Japan's trade with Western Europe grew steadily but had been relatively small well into the 1980s considering the size of this market. In 1980 Western Europe supplied only 7.4 percent of Japan's imports and took 16.6 percent of its exports. However, the relationship began to change very rapidly after 1985. West European exports to Japan increased two and one-half times in just the three years from 1985 to 1988 and rose as a share of all Japanese imports to 16 percent. (Much of this increase came from growing Japanese interest in West European consumer items, including luxury automobiles.) Likewise, Japan's exports to Western Europe rose rapidly after 1985, more than doubling by 1988 and accounting for 21 percent of all Japan's exports. By 1990 Western Europe's share of Japan's imports had risen to 18 percent and the share of Japan's exports that it received had risen to 22 percent.
In 1990 the major European buyers of Japanese exports were West Germany (US$17.7 billion) and Britain (US$10.7 billion). The largest European suppliers to Japan were West Germany (US$11.5 billion), France (US$7.6 billion), and Britain (US$5.2 billion). Traditionally, West European countries had trade deficits with Japan, and this continued to be the case in 1988, despite the surge in Japan's imports from them after 1985. From 1980 to 1988, the deficit of the West European countries as a whole expanded from US$11 billion to US$25 billion, with much of the increase coming after 1985. That diminished somewhat to US$20.7 billion in 1990, before rising sharply to US$34 billion in 1992.
Trade relations with Western Europe were strained during the 1980s. Policies varied among the individual countries, but many imposed restrictions on Japanese imports. Late in the decade, as discussions proceeded on the trade and investment policies that were expected to prevail with European economic integration in 1992, many Japanese officials and business people became concerned that protectionism directed against Japan would increase. Domestic content requirements (specifying the share of local products and value added in a product) and requirements on the location of research and development facilities and manufacturing investments appeared likely.
Fear of a protectionist Western Europe accelerated Japanese direct investment in the second half of the 1980s. Total accumulated Japanese direct investments in the region grew from US$4.5 billion in 1980 to over US$30 billion in 1988, from 12.2 percent to more than 16 percent of such Japanese investments. Rather than being discouraged by protectionist signals from Europe, Japanese businesses appeared to be determined to play a significant role in what promises to be a large, vigorous, and integrated market. Investment offered the surest means of circumventing protectionism, and Japanese business appeared to be willing to comply with whatever domestic content or other performance requirements the European Union might impose.
Data as of January 1994