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the dollar the prior year, when Japan earned a $50 billion current account surplus, the overwhelming proportion in manufacturing trade exports. In May of 1986, the bilateral trade deficit stood at $4.7 billion, the bilateral annual merchandise trade deficit for that year being $54.4 billion. Samuelson's prescription was for Japan to grow faster at home, cut domestic interest rates, and to import more.

In a Los Angeles Times article nearly a decade later, relatively soon after an announcement that Japan's January bilateral trade surplus with the United States had reached over $14.7 billion, Samuelson (1995) wrote, ''Japan's huge trade surpluses are unsustainable. If they aren't corrected, the cycle of stagnation may continue, and the Japanese will have only themselves to blame." Within weeks, the yen exchange rate grew to 80 to the dollar. By then Japan's monthly surplus with the United States had grown by an order of magnitude. For 1993, the latest available figures, the annual U.S. trade deficit with Japan had reached $60.5 billion.

In the time between these two comments, Japan had earned billions of U.S. dollars, and the deficit grew despite the best-devised policies of successive Republican and Democratic administrations in raising and then lowering interest rates, despite strengthening the dollar's value and then letting it weaken, despite introducing and then discarding protectionist trade measures, and, of course, despite seemingly innumerable rounds of bilateral negotiations between successive U.S. administrations and their Japanese counterparts.

And in contrast to the public warnings of the imminent "hollowing out" of the Japanese economy as the high value of the yen drives Japanese firms off shore, recent and forthcoming studies indicate quite clearly that the economic structure of Japan's most strategically important industries remain firmly intact. Although assembly facilities have moved off shore as part of an ongoing process for the last two decades, the heart of Japan's manufacturing capability and its industrial basis remains firmly entrenched in its traditional domestic centers.2

In June of 1995, Samsung, a Korean firm, announced that it had "beaten" both its American and Japanese rivals "to the punch" by being the first to develop a fully functional "next-generation" 256-k semiconductor DRAM chip. But such a development marks a startling change from a decade ago, just as Japanese firms confounded their American critics by first developing computer components, then full hardware systems, and subsequently software.

In this paper I argue that these facts are not altogether unrelated. Indeed, in stronger terms, I suggest that patterns of trade, strategies of investment, and the development of the next generation of technology share an intrinsic relationship

2  

 For an extensive, critical assessment of the rectitude of the claim of the "hollowing out" of the Japanese economy, see Tilton (1995). On page 14, Tilton suggests that, "Although the Japanese talked about hollowing out as domestic production was replaced by imports, it never happened, except in aluminum smelting, in apparel, and to a very limited degree, lumber and furniture."



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