Trump will also play golf with Abe(right) and inspect Japan
A FAST-RISING Asian power has built up a huge trade surplus with the U.S. and threatens American economic supremacy. Washington is outraged at how this new giant has acquired U.S. technology—often, U.S. officials warn, by theft—and how it has used the heavy hand of government to thrust its companies into a dominant global position. Now a Republican president who won election with surprising support from blue-collar men in the Midwest says that the economic rival had better make a deal, or else.
That, of course, is a description of the mid-1980s, when the rise of Japan was a top challenge for President Ronald Reagan and the U.S. was constantly setting deadlines and threatening tariffs. Now the U.S. has a similar challenge on its hands—only this time, it is China, which has replaced Japan as the world’s No. 2 economy and America’s No. 1 challenger.
President Donald Trump announced a temporary truce after a grilled sirloin dinner with Chinese President Xi Jinping in Buenos Aires on Dec. 1, and talks have resumed with a quick Chinese offer to trim auto tariffs. But a U.S. deadline looms: Without a new overall agreement in 90 days, Washington will slap 25% tariffs on $200 billion in Chinese goods. Days before the dinner, Mr. Trump told The Wall Street Journal, “They have to open up China to the United States. Otherwise, I don’t see a deal being made.”
Under similar pressure three decades ago, Tokyo made a fateful choice: major concessions to the U.S., including in the 1985 Plaza Accord that let Japan’s currency rise against the dollar. What happened next offers important lessons for the U.S. about how trade conflicts can end in unanticipated ways.
Faster than anyone thought possible, Japan ceased to be a threat to U.S. economic primacy. Under U.S. pressure, it cut interest rates to stimulate demand for imports. That spurred a historic bubble, which collapsed in the early 1990s, sending Japan into a tailspin. Soon after, all the hand-wringing about a world economy controlled by Tokyo ceased.
By that measure, the U.S. emerged from that trade war a winner, and many of those pushing Mr. Trump to get tough on Beijing would be more than happy to see a similar outcome this time. A weakened Beijing would have trouble threatening the U.S. Navy in the Pacific or dictating how the globe’s cellphones should work.
But Japan’s case shows that slapping down No. 2 doesn’t necessarily solve the fundamental problems driving trade imbalances—including America’s propensity to spend money it doesn’t have. The imbalances with Japan transferred, in effect, to China. The blue-collar, Midwestern manufacturing jobs that Mr. Reagan and later presidents hoped to protect continued disappearing, with consumers no more likely to buy a U.S.-made TV or microwave oven than before.
China has closely studied Japan’s experience and is likely to put up greater resistance to the concessions that the U.S. wants. But whether it gives in to Washington’s demands or resists and suffers a big tariff hit, the Chinese economy is in for a destabilizing jolt. Like Japan, China may show vulnerabilities America didn’t expect and isn’t prepared for.
The passage of three decades has erased some memories of just how big a challenge Japan was thought to pose in the 1980s. In 1984, the U.S. trade deficit soared to more than $100 billion for the first time. Democrats pushed legislation that would retaliate against countries running large trade surpluses with the U.S. with punitive tariffs. Japan was the top target.
“The Americans were always threatening Japan,” recalls Toyoo Gyohten, then a top Finance Ministry official in Tokyo, in an interview. Mr. Gyohten, now 87, says that Japan realized that it had to placate its American ally or risk getting blocked from the U.S. market. So one day in September 1985, Japanese Finance Minister Noboru Takeshita slipped out of his house wearing golf shoes, to put any reporters off his scent, and played nine holes. But instead of completing the back nine, he headed to the airport and boarded a flight to New York, as Mr. Gyohten recalled in a 1992 book co-authored with former Federal Reserve Chairman Paul Volcker.
On Sunday, Sept. 22, 1985, at the Plaza Hotel in New York City, the U.S., Japan and three European countries announced what later became known as the Plaza Accord, calling for a sharp devaluation of the dollar. The goal was to make American exports more attractive and to cut the U.S. trade deficit. Otherwise, warned the finance chiefs, the result could be “mutually destructive retaliation.”
One participant said “the element of surprise was complete.” The devaluation happened with breathtaking speed—“unstoppable,” Mr. Gyohten recalls. A dollar bought about 240 yen just before Plaza. Within a year, it bought only 154 yen.
President Reagan wanted more action. The day after Plaza, with Japan in mind, he told a business group, “When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” U.S. companies, belatedly noticing Japanese rivals grabbing a bigger share of global markets, sometimes said they were getting cheated. International Business Machines Corp. alleged that Fujitsu Ltd. copied IBM’s mainframe operating-system software; Honeywell said Minolta stole its patented technology for a hit camera in 1985. Both disputes were later settled, but Washington barred foreign scientists from a 1986 conference on superconductivity for fear that Japan would take the lead, and pushed Japan to do more basic research on the theory that it would stop Japanese scientists from free-riding on American innovation.*
Meanwhile, urged on by U.S. officials, Japan embarked on a quick stimulus program to boost imports. The Bank of Japan ratcheted down interest rates by half within a year and a half. The U.S. economy boomed, and the trade surplus shrank somewhat.
Still, America’s concern deepened. The late 1980s and early 1990s were full of alarms from trade officials and experts about how Japanese bureaucrats were plotting to control the world. U.S. trade officials warned in 1989 that a Japanese technology standard called Tron could undercut American dominance in computers.
A 1991 book, “The Coming War With Japan,” by George Friedman and Meredith LeBard, predicted that Japan, irked by U.S. trade demands, would “once more seek to become an empire on its own, dominating the western Pacific and eastern Asia.” Reviewers called it thought-provoking and disturbing. James Fallows, in the New York Review of Books, wrote that the authors’ prediction of “more and more open rivalry” between Japan and America “may well seem prescient.”
What few saw coming—even though it was already happening—was the crumbling of Japan’s juggernaut. The Plaza Accord and interest-rate cuts had exposed little-noticed flaws in economic management. Conflicted regulators let banks lend huge sums with inflated real estate as collateral. The Bank of Japan, lacking independence, hesitated to remove the punch bowl when Japan’s party of the century was in full swing. “Easy money, instead of generating greater demand for consumption and imports—it stimulated an asset bubble. Every Japanese was totally mesmerized,” says Mr. Gyohten, the former Finance Ministry official.
When the inevitable crash came, regulators were caught with their pants down—almost literally—as it was discovered that Finance Ministry officials and the bankers they regulated had enjoyed “no-pants shabu-shabu” meals together, where scantily clad waitresses served a beef delicacy.
Japan plunged into two decades of stagnation. Banks went bankrupt under the weight of bad loans, and prices started falling. Personal-computer software and chips based on the Tron technology proved no match for Microsoft Corp.’s Windows and Intel Corp.’s processors as a global standard. The Japanese bureaucrats pushing it watched helplessly as giants such as Google and Amazon were born on the West Coast.
Washington learned that it had limited skill at micromanaging a distant economy to lift imports, but America’s power to innovate surpassed anything the Japan doomsayers foresaw. By the turn of the century, Japan had ceased to be a top trade issue for the U.S. It was no longer worth arguing about.
There was one place where people didn’t forget the U.S. tussle with Japan: China.
“We have been playing close attention to the Japanese experience,” says Yu Yongding, a leading Chinese economist who has served as a planning adviser to the government. Mr. Gyohten and other top Japanese officials who lived through the bubble and its aftermath describe frequent visits from Chinese representatives.
Initially, many in China focused on the simplest lesson of the Plaza Accord: the need to control one’s own currency. Even today, when most nations of China’s economic stature let their currencies move freely against the dollar, Beijing keeps daily trading of its renminbi within a narrow band.
“I wish to advise people to give up the illusion that another Plaza Accord could be imposed on China,” China’s ambassador to the U.S., Cui Tiankai, said in August. “They should give up the illusion that China will ever give in to intimidation, coercion or groundless accusation.”
Currency manipulation was among the biggest U.S. complaints against Beijing until a few years ago. Under Mr. Trump, the discussion has broadened into a critique of the entire way China runs its economy.
In place of Japan’s Tron, once-obscure bureaucratic plans in China are now at the center of global trade conflicts, particularly “Made in China 2025,” a policy adopted in 2015 calling on Chinese manufacturers to boost domestic production of critical high-tech components. China is considering changes to the policy under U.S. pressure, people familiar with the matter said this week. “I’m amazed at how this became such a big deal,” says Mr. Yu, the economist. “I don’t think any government can be so clever to know the new technologies.”
The parallels with Japan weaken when it comes to military tensions. While some in the 1980s feared that Japan could remilitarize and become a strategic rival to the U.S., China already plays that role, challenging the U.S. Navy by building up fortified outposts in disputed areas of the South China Sea. With a population more than 10 times Japan’s and a nuclear arsenal, China is far better-positioned to take on the U.S. globally than Japan was.
Yet amid the talk of superpower conflict, people may miss the risk of China going in the other direction, says Takahide Kiuchi, a former Bank of Japan policy board member now at the Nomura Research Institute in Tokyo. “The Chinese financial system is the biggest threat to global stability,” Mr. Kiuchi says. “The U.S.-China trade problem is occurring at exactly the wrong time.”
China’s economy isn’t the same as Japan’s in the 1980s—for one thing, the average Chinese is much poorer today than the average Japanese was then—but some structural flaws are similar. Beijing’s regulators still have an inadequate grasp of risks in the financial system, especially the trillions of dollars in deposit-like investment products. Real-estate prices in China’s biggest cities have risen far beyond the average person’s budget, recalling the 100-year loans people used in the late 1980s to buy tiny Tokyo apartments. And China’s working-age population has begun shrinking because of a low birthrate—resembling the demographic time bomb that underlies Japan’s long stagnation.
As the trade conflict with the U.S. wears on, economists such as Mr. Kiuchi say that Chinese leaders are already backing away from overhauls such as exposing state-owned companies to more market competition. And they may turn to short-term stimulus such as public works, the kind of move that Japan tried after the Plaza Accord and later regretted.
If China’s economy hits the brakes, the U.S. would have plenty of reason to breathe a sigh of relief. Beijing might have to dial back its military buildup, and middle-class frustration could jump-start the political liberalization that President Xi has halted.
The risk is the instability that could ripple out into the world. It isn’t just the Iowa soybeans or made-in-South Carolina BMWs that China buys. Global commerce is intertwined far more than it was three decades ago. If China buys fewer Japanese robots or German gas turbines, those countries may take a hit that spreads to the U.S. The mere fear of a recession in a country like China, which accounts for one-sixth of the global economy, can hit markets and create a self-fulfilling prophecy.
If the U.S. is perceived as rooting for Beijing’s downfall, it could be self-fulfilling in another way by turning a country that has some common interests with the U.S.—a frenemy, one might say—into an outright enemy. Mr. Trump himself seems aware of the risks. At a news conference on Nov. 7, he started one answer with what sounded like characteristic crowing about a policy success. “China has come down tremendously. Tremendously,” he said. “China would have superseded us in two years as an economic power; now, they’re not even close.”
But then he caught himself. “I don’t want them to go down,” he said. “We’re going to see what we can do.” - WSJ
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