EVAN D. SHIELD is a principal with Economic Forestry Associates of Brisbane, Australia.

The Asian crisis: Effects on forest products trade

In Japan, the worst economic conditions since the end of World War II now prevail. One company is filing for bankruptcy every 25 minutes, and, increasingly, they are medium and larger companies rather than small ones. To a very substantial degree, the Japanese situation is a self-inflicted injury for the world's second largest economy. It has been brought about by several causes, the most significant of which has been the rigidity of the Japanese financial and economic system. This system has poured vast amounts of money into under-performing enterprises which survive and grow only by virtue of massive non-tariff protection systems.

In a recent article, the Financial Times sought to explode the myth of Japanese manufacturing superiority. As an example of the second-ranked manufacturing industries surviving because of financial system rigidity and non-tariff trade barrier protection, they used the pulp and paper industry.

To gauge the extent of the protection afforded the Japanese pulp and paper industry, one need look no further than at the newsprint supply situation there. On average since 1982, newsprint has been twice the price that Canadian and U.S. manufacturers charge West Coast publishers.

In 1997, some 629,000 tons of newsprint was imported from the U.S. and Canada. At first sight, this might imply import penetration designed to break the cartel of Japanese manufacturers and their cozy arrangements with the newspaper publishers' cartel which continues to fix newspaper prices (although official sanction for doing so has expired). Not so! Some 564,000 tons of the imports were from the off-shore manufacturing facilities controlled by Oji Paper and Nippon Paper Industries, the dominant domestic producers. Only about 1.7% of the total supply of the newsprint in Japan in 1997 was "free." It is small wonder that an executive of Oji Paper has been qouted as claiming 70% of profits are from newsprint sales.

The situation applying to newsprint would not be so serious were it not for the fact that the "super" profits manufacturers obtain from newsprint production (and, in two cases, from imports of off-shore manufacture) can-and are-applied as cross-subsidies to the other grades of paper they make. Thus, uniquely in the world, most Japanese printing and communication grades of paper are at lower prices than newsprint. Further, the paper manufacturers are able to use their capacity to marginalize importers and the Japanese manufacturers-even large ones (such as Mitsubishi Paper)-who do not include newsprint in their product range.

The Japanese government has begun to address its acute problems, hopefully with greater success than has been achieved by the seven economic stimulus packages announced since 1992, which have seen vast amounts spent on construction projects of little or no economic value. The "big bang" financial reforms-application of which began Apr. 1-and the ill-defined proposals intended to solve the problems of the banking system's enormous non-performing loans portfolio must be pursued with an uncharacteristic rigor if they are to be successful. So too must more far-reaching reforms. If it is less than radical and complete, there is a real risk of global depression.

On the assumption that reform is successful- and acknowledging that it will take several years to be properly effective-I predict radical changes in forest products manufacturing and trade. Principally, this will be caused by an acceleration of the rate at which Japanese manufacturing is "hollowed out." Already, in wood products manufacture (sawmilling, plywood, etc.), this process is well established and it might be said that offshore investments by companies such as Oji, Nippon, and Daishowa are indicative of its application in this sector.

Freed of restrictions, Japanese capital will flow out of Japan to destinations where it can earn a competitive return. Japanese manufacturers, who cannot provide that return because their present businesses are built on the sands of protectionism, allowing them routinely to provide returns to investors below the weighted average cost of their capital, will be forced to follow the capital flow and to establish offshore manufacturing facilities.

One example of the potential for capital out-flow is provided by the upcoming deregulation of Japan's trust banks, which-under the reforms-will be permitted to invest offshore for the first time. For the forest products sector, this means an adequate volume of quality wood resources delivered at competitive cost.

In the short-term, the financial and economic crisis in East Asia will cause much pain, within the region and beyond. However, in the medium-term, the reforms which must be implemented in its solution will create new, global opportunities for those who can provide competitive quality, scale and production and delivery cost structures.