Consumers Get a Break in Sanctions Against Japan

A shopper, his income tax refund check secured in his pocket, gazed past rows and rows of silent TVs and came to rest in front of two Japanese-made sets.

His eyes narrowed as he looked first down, then up and back down again, comparing the pictures. The sets were the same size, closely priced and nearly identical--as far as he could tell--in quality.

What he couldn’t see was that both of them face 100% tariffs as part of a trade dispute between the United States and Japan.

Both models could double in price next month, or not even be on the store shelves.

And a new crop of shoppers will merely go on to the next row, or the next, and do their comparisons on other TVs.

At least that’s the scenario envisioned by a team of trade specialists in Washington who drafted the list of target items for sanctions against Japan and, in the process, carefully filtered out consumer discomfort.

Crucial Element

That American consumers should hardly notice the sanctions is a crucial element of the whole process.

It adds to the largely symbolic nature of the action by the United States, announced by President Reagan on March 27 in retaliation for Japan’s failure to uphold last year’s semiconductor trade agreement.

But it also is important in maintaining the fragile support for the sanctions--the harshest in postwar relations with Japan.

Concern for the consumer--a requirement of both houses of Congress in their call for sanctions--will be weighed against other objectives of the Reagan Administration in the next week as the tariff list is pared down to apply to $300 million in Japanese imports.

Other objectives include targeting products made by the Japanese semiconductor, or chip, manufacturers considered the biggest offenders in the dispute, and not forcing the burden of the sanctions onto the American companies that use Japanese-made chips in their products.

It’s a complex process that has to take into account dozens of factors, and already some troublesome areas are cropping up. Japanese companies that call themselves “innocent bystanders” in the chip dispute could be hurt as much as--or, in some cases, more than--the target companies.

American companies that use some of the listed imports in their own products might feel the pinch; and, in some product areas, the beneficiaries of the sanctions just might be other foreign manufacturers, such as Taiwanese or Hong Kong firms.

“All inequities will be short-lived, however,” said James I. Magid, an electronics industry analyst who heads Magid Research in New York. “It’s impossible to be fair to everyone when you’re acting for the greater good.”

Sorting through the concerns is the task facing the staff of U.S. Trade Representative Clayton K. Yeutter and the Commerce Department. A final list will be drawn up by April 17, with the tariffs retroactive to March 31.

On Monday, the trade representative’s office will hold a public hearing and accept written comments from companies affected by the tariffs. Meetings between U.S. and Japanese trade officials this past week and next could also affect the final form of the sanctions but not, it is believed, deter the imposition of the tariffs.

Growing Frustration

The sanctions reflect the United States’ growing frustration with Japanese trading policies over a number of years and in a wide range of products, but ostensibly the tariffs are aimed at encouraging compliance with the chip trade pact.

They will remain in effect, U.S. officials have said, until provisions of the agreement have been upheld for at least three months. The pact calls for Japanese companies to stop dumping chips on the worldwide market and to increase purchases of U.S.-made chips.

In part, the tariffs are aimed at companies that the United States believes have continued to dump chips: NEC Electronics, Hitachi, Fujitsu and Toshiba, in particular, with Oki Semiconductor and Mitsubishi close behind.

The tricky part came with the U.S. intention to avoid product categories that the Japanese companies dominate, such as videocassette recorders and stereo components. In these areas, U.S. trade officials feared, the Japanese companies could simply pass on the tariff to the customer in the form of higher retail prices.

With this in mind, U.S. officials turned to competitive, price-sensitive markets where Japanese companies are participants but not leaders.

The 17 categories of products being considered are: small color TVs, black-and-white TVs, radio-tape player combinations (“boom boxes”), phonograph-tape player combinations, power hand tools, hard disk drives, central processing units for computers, and color and monochrome monitors for computers.

Also: small electric motors, blank tape for audio or video recording or for computers, window air conditioners, electrical measuring equipment, pumps and pump parts, refrigerators, commercial photographic film and communications satellites.

When the final list is set, U.S. Customs will collect a 100% ad valorem duty, equal to the stated import value, on those Japanese products. Although the import value generally constitutes 60% to 80% of the retail price, experts say that if the import price doubles, so would the retail price.

Other Products Available

But most retailers believe that U.S. buyers of those goods would not be paying double--or even seeing double. In each of the categories, the government contends, there is sufficient competition from other sources, including American companies, to keep higher prices at bay.

“At the most, TV set prices wouldn’t go down, as they’ve been doing at a 7% annual rate every year since 1970,” said analyst Magid. “I’d be amazed if the price went up. . . . No one will lift retail prices for more than a week for more than 1%. The stores might try, but Americans wouldn’t pay it.”

By the same token, these products are far less significant to the overall revenues of the giant Japanese conglomerates, and the tariffs will at best sting rather than materially injure them.

“The Japanese may lose some market share through this, but in terms of changing their (trading) behavior, it won’t have any effect,” said Michael Borrus, an economist at the Berkeley Roundtable on the International Economy (BRIE) at UC-Berkeley.

In refrigerators, for instance, all imports account for only 1% of the U.S. market. Import value of Japanese refrigerators last year was $28.9 million, according to the Commerce Department, constituting only 12% of all refrigerator imports--or less than one-half of 1% of total U.S. sales.

The reasoning here is clear: With so many alternatives, the U.S. consumer won’t be forced, or even willing, to pay double for a Japanese refrigerator; Japanese competitors would have to absorb the tariff, leave the market for the duration of the sanctions (and thus lose sales) or move manufacturing offshore at a cost of Japanese jobs.

In some product categories on the tariff list, the Japanese companies that dominate the foreign share of the U.S. market are not priority targets of the chip dispute; some are not chip makers, and several of the products on the list don’t even contain semiconductors.

In power hand tools, Black & Decker of Towson, Md., has two or three times the share of its nearest competitor in the U.S. market, estimated at $1.5 billion to $2 billion a year. Other strong American competitors are Skil (a division of Emerson Electric), Milwaukee Electric and Porter-Cable.

Small Market Share

Japanese companies, including one of the companies on the target list--Hitachi--hold 18% of the U.S. market. Matsushita, a giant maker of consumer electronics--and thus one of the companies that the United States hopes will increase purchases of U.S.-made chips--also markets tools here under its well-known Panasonic brand name.

But they hold a paltry share of the market. The two other main Japanese sellers of power tools here, Makita and Ryobi, are not chip makers or major chip consumers.

Makita U.S.A., the Cerritos, Calif., company that is the American arm of Japanese-based Makita Electric Works, had sales of $254 million last year. That amounts to about 70% of the power hand tools imported from Japan last year and nearly 15% of the U.S. market. Makita stands to be hit hard if power hand tools are on the final tariffs list.

“We’re not a party to the semiconductor suit. . . . If they increased the duty, we could live with that, but they’re talking about doubling our price,” said Patrick Griffin, an assistant vice president of the company, his voice still registering shock.

Makita’s products are sold at many home-center and hardware stores, including the Builders Emporium chain in Southern California and Ace Hardware outlets across the country.

Donald V. Opal, Ace Hardware’s department merchandiser for power tools, said the Japanese companies would have to “eat” the tariffs.

“There’s no way they could pass along that kind of increase and retain market share,” he said. “Most (hardware stores) use power tools as traffic items--to get customers in the store, so they’re very price-sensitive items.”

Makita has a plant in Buford, Ga., where it primarily does assembly work. To enlarge the the 1-year-old facility for manufacturing, as Makita eventually hopes to do, would take 18 months to two years, Griffin said.

If the tariffs were imposed on power tools, Makita would have to shut down that plant, laying off its 40 employees there, said Makita’s general counsel, Gerald L. Margolis. “We’d have no choice.”

Pressure Own Government

Analyst Magid has little sympathy for companies like Makita that might be caught in the middle. “Tough luck,” he said. “They should go to their government and say those guys (the chip companies) shouldn’t break U.S. laws.”

Although the U.S. government hopes such messages get sent to encourage the Japanese to enforce the trade agreement, it is likely that equal pressure will be felt here. Makita officials hope to testify at Monday’s hearing.

So do officials of Sony Corp., a company with several manufacturing plants and about 6,500 employees in the United States.

Sony’s Japanese parent company could be one of the biggest losers in the trade dispute if the television sets now on the list--color TVs with 19-inch screens and smaller and black-and-white TVs--are left on the final tariff targets. Sony’s U.S. sales of 13-inch color TVs and black-and-white Watchman televisions, which it imports from Japan, would account for about 25% of the $300 million in imports targeted by the sanctions.

One of the most successful Japanese companies in the United States--in part because of the effort it has extended to learn the U.S. market from the inside--Sony is not one of the targets in the chip dispute, although the United States would like to see the Japanese parent company buy more U.S.-made chips. (It makes semiconductors, but it uses most of the chips it makes in its products and was never found guilty of “dumping” chips in the United States.)

“This is a miscarriage of justice,”’ said Robert Dillon, chief financial officer of Sony’s New York-based American subsidiary.

Borrus of BRIE agrees with Dillon. “If, in fact, Sony winds up bearing 25% of the tariff burden, the whole effort would be utterly misconstrued,” he said. “Sony is the least problematic of the Japanese electronics companies.”

Makes Sets in Southland

Sony makes a majority of the 19-inch color televisions that it sells in the United States at its plant in Rancho Bernardo, a suburb in northern San Diego County. They would not be affected by the tariffs.

The company has plans to shift more production of 13-inch sets to Rancho Bernardo but, like Makita, could not accomplish that task in time to escape the tariffs.

The solution, said Sony’s Dillon, is to drop 13-inch color TVs from the list. By leaving 19-inch TV sets on the list, other companies that would be penalized include NEC and Mitsubishi, which have been stepping up their imports into the United States.

“If it’s true that NEC and Mitsubishi have been guilty of these violations, as the U.S. government claims, then they should stick it to them rather than to us,” Dillon said.

Dillon agrees with analyst Magid and others who contend that price hikes won’t fly with the American consumer. “If the tariff doubles the import value, it will double the retail price. And if the price doubles at retail, then the product probably won’t be available, because the competitive market won’t allow it.”

Major U.S. retailers say they are studying the tariffs list closely. For some, the sanctions would cause barely a flutter. Sears, Roebuck, the nation’s leading retailer, uses domestic suppliers for more than 90% of the products it sells.

But at other companies, the tariffs could cause major headaches, in the words of James Tuttle, assistant general counsel for K mart, the nation’s second-largest retailer.

About 20% of the TVs and “boom boxes” sold by K mart are Japanese imports, according to Ronald Gullett, K mart’s senior buyer for major appliances. Neither Gullett nor Tuttle was ready to say Japanese-made goods would disappear from K mart shelves.

But both agreed that it would be difficult to fulfill K mart’s policy of “stocking our shelves with the best value to customers” with Japanese imports that cost twice the going price.

Could Boost Prices

Tuttle and Makita’s Margolis both said that while the immediate result of the tariffs might be to narrow the selection, the long-term effect could be higher prices. “If you remove a competitor from the market, prices tend to go up,” Tuttle said.

Although most of the U.S. companies, especially those selling in direct competition with the imports on the tariffs list, side with the decision to impose sanctions, few believe that it will prove costly to the Japanese companies.

Most industry analysts agree, citing the symbolic rather than financial nature of the tariffs. “The sanctions themselves are not very onerous,” said David Yoffie, associate professor at the Harvard Business School. “Japanese imports to the United States totaled $80 billion in 1986; $300 million is little more than one-third of 1%. The tariffs are also targeting products that are not of significance to many of the companies.”

Said Magid: “How will the tariffs hurt the Japanese? They’ll scream and cry but, on balance, there will be no real pain. It’s like if you stopped eating lunch for a month: It may be a little uncomfortable, but your weight’s not going to change that much.”