Diplomacy Playing It Cool

By John Greenwald

The two leaders are old friends who have fallen on the hardest times of their political lives. Japanese Prime Minister Yasuhiro Nakasone calls the American President "Ron," and Reagan calls the Japanese leader "Yasu." Thus Nakasone last week hoped to get a sympathetic welcome when he arrived in Washington for talks with Reagan aimed at defusing tense trade troubles between the two countries. Nakasone fully understood the importance of the trip, which he grandly described as the "most important journey ever made to Washington by a Japanese Prime Minister." As he jetted toward Washington, the Prime Minister read a book about Prince Fumimaro Konoe, Japan's pre-World War II leader. At one point he put the book down and mused out loud that a Konoe- Roosevelt summit might have prevented the Pacific war.

Nakasone has been hit by a series of domestic troubles. The runaway increase in the value of the yen, which has jumped more than 90% since October 1982, has hurt many Japanese companies and pushed unemployment toward 3%, a postwar high. In April the Reagan Administration slapped a 100% tariff on $300 million worth of Japanese electronics goods in retaliation for alleged trade misdeeds, which seemed to belie any special relationship between the two leaders. Then two weeks ago the Japanese parliament forced Nakasone to withdraw a cherished plan to impose a sales tax. The controversial measure was part of a broad effort to stimulate the economy by reforming the tax system. The setback placed the Prime Minister in desperate need of a foreign policy triumph to help keep him in office until his term ends in October.

Reagan could easily understand Nakasone's political troubles because he has plenty of his own in the wake of the Iran-contra scandal. In addition, Reagan has to deal with a Congress that has become increasingly protectionist. As America's trade deficit has steadily grown, political leaders have become more and more vocal in their demands for a halt in Japanese imports. Tokyo last week released new figures showing that Japan's worldwide trade surplus ballooned to an astonishing $101.4 billion in the twelve-month period that ended in March. Some $52 billion of that bulge came from trade with the U.S.

The Administration has long been pulled in different directions over its trade policy toward Japan. While State Department and National Security Council officials stress Nakasone's role as a faithful ally, the Commerce Department and U.S. Trade Representative Clayton Yeutter want to persuade Japan to open its markets more to American goods. In recent weeks the Administration has been using a double-edged strategy of showing understanding for Japan but pressuring the Japanese to do better.

Reagan was pushing that two-track approach last week even before Nakasone arrived. Speaking to the U.S. Chamber of Commerce, the President attacked a restrictive trade proposal put forth by Representative Richard Gephardt, a 1988 White House hopeful. The Gephardt plan was an amendment to a House trade bill that would force countries that pile up huge trade surpluses with the U.S. through unfair trade practices to slash the imbalances by 10% a year or face a barrage of withering sanctions. Reagan described it as a "particularly bad proposal." But in the same speech the President called on Japan to abide by the rules of fair trade. Declared Reagan: "The final answer to the trade problems between America and Japan is not more hemming and hawing, not more trade sanctions, not more voluntary-restraint agreements and certainly not more unfulfilled agreements. The answer is genuinely fair and open markets on both sides of the Pacific. And the sooner the better."

While Nakasone was flying to Washington, the House of Representatives passed the Gephardt amendment by a vote of 218 to 214. This signaled that the U.S. was getting tough with Japan. Said Gephardt: "The vote said very clearly and unequivocally that we want a change in trade policy."

When Reagan and Nakasone first met on the sun-drenched White House South Lawn, the President again used the double-edged sword. Turning to television cameras that were carrying the ceremonies live back to Japan, he spoke of the importance of U.S.-Japanese relations and told of the "great care" that has been taken over four decades "to mold and create this gem of a relationship." Yet he called the gaping trade imbalance between the two countries "unsustainable" and warned that "tangible actions must be taken by us both."

Nakasone sought the same ceremonial high ground. Said he: "I am deeply concerned that serious frictions on trade and economic issues are on the rise between our two countries. We should not allow such a situation to undermine the friendship and mutual trust between us."

Following the arrival ceremonies, the two leaders got down to serious talks. As they posed in the Oval Office for photographers, Reagan explained the Gephardt vote, saying, "We're now very much heartened by the narrow margin of victory," because it meant he would be able to sustain a veto. Yet the House later passed the final trade bill containing the Gephardt amendment by a decisive 290 to 137, just one vote shy of the amount needed to override a veto.

When talk turned to Reagan's 100% tariff on certain Japanese goods, the President said he expected to lift the measures "as soon as possible." That could mean early June, when Japan joins the U.S. and major West European nations in Venice for an economic summit. Nakasone would like the sanctions lifted even sooner. Calling them a "very sore thorn sticking in our small finger," the Prime Minister sought their immediate removal. But Reagan did not give any specific date. The U.S. first wants to see clear signs that Japan is living up to a 1986 agreement to refrain from selling semiconductors for less than it costs to produce them.

Nakasone attempted to disarm his critics by extending a few small olive branches. The Prime Minister said he had ordered the Finance Minister and the Bank of Japan to continue lowering interest rates to boost the Japanese economy and enable firms and consumers to buy more foreign products. The disclosure dovetailed neatly with congressional testimony last week by Federal Reserve Chairman Paul Volcker, who said the U.S. central bank was moving to push American interest rates higher. At week's end major U.S. banks raised their prime rate from 7 3/4% to 8%. Taken together, the U.S. and Japanese actions will make it more attractive for investors to hold dollars and less attractive to hold yen, which should strengthen the collapsing dollar against the surging yen.

The joint interest-rate moves reflected a quiet effort to coordinate U.S. and Japanese economic policies. Though some Administration officials were initially surprised by Nakasone's announcement, the White House later acknowledged that Treasury Secretary James Baker had discussed a combined policy with the Japanese and that Volcker knew about it.

While Nakasone was open and relaxed when talking with Administration officials, he found little to smile about once he ventured to see congressional leaders. His stops included an hourlong session with Senate < Majority Leader Robert Byrd and Republican Chief Robert Dole, in addition to a meeting with top House members. Byrd bluntly told him that the U.S. should keep its tariffs on Japanese electronic goods until Tokyo abandons all unfair trade practices. The Senate leader argued the same point in a letter to Reagan that warned against lifting sanctions until Tokyo demonstrates "sustained compliance" with trade agreements. Yet Nakasone's trip to Capitol Hill won him some respect. Said Senator Max Baucus, a Democrat from Montana and a trade hawk: "Now I understand why the Japanese do so well. They just hang in there. It was an impressive performance."

Skepticism dogged the Prime Minister throughout his three-day visit. In the past few years several Japanese leaders have traveled to Washington and promised to take action that would reduce the trade deficit. But the only result has been a larger and larger trade imbalance.

Nakasone and Reagan parted on an upbeat note during a final visit in the White House Rose Garden, and agreed that the trade deficit was "politically unsustainable." But both nations must now demonstrate far more than a will to discuss their problems during summit meetings. They must show that they can attack and solve the trade differences that are steadily turning the two close political and military friends into bitter economic rivals.

With reporting by Barry Hillenbrand with Nakasone and Barrett Seaman/ Washington