The recently concluded semiconductor trade negotiations between the United States and Japan, and the ongoing insurance talks, are painful illustrations of the failure of both nations to develop a set of sound principles for conducting trade diplomacy. The result is that each nation stands firm on issues where it ought to give way, and yields where it ought to hold out on principle.

For its part, the United States doggedly refuses to distinguish between public actions, for which any government can be held responsible, and the workings of the private market, for which no public body can be held accountable -- apart from futile attempts to "manage" trade flows.

Japan, after articulating sound policy, more often than not backs down from principle and accepts compromises that undermine the credibility of its own excellent case.

But, while correctly resisting managed trade solutions for market-based problems, Japan often tries to weasel out of its signed commitments to liberalize public regulations. When Tokyo does so, as it did in the insurance negotiations, it gives solid ground for perennial Japan bashers to argue that it is duplicitous and underhanded.

In the semiconductor negotiations, the United States has been demanding since 1986 a program of "affirmative action" from the Japanese government in the form of a "voluntary import expansion" in semiconductors. In effect, it has pressed the Japanese government to intervene in the market to force Japanese companies to buy more semiconductors from U.S. companies. At the same time, however, Washington has made the contradictory demand that the Japanese government deregulate its economy and withdraw from alleged "guidance" of the Japanese market in this and other sectors, such as automobiles and steel.

Japan initially refused to agree to a formal government-to-government agreement that would have established a de facto cartel in semiconductors. But it did sign in 1986 a so-called side letter accepting a goal of 20 percent of the Japanese market for foreign suppliers and stating its belief that "this (percentage) can be realized." When the semiconductor agreement was renewed in 1991, Japan further compromised its argument against managed trade by agreeing to include the goal in the agreement itself.

Such compromises with principle left Japan vulnerable when the Clinton administration made "results-oriented" import quotas official U.S. policy and then upped the ante in 1996 by demanding "continued progress" in semiconductor importation. That wording would have committed Japan to at least maintaining the current 30 percent foreign share of the semiconductor market.

In the recently adopted agreement, the Japanese government in effect won the day 10 years late by refusing to continue outright government-to-government commitments. Ironically, the price for the rest of the world may be expensive, since the private sectors of the two countries have been given free license to conspire to control semiconductor capacity and "moderate the business cycle," in the words of one semiconductor executive.

In the insurance negotiations, the circumstances are very different. Unlike in the semiconductor dispute, the issue here concerns purely public actions and regulations under the direct control of the Ministry of Finance.

The Japanese insurance market is one of the most tightly regulated in the world, with rules forbidding price or product competition and innovative marketing and distribution practices. Foreign companies have only been able to establish a presence in the so-called third sector, consisting of niche products such as personal accident and cancer insurance and long-term disability. The sector comprises a tiny 3 percent of the total Japanese market.

Under a 1994 agreement, the Ministry of Finance agreed not to introduce new competition into the third sector until the much larger life and nonlife insurance sectors were opened up to competition. Since then, it has taken no significant steps to accomplish this goal.

Despite that failure, the ministry earlier this year announced plans to allow the huge domestic Japanese insurance companies to compete in the third sector. Without real regulatory reform across the entire insurance spectrum, that will almost certainly wipe out the foreign presence in the niche markets.

Negotiations have been going on for the last six months. Astoundingly, the United States with a very strong case substantively -- and clearer legal grounds for retaliatory action -- has allowed the Japanese government to filibuster and continue to go forward with plans to renege on its own promises.

And the Ministry of Finance once again is playing into the hands of trade hawks in the United States who make no distinction between market-destructive, cartel-enhancing voluntary import expansion schemes and perversely anticompetitive public regulations.

It is time for both nations to rethink their trade negotiating strategies. Their national economic goals and the international economic welfare will be better served if they stand firm against both market-distorting interventions such as targeted import quotas and attempts to destroy real competition under the guise of deregulation.

Claude E. Barfield is a resident scholar, director of science and technology policy studies, and coordinator of trade policy studies at AEI.