Perhaps no alliance in the world is as important as the U.S.-Japan alliance-and yet perhaps no alliance in the world is in greater need of revision.

During the Cold War, the U.S.-Japan alliance rested on what might be described as a grand bargain between the United States and Japan. The Cold War Bargain consisted of two understandings-one in the realm of military security, and the other in the realm of economics. As part of the military bargain, the United States agreed to protect Japan's foreign security interests, in return for Japan's agreement to side with the United States against the Soviet Union and to host U.S. troops used in other parts of Asia like Korea and Indochina. The military bargain consisted of one-way free trade. Japan was allowed to export to the American market, while keeping its internal market largely closed to U.S. imports by means of nontariff barriers. Japan's export-oriented strategy was tolerated by American leaders from the 1950s until the 1980s because they were willing to sacrifice the economic interests of American industries threatened by Japanese imports to the military imperative of a strong U.S.-Japan alliance against the Soviet bloc.

The End of the Cold War Bargain

These two bargains that together made up the Japanese-American Cold War Bargain began to break down even before the end of the Cold War. In the 1950s and 1960s, American manufacturing was so dominant in world markets, as a result of the devastation of Europe and East Asia by World War II, that American producers were not seriously affected by protectionism in either Europe or Japan. But by the 1970s, Japan and Western Europe had caught up with the United States, and even surpassed American industries in some sectors like automobiles, machine tools and consumer electronics. The U.S. and the European Community (later the European Union) fought over some sectors like aerospace and agriculture. But in general the U.S. and the EU both opened their markets to products and investment from the other. However, the pattern of one-way trade between the U.S. and Japan, created by the combination of an American market largely open to Japanese products and capital and a Japanese market largely closed to American imports and investment, persisted. This created resentment among American industries and workers affected by what was regarded as unfair Japanese competition. This resentment translated into a series of initiatives by the U.S. government to try to "open" the Japanese market. These initiatives were most successful when, like the 1986 U.S.-Japan Semiconductor Agreement, they set negotiated targets for results in particular industries, rather than attempting to convert Japanese institutions into a mirror image of those in the United States and Western Europe.

The conflicts between the U.S. and Japan over trade were restrained as long as the Soviet threat made the U.S.-Japan security alliance important. The disintegration of the Soviet Union removed that threat-and with it the need for the old military bargain between the U.S. and Japan. The immediate result of the end of the Cold War was a new, harder line by the U.S. on trade issues in the early 1990s. No longer restrained by a need to keep Japan in the anti-Soviet alliance, the Clinton administration under Mickey Kantor increased pressure on Japan to open its internal market to American trade and investment.

Several factors, however, averted a crisis. One was the economic slump in Japan, combined with the prolonged boom in the United States that began in the mid-1990s. Another was Japan's recycling of Japanese surpluses to support the U.S. current account deficit. Yet a third factor was the rapid growth of China in both economic and military terms. Both of these factors resulted in a shift of American attention away from Japan. Indeed, by the year 2000, many Americans considered the land of the rising sun to be China; Japan was now thought to be the land of the setting sun.

But it is a mistake to write off Japan as a country in permanent decline. Japan has repeatedly caught up with the West and the U.S., using technologies invented elsewhere, and may do so again. It is also a mistake to assume that China's high rate of economic growth in recent years will continue indefinitely. In the 1980s and 1990s, much of the increase in Chinese productivity resulted from the movement of rural labor into industrial sectors. The real test will be whether an industrialized, urban Chinese economy could continue to increase its productivity. Many Americans mesmerized by the "China Market" also failed to understand that a giant population does not necessarily mean a large consumer market for foreign goods. While the absolute size of the Chinese economy is enormous, the per capita income of the Chinese people is very low, and is likely to remain low for a very long time to come. In 1800, China had the world's largest economy, but most world trade took place among smaller, richer nations like Britain, France, the Netherlands and the United States.

As a result of changing conditions, then, the Cold War Bargain between Japan and the United States is no longer adequate. Both countries need to negotiate a new bargain, based on new understandings in both the areas of national security and trade. Let us call the new bargain the Millenial Bargain.

What are the strategic interests that Japan and the United States share? The two most important are military and economic. The military interest shared by the United States and Japan is the need to prevent continental East Asia from being dominated by a hegemonic country or alliance. The economic interest is the shared interest of Japan and the United States in a global trading system of some kind. Each of these common Japanese-American interests must be considered in turn.

A Normal Country: A Millenial Security Bargain between Japan and the United States

The economic component of a new Grand Bargain for the Millenium between Japan and the United States, then, should take the form of a common commitment on the part of Japan and the United States to rejecting regional economic zones in favor of global managed trade. In the realm of national security, Japan and the U.S. need to work out a new bargain as well.

During the Cold War, Japan was a semi-sovereign nation. Even after the post-1945 U.S. military occupation ended and Japan regained its internal sovereignty, Japan did not act as an independent military power. Instead, with the encouragement of both the United States and Japanese supporters of the "peace constitution," Japan remained a military protectorate of the United States. The dependence of Japan on the U.S. did not prevent Japan from building up significant armed forces.

With the end of the Cold War, there was a debate within Japan between advocates of what the Japanese-American scholar Mike M. Mochizuki identifies as four schools of thought: the pacifist state, the autonomous great power, the civilian power, and the normal country. Neither the pacifist state strategy nor the autonomous great power strategy are plausible options for Japan. Let us begin with the pacifist state strategy. Japan is too big and important to be a neutral country like Switzerland or Sweden. The mere existence of its impressive defensive armed forces would make it the target of suspicion by China, other Asian countries, and perhaps the United States. As an autonomous great power, Japan could be quite formidable, thanks to its advanced technology. But if Japan severed its alliance with the United States, it probably would find no allies in Asia. This would be disastrous for Japan, because the history of the twentieth century proves that the great global conflicts are won by the most powerful alliances, not by the most powerful individual countries alone. The fact that Japan already has the most elderly population among the advanced technological countries also raises questions about how willing Japan would be to risk the lives of its dwindling supply of young people in war-and thus how credible Japan would be as an independent great power.

The real choice for Japan, then, as Mochizuki and others have argued, is between the civilian power strategy and the normal country strategy. The civilian power strategy-in which the United States focuses on the military responsibilities of the alliance, while Japan focuses on trade, foreign investment and humanitarian aid-cannot be sustained, because of American public opinion. During the Gulf War, many Americans believed that American soldiers were fighting in order to maintain the free flow of oil to Japan. It is unlikely that the U.S.-Japan alliance could survive a war for common interests in which American soldiers were killed while Japanese soldiers remained out of harm's way. It is significant that Germany-which, like Japan, remained a protectorate of the U.S. for half a century after World War II-participated in combat operations as an equal as part of the NATO war against Serbia in 1999. This stands in contrast to Japan's refusal to commit minesweepers and other assets during the 1995 Korean crisis, and the refusal of the Japanese government to end the ambiguity about whether it would support the U.S. in the event of crises in Korea, Taiwan or the Asia-Pacific more broadly.

For political reasons, then, the U.S.-Japan alliance must cease to be one based on a relationship between protector and protected and become a traditional alliance between a military power of the first rank and a military power of the second rank. Like Britain, France and, now, Germany, Japan must be willing to send Japanese troops to share in the risks of joint military operations, even in conflicts in which the United States provides the overwhelming majority of materiel and manpower.

The New Goals of the U.S.-Japan Alliance:

The old goal of the U.S.-Japan alliance-the containment of the expansionist Soviet bloc-disappeared with the Soviet Union. The U.S.-Japan alliance now faces two threats: regional instability in Northeast and Southeast Asia, and the threat of Chinese regional hegemony.

The danger of war between North Korea and South Korea, and of chaos in North Korea, is one for which Japan and the U.S. must continue to be prepared. But chaos in mainland and island Southeast Asia would also affect both Japanese and American interests. The break-up of Indonesia-the fourth most populous country in the world--along ethnic lines might endanger shipping while inviting rival great powers to intervene on opposite sides.

The threat of chaos comes from weak and unstable states. The threat of regional hegemony comes from a strong state that is growing stronger-China. Until recently, many Chinese officials assured American officials that they feared Japan more than the United States and welcomed an American military presence in Japan as a way of preventing an independent Japanese military policy. In recent years, however, the tone of the Chinese government and the press toward the United States has grown much more hostile. Leading Chinese military and political figures have called for the removal of American power from East Asia, and denounced American global "hegemony." To some degree, this reflects the attempt by the Chinese regime to change the basis of its legitimacy from Marxist-Leninist communism to Chinese nationalism. But the rhetoric must be taken seriously, when it is combined with the continued arms build-up by the regime.

The most likely source of confrontation between the United States and China involves Taiwan. This is an issue that should be of concern to Japan as well. In theory, the U.S.-Japan alliance could survive a failure by the U.S. to protect Taiwan from forcible conquest by China. But it seems likely that many throughout Asia and the world-including in Japan-would interpret a military or diplomatic defeat of the United States by China on the Taiwan issue as evidence of American weakness, with obvious implications for the credibility of the U.S. as an ally of Japan. The two threats confronting Japan and the U.S. in Asia-regional chaos and Chinese hegemony-will require military forces different from those designed and equipped for the Cold War era. U.S. and Japanese troops would most likely intervene on the Korean peninsula or in Southeast Asia as part of multilateral peace-keeping or peace-making forces. This will require highly-mobile, versatile light infantry forces prepared to impose or preserve order in a variety of different environments, ranging from urban slums to jungles and mountains.

An entirely different approach is required to prevent China from using its military arsenal to intimidate its neighbors. That task will require deterrence and arms control strategies, updated for the age of smart missiles. Theater missile defense is unlikely to be workable in the near future. Consequently, Japan, the U.S. and other countries will not be able to protect themselves completely against missile attack. Their safety must rest in convincing potential enemies that they have survivable second-strike deterrents. A Japanese deterrent deployed on submarines or aircraft could supplement similar American forces in the Asian theater and encourage China to be cautious in its threats as well as its actions. A Japanese nuclear deterrent cannot be ruled out, particularly now that countries as backward as Pakistan and India and China possess their own nuclear forces. If Britain and France can be independent nuclear powers while remaining allied with the United States, there is no reason that Japan cannot be.

In return for insisting that Japan become a normal country and a traditional ally comparable to America's European allies, the United States should make some concessions to Japan. The U.S. should eliminate the vestiges of its occupation in Japan, including, perhaps, the stationing of large numbers of Marines on Okinawa. If and when Korea is reunified, it seems likely that most of the U.S. forces in Korea would leave, and there would be no reason for Japan to be the only host to massive American forces. At any rate, the future international order of Northeast Asia is likely to be determined by missile forces used for intimidation, not by manpower used in combat.

Finally, the United States should push for a permanent Japanese seat on the United Nations Security Council. Today the Security Council is a museum of the victors of World War II. If post-Soviet Russia, a bankrupt Third World country, and China, a vicious communist dictatorship, both have seats, there is no reason to deny permanent Security Council membership to either Japan or Germany, which have been stable democracies for generations.

The Clinton administration has been inconsistent in its policy toward China. President Clinton has sent the U.S. navy to confront China during the 1996 Taiwan Straits crisis, but he also has looked the other way as China has encircled India by allying itself with Pakistan and Burma. Clinton has also described China as a "strategic partner" (a phrase that implies that Washington perceives Beijing and Tokyo to be of equal importance).

Ambiguity sometimes is important in diplomacy. But continued ambiguity in America's policies toward Japan and China is more likely to do harm than good. The U.S. next administration should make it clear that the basis of American policy in East Asia is a revised U.S.-Japan alliance. Japan and the United States are both three-dimensional powers-countries that combine military power with advanced economies and political systems. China, like the former Soviet Union, is a one-dimensional power-a country whose claims for importance rest solely on its population and its frightening military.

The predominant military position of the United States in East Asia is a result of the outcome of World War II and the Cold War. It will not last forever. In the long run, a China with an affluent population and a constitutional, accountable government would be the natural leader in the region. But that is a prospect for 2100 or 2200 A.D.-not 2020 or even 2050 A.D. In the foreseeable future, China will be a poor, dictatorial country that can dominate East Asia only if its military intimidates the other countries of the region into submitting to it out of fear. A revitalized U.S.-Japan alliance that balances Chinese power can prevent the Chinese dictatorship from using the threat of force to blackmail its neighbors. The success of the U.S. and Japan and other allies in deterring Chinese militarism might even encourage China to concentrate on enriching its people and reforming its government.

Maintaining a Global Trading System: A Millenial Economic Bargain Between Japan and the United States

Japan and the U.S. share a common economic interest as well as common military interests. Maintaining a global trading system is even more important to Japan than it is to the United States. The United States, because of its huge internal market and its vast natural resources, is less dependent on foreign trade and investment than any other major capitalist country. Although the proportion of the American economy accounted for by international trade and investment has grown significantly since the 1970s, it still remains lower than the average exposure to the global economy of most similar nations. Japan, too, has a relatively small proportion of its economy exposed to foreign trade. But Japan's exporters depend on access to North American and European markets, and Japan is highly dependent on resources from abroad.

Economic regionalism-the division of the world economy into closed economic zones-would damage both Japan and the United States. Japan would be hurt as a country dependent on exports of products and capital. The United States, as a country that in recent years has depended on the import of capital as well as of skilled labor from Asia and Europe, would suffer it were locked into a North American bloc in which Central America and the Caribbean had little to offer except vast numbers of poor people.

The European Union would suffer the least in a world of regional economic blocs. A protectionist Europe that tapped the low-wage labor of North Africa and the natural resources of Russia and the Middle East could secede from the global economy and still maintain a high standard of living. For that reason both Japan and the United States should oppose the creation by the Europeans of a closed commercial system.

Even if the European Union remains open to the world economy, there is a danger that the Europeans will try to use their status as the world's largest market to impose European standards in everything from food to intellectual property rights on the rest of the world. Inevitably, the standards promoted by the EU would be those that benefited European producers at the expense of Japanese and North American producers. To counter any such efforts, Japan and the U.S. have a common interest in strengthening institutions of global economic governance like the WTO and diluting the influence of regional economic blocs like the EU.

If this logic is accepted, then neither Japan nor the U.S. should support powerful pan-Asian or pan-Pacific economic organizations. It is true that the U.S. has been more enthusiastic than Japan about the potential of the Asia Pacific Economic Cooperation forum (APEC). But the U.S. supported APEC out of fear that the U.S. would be shut out of Asia as a result of intra-Asian trade and investment patterns. From the American perspective, as well as Japan's, it would be preferable to negotiate the rules of trade and investment at a global level, rather than to have a world in which three economic blocs-Asia, North America, and Europe-made deals with one another. Japan's rejection of the East Asian Economic Group (EAEG) proposed by Malaysia's dictator Mahathir Mohamad in the early 1990s showed that the Japanese government understood the threat that a purely Asian regionalism would pose to Japan's economic interests.

From Global Free Trade to Global Managed Trade?

A global trade regime, then, is in the interest of both the United States and Japan, if not necessarily in the interest of the European Union. But a global trade regime can come in two forms: free trade or managed trade.

Americans speak of "globalization" as though it were synonymous with "liberalization" or the adoption of free trade. This results from the domination of free-trade ideology in the American economics profession and the American media. But it is possible for countries to move toward greater economic integration by negotiation as well as by free trade. This is precisely what the European Union has done. It is possible to imagine a global market which, like the European Union, is based on managed trade-in some if not all sectors--rather than unrestricted mobility of capital and goods.

In addition to failing to realize that globalization can come in a managed form as well as in the form of free trade, most Americans fail to distinguish between financial capitalism and industrial capitalism. This is a grave mistake, because rules that promote international banking and investment do not necessarily promote-and may even harm-national manufacturing. Stock exchanges can be set up overnight, but manufacturing enterprises require long-term, patient capital as well as a reasonable assurance of a market in the future.

The insistence of the United States, under the leadership of Treasury Secretary Robert Rubin, that countries liberalize their capital markets was one of the major causes, if not the major cause, of the Asian financial crisis of the 1990s. By becoming dependent on foreign investors, Asian countries were rendered helpless when an irrational panic caused the foreigners to pull their money out. Why has the United States so consistently sacrificed the interests of national industries-in the U.S. as well as abroad-to the interests of international bankers and investors? The answer is found in American domestic politics. The political leadership in the United States at present is disproportionately Southern and Western, and the South and the West are traditionally commodity-exporting areas (cotton, cattle, oil) with a tradition of preferring free trade. In addition, thanks to the corrupt American campaign finance system, the elites of Wall Street and Hollywood, both of which benefit from unrestricted access to foreign stock exchanges and foreign markets, have more influence in politics than the manufacturers of the Rust Belt. Finally, many American manufacturers have moved much of their production offshore. American manufacturers seeking access to low-wage foreign labor are now allied with the financial and commodity-exporting elites that want to limit or eliminate the ability of all countries in the world to control the degree and pace of their exposure to the global market.

Thanks to the domination of free-trade ideology in the United States, most elite American policymakers and experts refuse to acknowledge that competition among countries to control the leading industries of a given industrial era-automobile yesterday, biotechnology tomorrow-is simply a fact of life. If, in time, other nations or regions join the ranks of the developed countries, they, too, will insist on having leading industries based in their territories. This is a normal and natural ambition and the rules of the trading system should recognize it (as James Fallows, one of the most informed American observers of Japan, has argued). If the rules of global trade prevent the major capitalist countries from promoting their high-tech industries, then governments will break the rules. They will use subsidies or nontariff barriers to promote their favored companies.

Why not be honest and admit that no country is going to give up its industries in the most desirable sectors, and simply work out global market-share agreements? To prevent today's developed countries from monopolizing the high-tech sectors forever, it might be necessary to grant market shares to newly-industrializing countries, as the global consumer market expands. This would benefit the old high-tech nations as well as the new high-tech nations-a smaller piece of an expanding pie can be better than a larger piece of a smaller pie.

In a global economy based at least in part on managed trade, corporations based in the old industrial countries would be tempted to invest in facilities in developing countries to evade restrictions on their market share. (In just this way, Japanese corpo