Difficult Tradeoffs

For those of us who struggle to remember yesterday, let alone 30 years ago, the news came as a surprise. Japan, for the first time since the early 1980s, recorded a trade deficit for the year 2011.

“It reflects fundamental changes in Japan’s economy, particularly among manufacturers,” Hideki Matsumura, senior economist at Japan Research Institute, told the Associated Press this week. “Japan is losing its competitiveness to produce domestically.”

Of course, such a state of affairs is unlikely to endure. Massive earthquakes, nuclear disasters, tsunamis and skyrocketing currency value don’t come around every year. And the country maintains a high trade surplus with the United States. But at a time when every nation seems determined to run a trade surplus, Japan’s example is worth a look.

Peter Drucker characterized the Japanese economic model as being “highly mercantilist,” meaning that national power is sought through economic strength, in particular by maintaining a trade surplus. “The Japanese . . . only sell; they do not buy,” Drucker wrote in The Frontiers of Management. “They practice adversarial trade.”

This wasn’t simple Japan-bashing, for Drucker admired Japan immensely (as we’ve noted). But he warned that such insistence on being all-sell-and-no-buy was a mistake. “In adversarial trade, both sides lose—one side, the buyer, right away, the other side, the seller, within a decade or so,” Drucker wrote.

The costs to the buyer are obvious. “If the seller in adversarial trade is truly successful, he eventually destroys the buyer’s industry,” Drucker said. The U.S. saw its consumer electronics largely replaced by those from Japan, for instance.

But the costs to the seller are still considerable, if less obvious. [EXPAND More]

“The seller has no defense against retaliatory action on the part of the buyer,” Drucker explained.  “He cannot counter-act by stopping his purchases: he does not make any.” For instance, while the U.S. could survive without imports from Japan, “Japan without industrial exports to the United States would face a major depression with double-digit unemployment.”

And that’s not all. “The seller in adversarial trade is also bound in the end to lose financially,” Drucker asserted. “He cannot be paid at all.”

Of course, today, China has long since displaced Japan as the chief mercantilist of the globe, and China faces similar problems. So while Japan’s trade deficit may seem like a setback, Drucker might call it an accidental blessing.

What do you think: Should Japan be worried about its trade deficit?  [/EXPAND]