paper we consider the competitiveness of 29 industries that make up the Japanese and U.S. economies. Our study begins with the 10 years preceding the Smithsonian agreements of 1970. In these Agreements the United States and its major trading partners, including Japan, abandoned the fixed exchange rates that had prevailed since the end of the Second World War. The dollar depreciated rapidly, from 360 yen to the dollar in 1970 to 203 yen per dollar in 1980. After a brief resurgence in the early 1980s the dollar resumed its fall after the Plaza Accord of 1985 and reached a level of less than 130 yen per dollar by the end of 1991.

We examine the relative competitiveness of U.S. and Japanese industries throughout a quarter century, 1960–1985, considering determinants of the competitive position of each industry. Our study encompasses the period of growing trade imbalances between Japan and the United States in the early 1980s. It also includes the period of the slowdown in economic growth that accompanied the energy crisis of the 1970s. We begin by comparing the relative position of U.S. and Japanese industries in 1970, on the eve of the Smithsonian Agreements. We find that almost all Japanese industries were more competitive internationally than their U.S. counterparts. By this we mean that Japanese industries could provide products to the international marketplace at prices below those available from their U.S. competitors.

The competitive strength of Japanese industries in 1970 was due almost entirely to an enormous labor cost advantage. Standardizing for important differences in education levels and taking differences in the age and sex composition of the Japanese and U.S. labor forces into account, the cost of an hour worked in Japan in 1970 was less than one-quarter the cost of an hour worked in the United States. This labor cost advantage enabled Japanese industries to overcome the formidable disadvantages of higher capital and energy costs and lower productivity. As a consequence of the dramatic appreciation of the yen after the Smithsonian Agreements of 1970, most Japanese industries lost their competitive advantage over U.S. industries by 1973. The rapid appreciation of the yen between 1970 and 1985 reduced but did not eliminate the Japanese labor cost advantage.

For the period 1960–1973, Jorgenson et al. (1987) have shown that productivity growth in Japan exceeded that in the United States for almost all industries.3 After the energy crisis of 1973, productivity growth slowed


The methodology for this study was introduced by Jorgenson and Nishimizu. They provided a theoretical framework for productivity comparisons based on a bilateral production function at the aggregate level and employed this framework in comparing aggregate output, input, and productivity for Japan and the United States; see D.W. Jorgenson, and M. Nishimizu, "U.S. and Japanese economic growth, 1952–1974: An international comparison," Economic Journal, vol. 88, no. 352, December 1978, pp. 707–726. Subsequently, Christensen et al. extended these comparisons to nine countries, including Japan and the United States; see L.R.

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