The fine art of sumo diplomacy

There's only one thing worse than when Japan and the US get too cosy. That's when they're not. By Peter Calder

An old African proverb holds that when elephants make love it is the grass that suffers. But the same saying acknowledges that the giants cause even more damage when they fight.

One of the over-riding imperatives of the Apec forum is maintaining the health of the relationship between its two elephant economies, the US and Japan.

That doesn't necessarily mean they should be the best of friends - indeed, many Apec members fear that too cosy a relationship between the big two could shut out everyone else. But the sheer size of their economies means a breakdown in their trade relationship would be disastrous for the rest of the region.

Whatever way you look at it, the Americans and the Japanese are the twin giants of the Apec group which meets in Auckland next month. Locked in a perpetual embrace, each is forced by mutual interdependence to ensure it never wrestles the other to the ground.

These two countries set the economic agenda for the rest of the forum. Each is the other's biggest market - America's trans-Pacific trade surpassed its trade across the Atlantic almost 15 years ago - staunchest ally and most fearsome rival. And everyone agrees that the success of Apec - not just this year but any time - depends on maintaining the relationship between the two economic superpowers who stare at each other across the Pacific.

Phrases like gross domestic product can bring a faraway glaze to the most attentive eye, but we can get a sense of the scale of it like this: the economies of Japan and the US are four times the size of the rest of Apec put together.

Even after almost a decade of very flat growth (Japan survived the 1987 crash only to have its own overvalued real estate market melt down in 1991) the Japanese economy is six times bigger than that of China, which has ten times the population.

Another comparison: put all the rest of the pre-crisis "tiger" economies of Asia together and their annual economic output is barely half that of Japan.

"They are the absolute behemoths of the whole business," says one foreign affairs insider. "They depend on each other to stay alive."

Ironically, it is Japan's meteoric post-war success - it makes too much money and has nowhere to spend it but in America - that has helped to make this the most delicate of trade relationships.

The American deficit has for years been financed by Japanese business investing in US Treasury bonds. As the US dollar steadily declined against the yen, many of those investors lost their shirts, not overnight, but inexorably, inevitably. And the worst of it all was that the Japanese had to watch it happen. If they sold out, they could put the American economy into a tailspin from which it would not recover, which would hurt no country more than Japan.

New Zealanders, particularly those who can hear the bleat of sheep as they settle down for the night, might be forgiven for laughing up their sleeves when Americans talk about free trade. Having given a direct taxpayer subsidy of $US100 million over three years to a lamb industry the size of Southland's in order to protect it from better, cheaper lamb from this part of the world, the US may not be in a position to argue for the wholesale dismantling of trade barriers.

Yet the US has been on the receiving end too. It is the world's second biggest rice exporter (after Thailand) yet its rice farmers - ironically the best American rice is grown in California by the descendants of Japanese immigrants - face tariffs of around 700 per cent when they try to sell their product to Japan.

The often problematic nature of the trade relationship results from some fundamental differences - corporate, economic and cultural - between the two countries. America is the home of enterprise capitalism, whereas the Japanese post-war revival has been engineered in an economy whose corporate structure is reminiscent of feudal fiefdoms. Massive corporations, clustered around their

own merchant banks, have presented inscrutable faces to the world.

Where private enterprise in America must raise venture capital from private banks, the world looks very different in the Land of the Rising Sun.

Cross-subsidies and cross-shareholdings, opaque accounting practices, and systems of decision-making which favour old connections ahead of simple commercial viability all add up to a vastly different corporate culture.

Cracks have appeared in the Japanese system to some extent since the real estate collapse of the early 90s, but US exporters - not unlike Southland lamb farmers - have often felt the playing field had a distinct tilt.

The Americans, for their part, have been slow - some would say with a racist off-handedness - to tailor their products to Japanese needs.

Japanese cars are much more visible on American roads than vice versa, and Detroit has wailed long and loud about that imbalance. Yet incredibly, it was only a few years ago that US carmakers began to set up production lines to turn out the right-hand drive vehicles the Japanese demanded.

Other Apec member countries might be forgiven for having distinctly ambivalent attitudes towards the relationship between Japan and America.

Certainly it's true that if those two countries sneeze, the rest of us catch a cold. But if things get too cosy between the economic superpowers, it could be at the expense of the rest of us.

Trade officials gaze with a mixture of glumness and apprehension at the 37 - count Ôem - bilateral trade agreements between the two countries. Apec would like many, if not most, of those replaced with multilateral treaties. But that may be easier said than done.

As the Apec host, New Zealand has a delicate task - and a weighty responsibility - juggling the competing interests of the forum's two economic superpowers.

Making the picture even more complicated is the fraught nature of the relationship with China: America sees it as the great trading partner of the 21st century but the history of Sino-Japanese relations is long, bitter and bloody.

"It's a big ask for an economy like New Zealand to chair this process," says one seasoned observer of Japan-US relations. "They have to move with the grain, so to speak. Unless Japan, the US and China go along with Apec objectives, they are not going to be objectives at all."