In January 1985, when President Reagan and Prime Minister Nakasone met in Washington, Reagan asserted that the United States was being denied full access to four important Japanese markets. Surprisingly, forest products were on the president's short list.
This recognition signified great progress of a sort for the forest products industry. Following the first Reagan-Nakasone meeting in Washington in 1983, the newly formed U.S.-Japan Advisory Commission was charged with examining issues of mutual interest, among them bilateral trade. Initially, forest products were not even considered. Only after the commission learned that U.S. forest product exports to Japan are substantial—amounting to some $2.5 billion annually, made up of about $1.9 billion in solid-wood products and $0.6 billion in pulp and paper products—did they become of major interest.
The groundwork has paid off: in January 1986 the Japanese government announced plans to make across-the-board tariff cuts on many finished wood products. Most of the cuts are scheduled to go into effect in April 1987, with a few slated for April 1988.
Following are the proposed cuts in Japanese wood products tariffs for selected items as reported in the Japan Economic Journal.
To understand how this development might affect U.S. exports to Japan, one must first understand the structure of Japanese international trade, especially regarding imports. Because Japan is a resource-poor country, its basic approach since World War II has been to import and process natural resources. The products are consumed domestically or exported to generate earnings that in turn finance additional resource imports.
For the most part, this trading pattern is followed in forest products, with Japanese domestic consumption of processed forest products far outstripping exports. Japan, however, is a relatively heavily forested country and historically has drawn from its own resources to meet domestic wood needs. Even today about 37 percent of the wood processed by the Japanese economy originates in Japan.
In the early postwar period Japan began to supplement its domestic resources by importing foreign logs, first from the Philippines and other Asian-Pacific countries and later from the United States and the Soviet Union. All the while Japan continued to develop its wood-processing industry. In the early years this made economic sense because Japanese wages were low and many forest products require labor-intensive production processes. But with the onset of much higher wages during the 1970s, the appropriateness of this policy has become open to serious question.
Nevertheless, today Japan is a massive importer of raw wood in the form of logs and wood chips; for these categories, Japanese imports represent 45 percent and 83 percent of total world imports, respectively. By contrast, Japan accounts for 10 percent or less of world imports of most processed forest products. The United States, a major exporter of both processed and unprocessed wood to Japan, accounts for almost 50 percent of Japan's softwood log imports and more than one-third of its chip imports. Overall, the United States is the source of about one-fourth of Japanese imports of unprocessed wood. For processed solid wood the United States accounts for about 18 percent of Japan's relatively modest total imports.
Keeping imports at bay
Japan presents numerous and effective obstacles to would-be exporters to its markets. As I. J. Bourke points out in a companion article in this Resources, by the completion in 1979 of the Tokyo Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade, tariffs in Japan on most finished wood products were all but eliminated, with the notable exceptions of wood panels and veneers. Until the January 1986 announcement, the Japanese tenaciously resisted reducing the tariffs on wood panels, which protected a depressed industry. For pulp and paper products, tariffs were reduced earlier but still are common. Some lumber tariffs remain, but generally these apply to wood species that are not important U.S. exports to Japan.
The Japanese tariff structure—or, better, restriction structure—is characterized by what Bourke describes as "tariff escalation": the higher the degree of processing, the greater the tariffs or other restrictions on importing. Tariff escalation is not unique to forest products, or to Japan; indeed, the practice is common.
Nontariff barriers include prohibitions or quotas that are designed to limit imports, measures aimed at other goals such as the preservation of industrial standards, and restrictions based on health and sanitary considerations. It often is difficult to determine the real purpose of some of the restrictions, but progress has been made in sorting out and dealing with de facto barriers. For example, Japan's requirement that all imported lumber be re-sorted and regraded was discontinued in the late 1970s.
Differences in building standards and housing codes, as well as in tastes, also have restricted imports. Japan's post-and-beam approach to building differs so much from North American platform-frame construction techniques that different lumber standards are required. The North American standard plywood panel is 4 feet by 8 feet, whereas the Japanese standard is 3 feet by 6 feet. The Japanese place a premium on white wood, freedom from knots and other defects, and the aesthetic quality of the grain, with much of the lumber used for residential construction custom-sawn by mills. For some paper products, the Japanese prefer different shades of coloring than do North Americans.
In addition, institutional factors limit the degree to which imports can penetrate the Japanese market. The complexity of the Japanese distribution system effectively restricts processed imported products, and the traditionally close relationships among producers, distributors, and banks tend to make access to the system even more difficult.
Also, the Japanese have a tolerant view of cartels and cooperation among firms, particularly in distressed industries. Japanese importer associations, which sometimes function to maintain "orderly markets," have the power to impede imports and provisions of the 1979 Act for Specified Depressed Industries, which allows for cartels and government subsidies to struggling industries in Japan, can be used to deter foreign competition. The effects of these arrangements on forest products imports can be substantial because plywood, corrugated cardboard, and, in some regions, lumber industries are officially classified as depressed.
Opening the door a crack
Given this spectrum of import barriers, how much difference to the U.S. trade deficit with Japan will the reduction in tariffs on finished wood products make? Overall, probably not much. Clearly, trade restrictions are only part of the general problem that has resulted in a huge U.S. trade deficit with Japan—about $50 billion in 1985. The formerly strong dollar surely inhibited U.S. exports. And while the United States is a major exporter of softwood plywood, it has formidable competitors, particularly in the Canadians. In fact, because Japan's plywood industry primarily produces hardwood plywood, it is likely to feel much more pressure from the Indonesians, who also produce hardwood plywood, than from the North Americans.
Nevertheless, lower tariffs could be significant for some wood products groups. Japan is one of the world's leading wood-using economies. Japanese wood-panel imports, in particular, probably would be substantial without tariff and other restrictions, and U.S. pulp and paper export prospects appear increasingly favorable as the Japanese competitive position in several products continues to erode.
Taking the long-term view, Japan's comparative advantage in both solid wood processing and in paper and pulp production has declined and probably will continue to do so as she becomes increasingly dependent on foreign resources. Given these facts, how might Japan be expected to respond?
The answer will be conditioned by the complex relationships among Japan's domestic economy and international economic realities. In the early years following World War II, the Japanese tended to be pragmatic and flexible in allowing orderly retreats from declining industries as resources were redirected into more promising areas. Later, as represented by the Depressed Industries Act of 1979, this flexibility seems to have given way to a policy of long-term retrenchment and protection of declining industries. Finally, the recent lowering of trade barriers suggests a willingness, however reluctant, to move back toward more liberal trade, given heavy enough pressure to do so.
Roger A. Sedjo is senior fellow in RFF's Renewable Resources Division and director of its Forest Economics and Policy Program. He is the author or editor of several RFF publications, including Issues in U.S. International Forest Products Trade (1981).
A version of this article appeared in print in the June 1986 issue of Resources magazine.
