA

Future cooperation between the GOJ and the USG in Latin America depends heavily on both governments maintaining the existing perception that the interests and goals of the two nations in the region are similar, if not identical. Even though the involvement of the GOJ and the private sector in the region is bound to increase,

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Tokyo is likely to refrain from launching any major policy initiatives toward Latin America. Therefore, the applicability of the U.S.Japanese "global partnership" to Latin America will depend primarily on the nature of the policies that Washington chooses to pursue. At present, the GOJ finds the Bush administration's policies in the region very much to its liking, with the possible exception of the U.S. intervention in Panama. It endorses USG support of stable democratic governments, open economies that welcome foreign investment, respect for human rights, and an end to drug production and trafficking. It appears to be reassured by repeated USG statements that the proposed North American free trade zone will not erect walls against outsiders. It is relieved to see that, in contrast with the Reagan administration, the Bush administration has welcomed United Nations and OAS peacekeeping and electionmonitoring efforts in the region. It finds the Enterprise for the Americas Initiative, apart from the endorsement of official debt forgiveness, congenial to its interests. The first test, then, for the global partnership in Latin America will come only if and when dramatic changes in the region lead to a sudden shift in USG policies. These could include (a) the insistence of Mexico or other nations of Latin America in negotiating with the United States exclusionary trade agreements not in compliance with GATT rules, (b) the overthrow of the region's fragile democracies by their military establishments, (c) the election of civilian leaders, hostile to free market principles and close relations with the United States, who proceed to move their countries back to the failed populist, nationalist, and protectionist policies of the past, (d) the success of extreme left-wing revolutionary movements such as the Shining Path in Peru, and (e) an uprising in—or mass exodus from—Castro's Cuba, which leads to U.S. military intervention. If such scenarios were to become reality, the nature of Washington's response to them would test the durability of the Japanese commitment to cooperation with U.S. policy in the region. Even if undemocratic Latin American governments, of the left or right, unacceptable to the United States should emerge, the global partnership is likely to continue to function in Latin America, as one Japanese academic puts it, "provided the United States doesn't do something stupid." The conclusion that "stupid" in this context means illegal or unilateral behavior is buttressed by the words of a Japanese government official: "Japan will be able to support U.S. policy in Latin America, including military intervention, as long as organizations like the United Nations are involved." Washington

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would appear to have a similar interest in avoiding, in Latin America as elsewhere, actions that would undermine the credibility of the "New World Order" it is trying to establish in global partnership with Japan as well as the major European democracies. This should increase the odds that the Bush administration will rely on coalition diplomacy rather than unilateralism if forced to cope with new and unpleasant scenarios in Latin America. U.S.-Japanese cooperation in Latin America can also be threatened by visible USG ambivalence towards Japan's involvement in the region. While the United States is on record as favoring a substantial increase in GOJ economic assistance to Latin America, some USG officials are beginning to voice doubts about giving Japan a larger role in setting aid policy guidelines. They are reluctant to support recent requests from Japan for increased voting power, commensurate with its economic contributions, in the InterAmerican Development Bank and other international financial institutions. Furthermore, they remain uneasy a b o u t the implications of increasing GOJ involvement in a region that traditionally has been in the U.S. sphere of influence. While the Bush administration is highly unlikely to adopt such a position on its own, Congress may press for a revision of U.S. policy, thereby preempting the policy options of future U.S. administrations. In this connection, it must be recognized that some elements of the private sector in the United States are already expressing concern over growing GOJ involvement in Latin America. This is most noticeable in industries, such as autos and electronics, that are already reeling from Japanese competition. In contrast, the more competitive U.S. industries so far agree with the USG and GOJ as well as with Japanese business leaders that (a) GOJ economic involvement—whether through official development assistance, nonconcessional loans, encouragement of private investment, or promotion of two-way trade—will contribute significantly to Latin America's current economic recovery and future growth and (b) because of geography and traditional trading patterns, the United States far more than Japan will be the major beneficiary. A third possible brake on future U.S.-Japanese cooperation in Latin America is fear on the part of the Japanese private sector that the GOJ might be adopting too high a profile in the region. The Japanese business community is well aware that USG policy toward Latin America over the last two decades has been characterized by wide and sudden shifts whenever administrations change in Washington. Although encouraged by the manner in which the Bush

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administration's performance has generally matched its stated goals, the Japanese have had enough experience with U.S. policy toward other regions and nations (Vietnam, Iran, Iraq) to know that a more vigorous GOJ policy in support of the current administration's goals in Latin America could backfire after the next presidential election. The Japanese also display some concern that if USG policies toward the region miscarry, a Japan closely associated with these policies could be made the scapegoat by those elements in the United States who have already identified Japan as the principal cause of the United States' economic decline. The Japanese may not know the exact meaning of "Catch-22," but they know how to avoid such situations. It is in this context that many in the private sector in Japan dismiss GOJ assurances and continue to worry openly about Washington's real intentions with respect to the North American free trade agreement and, beyond it, a possible future Western Hemisphere free trade area. Will the USG and its Latin American negotiating partners agree on rules of origin that significantly curb Japan's ability to compete in Latin American markets? If so, the GOJ will come under increasing pressure from Japan's private sector to be considerably less generous in providing financial support for any approach to Latin American economic recovery and expansion that appears to be made in or approved by Washington. The length and depth of U.S.-Japan bilateral cooperation in Latin America will also be affected by Washington's willingness to involve Tokyo in the formulation of policies toward Latin America that require not just political support but also financial largesse on the part of the GOJ. While the State Department now seems sufficiently sensitive to the need to consult regularly on such matters with the Foreign Ministry, as evidenced by frequent meetings and other contacts between State's Bureau of Inter-American Affairs and the Foreign Ministry's Latin American Bureau, other USG agencies have been less willing to talk with their counterparts in Japan before announcing new policies. A case in point is the Enterprise for the Americas Initiative, with its proposals for a Western Hemisphere free trade zone, a multilateral investment fund (MIF), and official debt reduction for those nations in the region adopting sound fiscal and monetary policies. The GOJ, particularly the Ministry of Finance, was annoyed that it was not consulted in advance, even though it was expected to provide one-third of the capital for the MIF. It was not surprising, therefore, that the GOJ initially reacted with hesitation and even

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hostility toward much of the Enterprise proposal. It finally decided in May 1991 to contribute a total of $500 million—$100 million a year for five years—only after (1) the Foreign Ministry as well as the highest levels of the USG put immense pressure on the Finance Ministry to drop opposition to the Initiative, and (2) the USG agreed that the organization managing the MIF would be separate from the Inter-American Development Bank and would provide Japan with voter shares commensurate with its contribution. Nevertheless, the high degree of GOJ irritation over its treatment means that its future financing of similar projects will require involvement in their planning from the beginning. The Treasury Department will need to develop the habit of discussing new international spending proposals with all the potential paymasters, European as well as Japanese, before publicly asking them to sign the check. The GOJ is currently even more concerned about yet another sudden switch in USG policy without adequate consultations. Until 1991, both governments supported reduction of private commercial debt under the Brady Plan but opposed forgiveness of official debt. Nevertheless, the USG suddenly agreed, at a meeting of the Paris Club of creditors in the spring of 1991, to forgive the official debt of Egypt (because of its supportive role in the Gulf conflict) and Poland (because of pressure from a strong U.S. domestic constituency that wants to be kind to Lech Walesa). There is great fear in Japanese official circles that, in spite of the Treasury Department's insistence that Egypt and Poland do not constitute precedents, the USG may decide in the future to reward good economic performers in Latin America with official debt reduction. Should the USG put this policy on the table either in bilateral talks with the GOJ or in the context of the G-7, Japan would almost certainly refuse to go along, thereby creating a major new obstacle to bilateral cooperation in the region. The shifting balance of power among GOJ agencies will have an impact on the global partnership, in Latin America as elsewhere. Heretofore, the Ministry of Foreign Affairs (MOFA), with supervisory authority over the Overseas Economic Cooperation Fund (OECF), has been the single most important agency in determining the recipients of Japan's ODA, even if the Ministry of Finance has had the final word with respect to the amount extended. During the Reagan administration, it was MOFA that took the lead in successfully persuading an initially reluctant Japanese

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bureaucracy to approve the concept of "strategic aid" to governments friendly to the United States—governments threatened either internally by Marxist insurrection or externally by Sovietbacked military forces. This marked the first time that the GOJ agreed to extend loans, grants, and technical assistance for political reasons even if such aid could not be justified on the basis of "economic need" criteria. The GOJ implemented this new policy rapidly, extending ODA in 1982 to Jamaica (a nation in which it had not yet established an embassy) and shortly thereafter to Costa Rica and Honduras. MOFA believed in the strategic political importance of these programs and also argued within the GOJ that their approval would strengthen Japan's overall relationship with the United States. This approach is now under attack within the GOJ bureaucracy. In the first place, the end of the Cold War undermined the principal justification for extending Japanese aid to close friends of the United States otherwise ineligible for this aid. Second, as the amount of Japanese aid increases greatly and reports of misuse of such aid by recipients gain wide circulation in Japan, the Ministry of Finance appears to be expanding its control over the process on the grounds that it has the principal responsibility for ensuring the proper use of the Japanese taxpayer's yen. Third, long-standing efforts to establish an independent cabinet-level External Aid Ministry may be picking up steam. Finally, the OECF, although still under MOFA's supervision, is developing its own expertise and expects to exercise greater autonomy. Each of these factors is likely to result not only in a decrease in the amount of aid extended by Japan to Latin America (on the grounds that many nations in the region have an overall per capita income higher than that of other regions) but, more significantly, also in a change in the criteria on which aid is extended that will be much less congenial to U.S. policy goals. In an attempt to deflect this trend, the Foreign Ministry in the spring of 1991 succeeded in persuading then Prime Minister Kaifu to enunciate new political criteria for the disbursement of ODA that are very much in accordance with the Bush administration's policies. Henceforth, the GOJ will examine in a potential aid recipient (1) the percent of GNP devoted to military expenditures, (2) the amount of weapons sales in the nation's overall export figures, (3) the extent to which it possesses weapons of mass destruction, and (4) the degree of its commitment domestically to human rights, democratization, and a market-oriented economy.

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These principles, if applied to Japan's ODA to Latin America, will certainly contribute to the cooperative relationship with the USG in the region. It remains to be seen, however, whether the other GOJ agencies will agree to implement these principles when actually deciding on aid budgets for individual Latin American nations. A change in MOFA's personnel policy could also adversely affect U.S.-Japanese cooperation in Latin America. The ministry's Latin American and Caribbean Bureau, which was part of a single Americas Bureau (including the United States) until the early 1980s, has more often than not been headed by diplomats who have considerable experience in dealing with the United States and who are generally sympathetic to USG policies. There is, however, a growing group of professional diplomats trained in Iberian and Latin American affairs but without much experience in managing the bilateral relationship. They may not be as sensitive to the nuances of Washington's relations with the nations of Latin America as their predecessors were. Another complicating factor may be the increased involvement of Japanese parliamentarians in GOJ policy toward Latin America. Until now, the Japanese bureaucracy has had a virtually free hand in setting GOJ policies toward Latin America. This is in sharp contrast to the constraints placed on the bureaucracy by political parties, individual Diet members, and the media when formulating policy with respect to the United States, the former Soviet Union, China, and the two Koreas. There has been no sustained outside challenge to the bureaucratic inclination so far to synchronize with the USG the GOJ's overall policies toward the region. Moreover, MOFA has had some success in gaining the support of those few Diet members who have shown interest in the political and economic realities of the region. The signs of change are already emerging. There now exists a small group of Diet members, including a prime ministerial hopeful in the ruling Liberal Democratic Party (LDP), who champion Castro's Cuba and sympathized with Ortega's Nicaragua because those countries represent current and former Latin American Davids heroically confronting the U.S. Goliath. This group could grow rapidly if emotional resentment over U.S. pressure on bilateral issues deepens in Japan or if the USG reverts to unilateral military action in dealing with perceived threats to U.S. interests, particularly in the case of Cuba. Even if the conservative LDP remains indefinitely in power, antagonism among some of its influential members toward the United States could force the GOJ to adopt

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certain policies in Latin America that would be significantly less congruent with those of the USG. Finally, the global partnership as applied to Latin America will undoubtedly be affected by the growing influence of the Japanese media on public attitudes toward the region. As in the United States, the "democratization" of foreign policy slips easily into sensationalism. The Japanese media is obsessed with the twin themes of U.S. political omnipotence and Japanese victimization. They increasingly p a n d e r to xenophobic strains in the Japanese body politic. Hysterical coverage of the fiftieth anniversary of Pearl Harbor, which included fine-combing the length and breadth of the United States in search of traces of anti-Japanese sentiment, is only the latest example. Latin America has also become a news story for Japan. Should there be, for instance, a serious policy difference between Peruvian President Fujimori and Washington, a substantial portion of the Japanese media probably would turn the story into an example of U.S. racism at work. This may further complicate GOJ efforts to cooperate with the United States in the region.

THE LATIN AMERICAN PERSPECTIVE

There is obviously no coordinated Latin American approach to Japan. The governments of Latin America differ considerably in terms of their interest in and dependence on Japanese trade, aid, investment, and managerial know-how. Nevertheless, they share some common attitudes, above all the belated recognition of Japan as an economic superpower. In the last decade, Latin American governments generally have welcomed the greater interest and more active role of Japan in the region, not only because of their hunger for Japanese capital, but also because of their long-standing efforts to reduce their economic dependence on the "Colossus of the North." It seems unlikely, however, that the major Latin American nations would or could play a "Japan Card" in their dealings with the United States. First of all, for the time being, Latin America's democratic governments themselves seem relatively uninterested in this card. Instead, they seem to have designed policies intended simultaneously to maintain the support of the Bush administration and to encourage Japan to provide investment capital for the region's development. Moreover, Latin American nations so far have not detected any

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inclination on the part of either the GOJ or the private sector to encourage them to play this card. Unless there is a serious rupture in the U.S.-Japanese bilateral relationship, no GOJ policymaker and only the maverick Japanese business concern would entertain, as a serious policy option, active confrontation with the United States in the region. As argued above, the GOJ still subscribes to the view that it can use its Latin American policies to strengthen its relationship with the United States. The Gulf War's demonstration of the military strength as well as the political determination of the United States to resist the aggressive behavior of expansionist Third World nations may even have helped to reinforce Japan's belief in the value of its alliance with the United States. Second, even if the GOJ should cease to support actively USG policy in Latin America, its own constitutional constraints and foreign policy style would inhibit it from taking on the USG in the political arena. It has a firm policy against arms exports, which is likely to become more stringent. It has not shown any eagerness to export dual use technology to even its major Asian trading partners and would be less likely to do so in the case of Latin America. Above all, no Japanese government would tolerate the amount of nuclear technology that has poured out of the United States' European allies to the Third World. More likely is a challenge the private sector, with the tacit encouragement of the GOJ's economic ministries, might pose to traditional U.S. markets in the region. Without the current quiet advice from the GOJ to tread cautiously, Japanese manufacturing, construction, and financial firms could compete with U.S. businesses in Latin America as vigorously as they are now doing in Southeast Asia. A more immediate problem for the United States in Japan's relations with Latin America is the opposite tendency: Japanese skepticism of Latin America's ability to create stable political systems or efficient market economies. This leads to widespread unwillingness in Japan to commit significant resources in the name of strengthening democracy, creating free markets, and alleviating social injustice. This skepticism seems more pronounced in the Japanese private sector, whose representatives often still see the region as plagued by the heritage of "populism, nationalism and xenophobia." Japanese in and out of government claim to be mystified by Latin America's failure to understand that Japanese investment has to be sought after and Japanese investors need to be wooed. As a Japanese banker elaborated, "Latin America needs foreign investment, but the Latins don't learn from history. When a

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company such as Sony approaches less developed districts of the United States, the United Kingdom or France, it is offered all kinds of incentives. Latin America ignores this. The Latins just wonder why Japanese investment doesn't come, why the Japanese look only at the weak parts (of their economies). . . . They d o n ' t seem to understand what foreign investors are looking for. Latin America always wants to spend more than it gets. And the Latins d o n ' t understand that the Japanese want to make a profit." Many Japanese private sector representatives, however, are finally beginning to make distinctions among the Latin American countries in terms of commitment to economic restructuring and ability to provide incentives to potential investors. They now recognize differences in the performance of individual nations in the region. They give high marks to Mexico and Chile while displaying increasingly negative views about Brazil's economic prospects. At the April 1991 meeting of the Inter-American Development Bank in Nagoya, the Japanese media personalized these national distinctions by contrasting the professionalism of the Mexican finance minister with the allegedly amateurish behavior of his (since resigned) Brazilian counterpart. In sum, while there is growing recognition among GOJ leaders that Latin America's "lost decade" of the 1980s is likely to be followed by a decade of potential growth, the predominant attitude is still one of wait and see. Most Japanese continue to think of the region in terms of the debt crisis or other critical economic problems. Mexico has become the single exception to this rule. This skepticism does not mean that the Japanese are rejecting Latin American efforts to forge closer ties. Efforts by those Latin American nations fronting the Pacific Ocean to add a trans-Pacific dimension to their traditional North American and European links, as demonstrated by the applications of Mexico, Chile, and Peru for membership in the Pacific Economic Cooperation Council, have been supported by J a p a n as well as the United States. As one Japanese observer put it, "There was no reason to say no, and the United States and Japan had to support Mexico's membership because they are committed to President Salinas."

POLICY RECOMMENDATIONS The moment is right for active collaboration between Japan and the United States in Latin America. The nations of the region are cur-

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rently governed in almost every case by a new group of democratically elected, pragmatically minded leaders unencumbered by Marxist ideology or Third World rhetoric and eager to cooperate with both Tokyo and Washington in furthering their programs of economic liberalization and social reform. They are also in the process of ingesting just those brands of free market economic policies that both the United States and Japan have long prescribed. In principle, the prospects for the successful application of the global partnership to Latin America seem quite promising. The USG, either out of frustration with the slow progress of the Uruguay Round of GATT negotiations or because the Bush administration wants to dramatize its commitment to a new pragmatic approach to the hemisphere, has begun to emphasize the desirability of a Western Hemisphere free trade area, while simultaneously muting discussion of a U.S.-Japanese free trade agreement or even expanded Pacific Basin cooperation. Until Secretary of State Baker's November 11, 1991 speech in Tokyo, there had been no public assurances by a senior Bush administration official that the administration's full-speed-ahead approach to NAFTA did not mean that it favored one economic region of the world at the expense of others. The net result is that many members of the Japanese establishment have convinced themselves that the United States, fearing a worsening of the bilateral economic relationship and losing market shares to Japan in East Asia, is adopting a Western Hemisphere-first policy. It is therefore of vital importance for the United States to engage Japan actively and continuously in a discussion of a broader regional economic grouping encompassing both sides of the Pacific, including all those Latin American nations that desire entry regardless of whether they face the Pacific geographically. To demonstrate a firm commitment to the Pacific Basin concept, however, the president should follow the lead of his predecessor by appointing a special ambassador who, among his or her other duties, would represent the USG at the many international gatherings in Asia, Latin America, the United States, and Canada where this concept is being fleshed out. Second, Japan should do its part to prevent the East Asia Economic Caucus (EAEC) inspired by Malaysian Prime Minister Mahathir from excluding those trading nations of the Pacific Basin—such as Australia, New Zealand, Canada, and the United States—where the majority of the population is of European origin. If an "exclusive" EAEC becomes a permanent organization, it will

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serve as yet another classic example of the self-fulfilling prophecy. It may well inspire the United States to do just as Mahathir had initially feared, turning away from the Pacific and toward exclusive Western Hemisphere and European trading zones. Third, to avoid future serious strains in its relations with Japan as well as with the democratic governments of the hemisphere, the United States should make clear its commitment to multilateral action when faced with what it considers to be threats to democracy and stability in the hemisphere. With the end of the Cold War, the sundering of the Soviet empire, and the disinclination of Russia to involve itself worldwide, the United States has no legitimate pretext to resort unilaterally to the use of force in the hemisphere. It needs to work patiently for the development of a multinational coalition authorized by the United Nations or the Organization of American States. It has done this in the case of Haiti, joining with members of the Organization of American States in imposing an economic embargo in reaction to the military coup that deposed the democratically elected president, Jean Bertrand Aristide. It also reacted to the abolition of constitutional rule by President Alberto K. Fujimori and the military in Peru by urging multilateral pressures to restore democratic rule there. The continuing disintegration of the Cuban economy may provide the next big test of Washington's commitment to multilateral solutions to hemispheric problems. The outbreak of violence in Cuba could cause the right wing of the Republican Party a n d / o r elements of the Cuban-American community to pressure the Bush administration to take military action to eliminate the last totalitarian regime in the Western Hemisphere. Failure to resist such pressure would undo the patient efforts of the administration to date to forge new relationships with all of Latin America. It would also seriously derail efforts to involve Japan constructively in the region's political and economic development. On the other hand, the United States should urge Japan to join it in spotlighting the Cuban government's egregious violation of the basic human rights of its own people as well as its disastrous handling of its economy. There is every reason for the USG to enlist J a p a n , as well as its European allies, in efforts to push condemnations of Cuba in the UN Human Rights Commission and to refrain from trade concessions or aid that would in effect reward Cuba's misguided economic policies. Japan and the United States cannot and should not try to operate in Latin America as if the region exists in a vacuum. The

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governments of the major industrialized democracies of Europe, either individually or through the expanded authority of the European Community, should be encouraged to coordinate closely their political and economic policies in Latin America with those of Tokyo and Washington. The principle of such talks was established in connection with Central American reconstruction. The Summit Seven should deal with other areas of the region, as well as with the application to the region of common policies toward arms sales, nuclear nonproliferation, and human rights. Both Japan and the United States hope that democratically elected governments and market economies will prevail in Latin America. Nevertheless, events in at least some of the Latin American nations may suddenly proceed in a different and much less desirable direction. If this happens, the policies of the USG as well as those of Canada and the European Community toward these retrograde nations may undergo an abrupt shift. Japan, however, may find it more difficult than the other industrialized democracies to change course. To prevent such a contingency and to develop "worst case" plans, the policy planning staffs of the U.S. State Department and the Japanese Foreign Ministry should engage in periodic consultations on future developments in the region. The United States and Japan should frankly exchange views on future scenarios for Latin America and the implications of each of these scenarios for USG and GOJ policy toward the region. If the USG keeps the GOJ not only informed but actively involved in the contingency planning process, the chances of major misunderstanding and conflict over Latin America on the governmental level should be reduced. The field of Latin American studies, while growing in Japan, is far more developed in the United States. The USG's Fulbright and International Visitor programs, as well as the GOJ's newly established Global C o o p e r a t i o n Fund, should increase opportunities for a much larger two-way flow of scholars and researchers of Latin America between the United States and Japan. Finally, Latin American nations, for their part, should develop much more expertise on Japan. Brazil, Chile, and especially Mexico are already doing so. The governments and business communities of the other Latin American nations must strive harder to interest Japan in Latin America and, in particular, to persuade the Japanese private sector that investing in their economies makes sense. If a regional free trade zone should emerge in all or part of Latin

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America, the leaders of these nations as a group might want to encourage periodic high-level consultations with Tokyo, Washington, Ottawa, and the European Community in Brussels in a format similar to the one the Association of Southeast Asian Nations (ASEAN) has so successfully pioneered.

CONCLUSIONS The Cold War has ended. With the exception of Cuba, all of Latin America has already embarked on a new and high-risk experiment with democracy and free markets. At the same time, the heretofore robust U.S.-Japanese relationship is undergoing unprecedented strain. Constructive cooperation between the United States and Japan in Latin America could make the difference between success and failure as the nations of the region strive to achieve stable and sustained development. It certainly would contribute to the strengthening of the world's most important transocean bilateral relationship. The political leadership of Japan and the United States must be awakened to this challenge.

NOTES Susan Kaufman Purcell wishes to thank the Foreign Ministry of the Government of Japan for providing her with the opportunity to visit Japan between April 22 and May 2, 1991 to gather material for this chapter. All quotations in this chapter are from interviews carried out by either Susan Kaufman Purcell between April 22 and May 2, 1991, during her trip to Japan, or by Robert M. Immerman during his visit to Japan, from July 13 to August 13, 1991. Interviews were conducted with officials from the Ministry of Foreign Affairs, the Ministry of Finance, the Ministry of Trade and Industry, the Bank of Tokyo, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund, the Japan Federation of Economic Organizations (Keidanren), the Institute of Developing Economies, the Japan Institute of International Affairs, the International Institute for Global Peace, Tokyo University, the Nissan Motor Company, the Mitsubishi Corporation, and the U.S. Embassy in Tokyo. 1. It fell back to second place again in 1990 when the United States insisted at the OECD that forgiveness of Egyptian and Polish debt made the United States number one again. 2. Japan's Official Development Assistance (ODA), 1990 Annual Report, Ministry of Foreign Affairs, p. 42. Latin America's share of ODA is not higher, according to Japanese government officials, because of the region's relatively high per capita income.

Appendix

A

Key Provisions of the "Enterprise for the Americas Initiative" Unveiled by U.S. President George Bush on June 27, 1990, the Enterprise for the Americas Initiative (EAI) is an attempt to address the "clear and compelling need for new economic initiatives" throughout Latin America. The EAI's main objectives are the following: • To build a stronger and more comprehensive economic partnership in order to support the process of democratic change and economic liberalization in Latín America • To foment free trade • To reduce external debt to more manageable levels • To support the preservation of the environment The Initiative stresses trade rather than aid policies and it places upon each individual country the primary responsibility for achieving economic growth. EAI rests upon four pillars: I. The Trade Initiative • Successful conclusion of the Uruguay Round of multilateral trade negotiations will lead to tariff reductions among GATT members. • Initially, the Initiative calls for bilateral framework agreements, to date signed by more than twenty nations in the region, to eliminate specific trade barriers and resolve specific trade problems. This represents the first step in preparation for an eventual hemispheric free trade environment.

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• A long-term result of the EAI will be the creation of a Western Hemisphere free trade zone. II. The Investment Initiative • The EAI calls for an increased role of the Inter-American Development Bank (IADB), along with the World Bank, to support economic liberalization measures (i.e., privatizations, easing of foreign investment restrictions) throughout Latin America. This will essentially be accomplished by the establishment of a $1.5 billion five-year Multilateral Investment Fund (MIF) f u n d e d by the industrialized countries. III. The Debt Initiative • Guaranteed multilateral lending will be made available to the heavily indebted nations that engage in economic reforms and sign a Brady Plan agreement with the commercial banks. The funds are to be provided by the IMF, World Bank, and IADB. • Official concessionary debt owed to the U.S. government will be reduced by establishing a facility within the U.S. Treasury to support new investment, capital repatriation, and sustainable natural resource use. The facility would renegotiate the debt on more favorable terms on a case-bycase basis. IV. The Environmental Initiative • Environmental trust funds will be created to provide grants in support of the environment. The trusts are to be funded by the interest concessions resulting from the foreign debt reschedulings and by debt-for-nature swap operations.

Appendix B

The United States-Canada Free Trade Agreement The signing of the United States-Canada Free Trade Agreement (FTA) on January 1, 1989, created the world's largest free trade area. T h e FTA covers bilateral trade in goods, services, and investment. T h e two countries are each other's largest trading partner. Bilateral trade reached $175 billion in 1990. T h e major provisions of the FTA are: I. Tariff Provisions • T h e gradual elimination of all tariffs on bilateral trade will be accomplished by 1998. • Only those products that meet the rules of origin clauses will qualify for preferential FTA tariff treatment. II. Government Contract Provisions • T h e number of contracts open to fair competition from suppliers of both countries will be increased. III. Investment Provisions • T h e FTA, following the Mulroney government's liberal investment regime, creates a stable and predictable business environment, which should spur investment. • Canada and the United States cannot implement any new discriminatory measures that will affect bilateral direct investment without the consent of the FTA. • Canada will no longer review U.S. investments in Canadian business that are valued below $200 million.

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• Discriminatory measures by Canada and the United States in the service industry will be barred. This applies especially to U.S. financial institutions operating in Canada. IV. Energy Provisions • The energy security of North America will be enhanced by promoting further deregulation of the energy sectors in both countries. Almost all barriers to bilateral energy will be removed, providing secure access to energy supplies and markets. V. Agriculture Provisions • All bilateral tariffs, export subsidies, and most quantitative restrictions on certain products (such as U.S. wine and spirits) will be eliminated. VI. Dispute Setdement Provisions • The United States-Canada Trade Commission will be created to handle trade disputes and to oversee the elaboration of the FTA and any other matters that may affect the FTA. • A binadonai secretariat will be established to administer the panel process to review disputes pertaining to final determinations in antidumping and countervailing duty cases. VII. Service Provisions •

Considering that both markets are already relatively open, the main provision here will be made for future liberalization of the laws affecting those sectors specified in the agreement.

VIII. Border Crossing Provisions • Transit will be eased for qualified persons.

Appendix

C

Study Group Sessions and Participants Stephen W. Bosworth, Chairman; Susan Kaufman Purcell, Codirector; Robert M. Immerman, Codirector; Alessandra J. Griffiths, Rapporteur First Meeting: March IS, 1991: Japanese Economic Relations with Latin America Discussants: Yukinori Ito, Resident Executive for the Americas, ExportImport Bank of Japan N e a n t r o Saavedra-Rivano, Professor of Economics, Fundagäo Getulio Vargas (Rio de Janeiro, Brazil) Commentator: A. Blake Friscia, Adjunct Professor of Economics, New York University Second Meeting: May 14, 1991: Japanese Policies Toward Brazil and Mexico Discussants: José Thiago Cintra, Professor of Asian and African Studies, El Colegio de México Barbara Stallings, Professor of Political Science, University of Wisconsin, Madison Commentators: Riordan Roett, Director, Latin American Studies Program, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University Luis Rubio, Director, Centro de Investigación para el Desarrollo, A.C.

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Third Meeting: J u n e 5, 1991: J a p a n , Latin America, and the United States: Prospects for Cooperation and Conflict Discussants: Shinya Nagai, Counsellor, Permanent Mission of J a p a n to the United Nations Gabriel Szekely, Assistant Director, Center for U.S.-Mexican Studies, University of California, San Diego Commentators: Susan Kaufman Purcell, Vice President for Latin American Affairs, Americas Society Robert M. Immernlan, Senior Research Associate, East Asian Institute, Columbia University Study Group Participants: Elliott Abrams, The Hudson Institute; Wataru Aoki, Export-Import Bank of Japan; Frank Ballance, Citizens Network for Foreign Affairs; Keiko Chino, The Sankei Shimbun; G. Brooks Frazar, Citibank, N.A.; Edmundo Fujita, Permanent Mission of Brazil to the United Nations; Elio Gaspari, Veja; Stephen Geffen, IBM Latin America; Jack Guenther, Citibank, N.A.; Seiji Hagiwara, J a p a n External T r a d e Organization (JETRO); Robert Helander, J o n e s Day Reavis 8c Pogue; Shafiqul Islam, Council on Foreign Relations; Ruri Kawashima, The Japan Society; George W. Landau, Americas Society; S t e p h e n L a n d e , M a n c h e s t e r T r a d e ; Marc Levinson, Newsweek; Ricardo Luna, Permanent Mission of Peru to the United Nations; Minoru Makihara, Mitsubishi International C o r p o r a t i o n ; Mervyn Manning, Ford Motor Company; Frank McNeil, Commission on U.S.-Japan Relations for the 21st Century; James Michel, U.S. Agency for International Development (AID); J o r g e M o n t a n o , P e r m a n e n t Mission of Mexico to the U n i t e d Nations; Martha T. Muse, The Tinker Foundation, Inc.; Shinya Nagai, P e r m a n e n t Mission of Japan to the United Nations; J o h n Purcell, Salomon Brothers Inc.; Ronaldo Sardenberg, P e r m a n e n t Mission of Brazil to the United Nations; Susan Segal, Manufacturers H a n o v e r Trust; Kojiro Shiojiri, Consulate General of J a p a n ; Dorothy Sobol, T h e Federal Reserve Bank of New York; J o h n Stevenson, Sullivan & Cromwell; Alan Stoga, Kissinger Associates; Takashi Ueda, Export-Import Bank of J a p a n ; Antonio Villegas, P e r m a n e n t Mission of Mexico to the United Nations; Atsushi Watanabe, The Bank of Tokyo, Ltd.

The Contributors A. Blake Friscia is adjunct professor of economics at New York University Graduate School. He served as vice president and international economist at the Chase Manhattan Bank from 1966 to 1990. At the Chase Manhattan Bank, Dr. Friscia was director of the Western Hemisphere Economics Section responsible for Latin America, Canada, and the Caribbean. He is the author of The Lost Decade?: Debt and Latin American Development. Robert M. Immerman is a senior research associate at the East Asian Institute at Columbia University, which he joined in 1990 after retiring from the U.S. Foreign Service. He spent most of his diplomatic career in Japan, but also served as minister counselor for political affairs at the U.S. Mission to the United Nations (19851989). Mr. Immerman is author of Labor Issues in U.S.-Japan Relations and European-Japanese Relations: Trilateralism's Weakest Link. Susan Kaufman Purcell is vice president for Latin American Affairs at the Americas Society in New York City. From 1981 to 1988 she was a senior fellow and director of the Latin American Project at the Council on Foreign Relations. She also served on the Policy Planning Staff of the U.S. Department of State (1980-1981). Prior to that, she taught at the University of California, Los Angeles. Dr. Purcell's publications include Latin America: U.S. Policy After the Cold War (coauthor), Chile: Prospects for Democracy (coauthor), and Mexico in Transition (editor and coauthor). Riordan Roett is director of the Latin American Studies Program at the Paul H. Nitze School of Advanced International Studies at the

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Johns Hopkins University. Since 198S, Dr. Roett has served as director of International Relations-Western Hemisphere at the Chase Manhattan Bank. He has spoken and written extensively on Latin America. Mexico's External Relations in the 1990s; Latin America, Western Europe and the U.S.: Reevaluating the Atlantic Triangle, and Brazil: Politics in a Patrimonial Society are some of his publications. Luis Rubio is director general of the Centro de Investigación para el Desarrollo, A.C. (CIDAC), an independent think tank devoted to the study of economic and political policy issues in Mexico City. Before joining CIDAC, in the 1970s, Dr. Rubio was planning director of Citibank in Mexico and served as an adviser to Mexico's secretary of the treasury. He is the author or editor of sixteen books, including Mexico's Dilemma: The Political Origins of Economic Crisis; Political Reform: Necessary Component of Modernity; and Sovereignty and Free Trade.

Selected Bibliography Ballance, Frank, and Anne Emig. Opportunities for Trilateral Cooperation: Mexico, United States and Japan. Washington, D.C.: The Citizens Network, 1992. Belassa, Bela, and Marcos Noland. Japan in the World Economy. Washington, D.C.: Institute for International Economics, 1988. Cronin, Richard P. Japan's Expanding Role and Influence in the Asia-Pacific Region: Implications for U.S. Interests and Policy. Report for Congress, Congressional Research Service. Washington D.C.: The Library of Congress, September 7 and 19, 1990. Emmott, William. "The Limits to Japanese Power." In International Economics and Financial Markets: The Amex Bank Review Prize Essays, edited by Richard O'Brien and Tapan Datta. Oxford: Amex Bank, 1989. Hollerman, Leon. Japan's Economic Strategy in Brazil: Challenge for the United States. Lexington, Mass.: Lexington Books, 1988. Inter-American Development Bank and Export-Import Bank of Japan. The Fourth Symposium on Financial and Business Cooperation Between Latin America and Japan. Proceedings of a symposium held in Nagoya, Japan, November 12-14, 1991. Inter-American Dialogue and Aspen Institute. "The Americas in a New World." 1990 Report of the Inter-American Dialogue. Washington D.C.: Inter-American Dialogue and Aspen Institute. Islam, Shafiqul. Yen for Development: Japan's Foreign Aid and the Politics of Burden Sharing. New York: Council on Foreign Relations Press, 1991. Japan Ministry of Foreign Affairs. Annual Evaluation Report on Japan's Economic Cooperation. Tokyo: Japan Ministry of Foreign Affairs, March 1990. Japan Ministry of Foreign Affairs. Japan's Official Development Assistance, 1990 Annual Report. Tokyo: Japan Ministry of Foreign Affairs, 1990. Julius, DeAnne. Foreign Direct Investment: The Neglected Twin of Trade. Washington D.C.: Group of Thirty, 1991. Kojima, Kiyoshi, and Terutoma Ozawa. Japan's General Trading Companies: Merchants of Economic Development. Paris: Organization for Economic Cooperation and Development, 1984. Latin American Information Services. Japan Inc. in Latin America: A Status

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Selected Bibliography

Report on Aid, Trade Investment and Debt. New York: Latin American

Information Services, 1989.

Lin, Ching-Yuan. Latin America vs. East Asia. Armonk, N.Y.: M. E. Sharpe,

1989.

Naya, Seiji, ed. Lessons in Development: A Comparative Study of Asia and Latin

America. San Francisco: International Center for Economic Growth, 1989.

Noland, Marcus The Pacific Basin Developing Countries. Washington D.C.:

The Institute of International Economics, 1990.

Ozawa, T e r u t m o . Recycling Japan's Surpluses For Developing Countries. Paris:

Centre of the Organization for Economic Cooperation and Development, 1989. Smith, Peter H. "Japan, Latin America, and the New International Order." Tokyo: Institute of Developing Economies, Visiting Research Fellows Series 179, September/October 1990. Stallings, Barbara. "Latin American Trade Relations with Japan: New Opportunities in the 1990s." Paper prepared for the conference "Changing Hemispheric Trade Environment," Latin American and Caribbean Center, Florida International University, January 10, 1991. Stallings, Barbara. "Reluctant Giant: Japan and the Latin American Debt Crisis." Journal of Latin American Studies (February 1990).

Stallings, Barbara, and Gabriel Szekely, eds., Japan, the United States and Latin America: Toward a Trilateral Relationship in the Western Hemisphere?

Macmillan and Johns Hopkins Presses, forthcoming 1993. Szekely, Gabriel, ed. Manufacturing

Across Borders and Oceans: Japan,

the

United States, and Mexico. Monograph Series 36. San Diego: Center for U.S.-Mexico Studies, University of California, 1991. United Nations Economic Commission for Latin America and the Caribbean. "Towards New Forms of Economic Cooperation Between Latin America and Japan." Santiago: United Nations, 1987.

Index Africa, 46 Alaskan oil reserves, 124 Americas Society, 1-2 Arab oil embargo of 1973, 71, 77, 101 Argentina, 7, 11, 22, 48; bank debt in, 31, 110; capital recycling plan and, 43; economic integration and, 60; exports to Japan, 14; Falklands conflict and, 125 Aristide, Jean Bertrand, 143 ASEAN. See Association of Southeast Asian Nations Asia, 7, 35, 46, 60; capital recycling plan and, 41; investment by Japan in, 18, 21, 23; manufactured goods to Japan from, 11-12, 13; Nissan's strategy in, 90; trading companies and, 53, 54-55 Association of Southeast Asian Nations (ASEAN), 145 Australia, 55 Bahamas, 9, 14 Baker, James A., Ill, debt plan of, 30, 41, 82,126 Bank for International Settlements (BIS) guidelines, 36 Bank lending, international, 27 Bank of Japan, 30 Bank of Tokyo, 28 Banks, Japanese: Brazil and, 29, 31, 102, 109-113; Latin America and, 5, 6, 2738; Mexico and, 29, 31, 77-79,82, 85, 89,93,110 Barrios de Chamorro, Violeta, 130, 131 Bay of Pigs, 123

BIS. See Bank for International Settlements Bolivia, 47 Brady plan for bank debt, 31, 32, 35-36; capital recycling plan and, 39, 40, 41, 42; global partnership and, 128-129 Brazil, 6, 7, 91, 144; banking by Japanese in, 29, 31, 102, 109-113; capital recycling plan and, 43; economic integration and, 57, 60; economic trends between Japan and, 105-107, 113-118; historical cooperation with Japan, 103; investment by Japan in, 18, 21, 23, 24-25, 47,48, 93,105-106, 113; social/investment reforms needed in, 101-102,116,117-118; trade with Japan, 13, 14, 54-58, 61, 107-109 Britain, 22,81,125 Bueno, Carlos, 114 Bush, George H., 64; coalition diplomacy and, 134; democracy in Latin America and, 130; Enterprise for the Americas Initiative, 50, 64, 102, 135-136, 147-148; North America Free Trade Agreement and, future, 142; trade and investment policies of, 127129 C. Itoh, 53, 56, 57 Canada, 7, 50, 54 Capital control, Japanese, 84 Capital recycling plan, Japanese, 7-8, 3844,60,63,111-112,129 Cardoso de Mello, Zelia, 114 Caribbean, 6, 23, 50

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158

Index

Carter, Jimmy E., 124-125 Cayman Islands, 82 Central America, 23, 50 Chile, 6, 13, 14, 144; capital recycling plan and, 43; economic integration and, 60; investment by Japan in, 26, 48, 93; open competitive economy in, 7; trading companies and, 56, 59 China, 21 Chino, Tadao, 63-64 Cold War, ix, 127, 137 Colombia, 7, 43; investment by Japan in, 21, 26, 48; trade with Japanese, 14, 56, 59 Communism, collapse of, 127 Constitutional restraints, Japanese, 140 Contras (Nicaraguan), U.S. support for, 125 Costa Rica, 31, 36, 137 Cuba, 126,133,143 DAC. See Development Assistance Committee Dai-Ichi Kangyo Bank, 28 Debt crisis, Latin American, 126, 153; Brazil's debt to Japan, 109-111; capital recycling plan and, 38-39; Japan's economic relationship with Latin America disturbed by, 5-6, 9-11, 12, 18-19, 45; open economies in response to, 128; stages of, 29-31 Debt crisis, Mexican, 72, 81-82 Debt relief for Latin America, ix, 28-35, 46. See also Capital recycling plan Democracy in Latin America, Japanese support for, 130-131 Development Assistance Committee (DAC), 51 Dominican Republic, 48 Drugs in Latin America, 131 EAEC. See East Asia Economic Caucus East Asia Economic Caucus (EAEC), 142-143 Echeverría, 80 Economic Cooperation Department of Keidanren (Japan), 116 Economic integration in Latin America, 57-58,60,61,108-109 Economist, 52-53

Ecuador, 14,31,43 Egypt, 47,136 Election observers, Japanese, 130 Emigration from Japan, 123 Emmott, William, 44 Enterprise for the Americas Initiative, 50, 64,102, 135-136; key provisions of, 147-148 European Community, 7, 50, 74, 144; manufacturing investments by Japan in, 21, 23; maquiladora industry and, 92; nuclear technology and, 140; trading companies and, 53-55 Export-Import Bank of Japan (JEXIM), 28, 35; Brazil and, 112-113; capital recycling plan and, 39-44, 111; oil reserves of Mexico and, 77; survey of investment trends by, 23 Exports. See Trade, foreign Falklands (Malvinas) conflict, 125 Fonseca, Marcos, 114 France, 22, 51 Free riders, bank lending and, 29, 31 Fujimori, Alberto K., 143 Fulbright Visitor programs, 144 Fund recycling plan. See Capital recycling plan GATT. See General Agreement on Tariffs and Trade General Agreement on Tariffs and Trade (GATT), 108-109, 133,142 Geopolitical interests, economic assistance and, 46, 47-48, 60,104-105 Germany, 22, 25, 51,74,81 Global Cooperation Fund, 144 Global partnership (Japan and U.S.), x, 1-2,128-139 Grenada, 125 Gulf War, 44, 50 Haig, Alexander, 125 Haiti, 91,130,131,143 Hashimoto, Ryutaro, 50, 114, 115 Hollerman, Leon, 117 Honduras, 47, 137 Hong Kong, 21 Human rights offensive in Latin America, 124-125

Index IMF. See International Monetary Fund Import liberalization trend in Latin America, 58, 128 Imports. See Trade, foreign Income threshold, Japanese assistance and, 48-49 India, 91 Indonesia, 46, 90 Inter-American Development Bank, 38; capital recycling plan and, 39, 41, 43; cooperation between Japan and Latin America and, 14 Inter-American Dialogue, 116 International Monetary Fund (IMF), 30, 31, 39, 43; Brazilian negotiations with, 58; influencing Japan's lending policies towards Mexico, 72, 81-82 International Visitor programs, 144 Investment, direct foreign: Brazil receives from Japan, 18, 21, 23, 24-25, 47, 48, 93, 105-106, 113; Chile receives from Japan, 26, 48, 93; Colombia receives from Japan, 21, 26, 48; Latin America receives from Japan, 5, 9, 18-26; Mexico receives from Japan, 18, 21, 23,25, 26, 48, 69, 73-74, 77, 78,80-85, 98. See also Organization of Economic Cooperation and Development; Overseas development assistance Israel, 47 Italy, 51 Jamaica, 137 Japan, 1, 3, 7, 103, 104; Brazilian social/investment reforms required by, 101-102,116,117-118; debt from Brazil to, 109-111; democracy in Latin America encouraged by, 130-131; drugs in Latin America and, 131-132; economic trends between Brazil and, 105-107,113-118; economic trends between Latin America and, 16-18, 44-51, 59-62; global partnership with U.S., x, 1-2, 128-139; history of economic relationship with Mexico, 70-73; maintaining political relationship with U.S., ix, x, 3, 72, 121-122,126-127,131,142-143,145; manufactured goods purchased from Asia, 11-12; perceptions of Mexico,

159

changing, 85-87; phases of interest in Latin America by, 122-127; strategic approach towards Mexico by, 88-96, 118; threats to U.S. cooperation with, 1, 3, 133-139; trading companies of, 51-59; U.S. hegemonic sphere and, 8, 62-64,104-107,117,118-119. See also Banks, Japanese; Capital recycling plan; Investment, direct foreign; Trade, foreign Japan and Latin America in the New Global Order (study group), 2 Japanese Foreign Ministry, 125, 129, 137 Japanese Liberal Democratic Party (LDP), 138-139 Japanese Ministry of Finance, 33, 110, 135-136,137 Japanese Ministry of Foreign Affairs (MOFA), 136-138 Japanese Ministry of Trade and Industry (MITI), 63, 87, 107 Japanese private sector, 24, 141; economic strategies of, 90-91, 93; fears over high profile of government, 134-135; intrafirm trade with, 21; investment activities and, ix, 18; North America Free Trade Agreement (NAFTA) and, future, 86-87; public relations with U.S., 89; skepticism about Latin America in, 140, 141. See also Investment, direct foreign; Trade, foreign; Trading companies, Japanese Japan External Trade Organization, 107, 115 Japan's Strategy in Brazil: Challenge for the United States (Hollerman), 24 JEXIM. See Export-Import Bank of Japan Johnson, Lyndon B., 123 Julius, DeAnne, 63 Kaifu, 50,131,137 Kandir, Antonio, 114 Keiretsu system, 53 Kennedy, John F., 123 Kirkpatrick, Jeane, 125 Korea, 21 Kubtischek, Juscelino, 105

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Index

Latín America, 5, 8, 26, 144; banks of Japan and, 5, 6, 27-38; capital recycling plan and, 38-44, 60, 63; economic integration in, 57-58, 60, 61, 108-109; economic trends with Japan, 16-18, 44-51, 59-64; global partnership's focus on, 128-139, 141— 145; import liberalization in, 58, 128; needs of Japanese met by, 140-141, 144-145; phases of interest by Japan in, 122-127; stabilization and economic reform in, x, 2, 8; trade between Japan and, 5, 6, 8-18, 51-59. See also Investment, direct foreign; specific countries in Law to Promote Mexican Investment and Regulate Foreign Investment (Mexico 1973), 80 LDP. See Japanese Liberal Democratic Party Loans, grants compared to, 45. See also banks Mahathir, Mohamed, 142, 143 Malaysia, 21,90, 91 Manaus Free Trade Zone, 106 Manufactured goods, ix, 9, 55, 71; Brazil exporting to Japan, 107-109, 115; investment concentration by Japan in, 23-24, 83-84, 91; Latin America's key imports from Japan, 12-13. See also Investment, direct foreign; Trade, foreign Maquiladora assembly industry, Japanese, 25; guarantor of market access in United States, 72-73, 92; misconceptions about, 82-83; stopgap nature of, 86 Marubeni, 53, 57 MDBs. See Multilateral development banks Media, Japanese, 139, 141 Mercosur group, 57-58, 60, 61, 109 Mexico, 6, 9, 11, 144; banks of Japan and, 29, 31, 77-79, 82,85,89,93,110; capital recycling plan and, 43; economic integration and, 60; history of economic relationship with Japan, 70-73; investment in, Japanese, 18, 21, 23,25, 26, 48, 69, 73-74, 77, 78,80-85,

98; Japanese economic strategy towards, 88-96, 118; open competitive economy in, 7, 44, 85, 89; Organization of Economic Cooperation and Development (OECD) trade and, 97-98; Pacific Economic Cooperation Council and, 141; perceptions ofJapan, 69-70, 8788; trade with Japan, 13,14, 56, 58-59, 75-77 Middle East, 46 MIF. See Multilateral Investment Fund MITI. See Japanese Ministry of Trade and Industry Mitsubishi, 52, 53, 57 Mitsui, 52, 53, 57, 59 Miyazawa, Kiichi, plan for bank debt by, 30-31,39,129 Modiano, Eduardo, 114 MOFA. See Japanese Ministry of Foreign Affairs Moreira, Marcilio Marques, 115 Mulford, David C„ 50, 114 Multilateral action, U.S. commitment to, 133-134,143 Multilateral development banks (MDBs), 39, 40,41,111 Multilateral Investment Fund (MIF), 135-136 Multinational companies, Japanese, 53 NAFTA. See North American Free Trade Agreement Nakasone, Yasuhiro, 39, 130 Netherlands, 51 New World Order, 134 New Zealand, 55 Nicaragua, 127,130 Nissan, 25, 73, 82; global strategy of, 85, 89-90; Japanese investment strategy and, 93-94; North American Free Trade Agreement and, 95-96 Nixon, Richard M„ 124 Nobrega, Mailson da, 113 North America, 23, 53-54 North American Free Trade Agreement (NAFTA), future: global partnership and, 142; Japan's reaction to, 64, 84; Latin America's economic linkage to Japan and, 7, 9, 17; Mexican

Index

expansion in anticipation of, 25; Nissan's global strategy and, 85, 90; uncertainty of Japanese firms about, 86,92,94-96,135 Nuclear technology, 140 OAS. See Organization for American States ODA. See Overseas development assistance OECD. See Organization of Economic Cooperation and Development OECF. See Overseas Economic Cooperation Fund Oil and Japanese foreign policy, 124 Oil reserves in Mexico, 71, 75, 77, 78 OPEC oil shocks of 1970s, 27 Organization for American States (OAS), 125,132 Organization of Economic Cooperation and Development (OECD), 45, 97-98; new disbursement criteria for, 137138; trading companies and, 54 Overseas development assistance (ODA), 44-51, 129 Overseas Economic Cooperation Fund (OECF), 77, 113, 136, 137; capital recycling plan and, 39, 40, 41, 111 Pacific Basin, economics in, 87-88, 142 Pacific Economic Cooperation Council, 141 Pakistan, 47 Panama, 6, 9, 11; bank debt in, 31; invasion of by U.S., 132; shipping registry finance and, 12,16, 22-23 Panama Canal Treaty, 124, 125 Paraguay, 6; economic integration sind, 57, 60; imports and, 14; ODA and, 47, 48 Petróleos Mexicanos (PEMEX) (Mexican state oil company), 28, 71, 77 Persian Gulf economies, Japanese assistance to, 50 Peru, 6, 14; abolition of freedoms in, 143; investment by Japan in, 18, 21, 48, 93; trading companies and, 56 Pinochet, Augusto, 125 Plaza Accords of 1985, 127 Poland, 136

161

Privatization of state-owned enterprises in Latin America, 58 Raw materials into Japan, 9, 13, 53, 123. See also Trade, foreign Reagan, Ronald W„ 125,126,127,129 Reverse exports, 17 Rules of origin, free trade and, 17-18, 86, 94-95,135 Sandinista rule, 130, 131 Samey,José, 111 Securitization process, bank debt and, 30 Singapore, 21 Smith, Peter, 117 Sogo shosha (trading companies), 51-59 Soybean embargo by U.S., 124 Stailings, Barbara, 39, 107-108,115-116, 117 Stock market, Japanese, 37 Sumita, Satoshi, 30 Sumitomo, 53, 57 Taiwan, 21 Takeshita, Noburo, 114 Thailand, 21, 90 Trade, foreign: Brazil with Japan, 13, 14, 54-58, 61. 107-109; Chile with Japan, 56, 59; Colombia with Japan, 14, 56, 59; European Community with Japan, 53-55; Latin America with Japan, 5, 6, 8-18, 51-59; Mexican Organization of Economic Cooperation and Development trade, 97-98; Mexico with Japan, 13, 14, 56, 58-59, 75-77 Trading companies, Japanese, 51-59 Triad market approach, 92, 94 Trilateral Commission, 104 Turkey, 47 United Nations, international bank lending and, 27 United States, 11, 54, 71, 81; economic policies toward Latin America, 13, 27, 28, 30-34, 127; global partnership with Japan, x, 1-2, 128-139; hegemonic sphere of, 8, 62-64,104-107,117,118119; influencing Japan's lending policies towards Mexico, 72; investment by Japan in, 21;

162

Index

maquiladora industry and, 72-73, 92; ODA and, 45, 47-48, 50-51; Pacific Basin and, 87, 142; political policies towards Latin America, 123-126, 130; relationship-securing steps with Japan, x, 142-143, 145; threats to cooperation between Japan and, 1, 3, 133-139; trading companies and, 54; unilateral military action and, 133-134, 143. See also specific president Uruguay, 31, 36, 48, 57, 60 U.S. Agency for International Development (USAID), 111 U.S.-Canada Free Trade Agreement, 149150 USAID. See U.S. Agency for International Development

Venezuela, 9, 11, 31, 35; capital recyclng plan and, 43; economic integration and, 60; exports to Japan, 13, 14; investment by Japan in, 21, 26; tradiig companies and, 56, 59 Walesa, Lech, 136 World Bank, 30, 31, 37-38; capital recycling plan and, 39, 40, 41, 43; influencing Japan's lending policie; towards Mexico, 72 World War II, Japan restoring relation after, 123 Yamaguchi, Yutaka, 37 Yen, status of the, 49, 50, 127 Yom Kippur War of 1973,124

About the Book As Latín America emerges from the "lost decade" of the 1980s into the "growth decade" of the 1990s, Japan is reassessing its relationship with the region. With its large and developing markets and its rich resource base, Latin America will look increasingly attractive to Japan, assuming it continues to stabilize and restructure its economies. The moment is also right for active collaboration between Japan and the United States in Latin America, and the United States has encouraged Japan's increased economic aid to the region. Japan and Latin America in the New Global Order explores the potential for conflict and cooperation in the emerging Japan-Latin America-U.S. relationship, highlighting the cases of Brazil and Mexico. The outcome of a high-level study group held at the Americas Society, the book addresses critical issues and offers policy recommendations to help ensure mutually beneficial relations now and in the years to come.

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