America shouldn’t treat China the same way it treated Japan back in the 1980s. When it comes to trade disputes, that is. It won’t work, and it could place the world trade and financial system at risk.
America’s current trade disputes with China parallel those with Japan back in the early 1980s. They both revolve around large trade surpluses, lack of access of American companies to domestic markets, and intellectual property protection.
America won those disputes by applying a number of hard negotiation tactics, which included the threat of tariffs on Japanese products.
Washington seems to be following the same approach in addressing these disputes with China as it did with Japan. “The US trade war with Japan in the 1980s seems to be cited favorably as an example of how Washington might ‘win’ in the current dispute with China,” says Ilya Spivak, Sr Currency Strategist (DailyFX). “In fact, the approach adopted by Washington seems to be heavily influenced by current US Trade Representative Robert Lighthizer, a Regan White House veteran with strong involvement in its Japan strategy.”
But America’s approach — treating China the same way it treated Japan — seems weak, for a number of reasons. One of them is that China is an emerging, not a developed country, as Japan was back then. This means that it’s normal for China to rely on exports as a major engine of economic growth rather than on domestic demand. It wasn’t for Japan back then.
China’s Terms of TradeKoyfin
Besides, China has already made some programs in reducing its reliance on exports. “While there are some parallels, they seem relatively shallow,” Spivak. “China has far stricter controls on its financial markets – and especially its currency – than Japan did on the eve of the 1985 Plaza Accord. That allows Beijing quite a bit more policy leverage. China’s deliberate move away from export-dependent growth in recent years insulates it further.”
Then there’s the state of competition between the two countries. Japan had developed a number of technology-intensive industries already that competed head to head against their American counterparts. Like automobiles, consumer electronics, and machine tools—to mention but a few.
That isn’t the case with China, which has yet to develop a single technology-intensive industry that presents a major challenge to its American counterparts.
And there’s another difference, too. The context — the conditions and circumstances surrounding the trade disputes — then and now. In the 1980s, the disputes took place within GATT. That was an informal trade organization working to cut tariffs across nations, including Japan, where tariffs remained high.
Now, the disputes are taking place within WTO, which replaced GATT.
That’s a formal trade organization that has already lowered tariffs for most products traded by its member nations, including China.
In the early 1980s, America’s mood was much different than it’s today. “Assuming that we’re discussing the peak years of the competitive and occasionally adversarial trade relationship between the U.S. and Japan in the 1980s and 1990s and then looking at the same for the U.S. and China, our observation is that these tensions are driven more by social mood in the countries involved and less so by the actual underlying fundamentals of any specific trade relations,” says Mark Galasiewski, chief analyst for Asia and Emerging Markets at Elliott Wave International. “And, tensions that simmer in bull markets which reflect a more positive social mood are often exacerbated in bear markets which reflect a more negative one.”
And, finally, there’s history. Unlike Japan, China historically doesn’t yield to foreign pressure. Even if the odds are clearly against her.
And that’s dangerous for the world financial system.
That’s why America should leave China some breathing room.
Let it lose the trade war gracefully.