Prestowitz

Japan rules the global supply chain

As the true severity of Japan’s twin tsunami and nuclear crises has become apparent over the past week, so also has the notion of America’s economic triumph over Japan in the 1990s been exposed for the myth it has always been. Volvo reported yesterday that it has only a ten-day supply of Japanese-built navigation and ...

YOSHIKAZU TSUNO/AFP/Getty Images
YOSHIKAZU TSUNO/AFP/Getty Images

As the true severity of Japan’s twin tsunami and nuclear crises has become apparent over the past week, so also has the notion of America’s economic triumph over Japan in the 1990s been exposed for the myth it has always been.

Volvo reported yesterday that it has only a ten-day supply of Japanese-built navigation and climate control systems left and is girding for a possible production halt. Last week General Motors announced it was closing its 923 employee Shreveport, La. plant where it assembles Chevrolet Colorado and GMC Canyon models because of a lack of Japanese made parts. In Marion, Arkansas, the Hino Motors Manufacturing Plant that makes rear axles for Toyota Tundra pickup trucks and other Toyota models struggled to stay open in the face of a rapidly declining supply of gears and other parts that are imported from Japan.

The situation is similar in a variety of other industries. Much of the equipment used to make semiconductors is made only or mainly in Japan with two thirds of the critical steppers coming from Nikon and Canon. About 90 percent of the BT resin used in production of cell phones and laptop computers and 60 percent of the world supply of the silicon wafers used to make computer chips comes from Japan. Companies like Apple and Hewlett Packard could find themselves in significant trouble if disturbances in Japan stretch out much longer. Products that no one ever thinks about like tiny microphones, high quality galvanized steel, high performance machine tools, advanced electronic displays, and the carbon fiber that is used to make golf clubs and the wings of the new Boeing 787 Dreamliner all come either only or mainly from Japan.

A number of recent articles, have discussed the intricacies of the global supply chain and how companies are scrambling to adjust their global production processes to the shortages already arising as a result of the situation in Japan. What no one has discussed, however, is the difference in this regard between Japan and the United States. But ask yourself. How many auto plants around the world outside of North America would face the danger of having to close for lack of parts made in the United States? How much danger would Apple be in from an earthquake even in Silicon Valley itself?

Okay, maybe that would hurt Apple, especially if Steve Jobs was injured in any way. But you get the point. A disaster in the United States would have nowhere near the impact on the global supply chain that the present disaster in Japan is already having. The reason is very simple. With a few exceptions like Intel computer chips (even Boeing only makes about 30 percent of the Dreamliner in America), the United States doesn’t make much for global markets anymore.

Yes, yes, I know, we’re supposed to be a services and high tech economy. But actually, our roughly $150 billion services trade surplus is tiny compared to our roughly $650 billion deficit in trade in goods. Moreover, even in advanced technology trade, our deficit is more than $100 billion. The truth is that we’re just not very competitive in anything in international markets.

Which takes me back to the competition between the United States and Japan from the late 1970s until the early 1990s. At the time, Japan’s economy was surging much as China’s is today. Japanese producers more or less wiped out the U.S. textile, consumer electronics, machinery, and machine tool industries, decimated the U.S. steel industry, were taking huge gobs of market share away from the U.S. auto makers, and even had Silicon Valley on its knees as they took more than 50 percent of the market for computer chips.

There was some talk at the time, stimulated by Vogel’s book, of Japan possibly achieving a bigger GDP than the United States. No one took that very seriously then because with half the population of the United States Japan would have had to have twice the per capital output — a very unlikely proposition. In any case, the real competition wasn’t between the two economies in total. It wasn’t between Japanese and American farmers or Japanese and American hospitals, or Japanese and American retail stores. It was between Japanese and American producers of goods and services for the international market place.

Eventually, the Plaza Agreement by which Washington forced Japan dramatically to revalue its yen by eventually over 100 percent and the bursting of Japan’s real estate and stock market bubble in 1991-92 created burdens that slowed Japan’s growth and pushed it into what came to be known as "Japan’s lost decade" of the 1990s.  At the same time, the U.S. entered its own long boom of the 1990s and the early 2000s. The slowing growth of Japan contrasted with the faster U.S. growth made it appear that American had emerged from its competition with Japan as the resounding winner. People asked why we had ever been worried about Japan.

The collapse of our own dot.com and sub-prime real estate bubbles has made it apparent that the U.S. performance over that time was actually not nearly as great as it had appeared. In fact, it had been something of a Potemkin Village.

Now the impact of Japan on the global supply chain as contrasted to the relatively weak influence of the United States on the chain demonstrates that it was actually Japan, not America, who won the competition for global markets.

 Twitter: @clydeprestowitz

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