How to win a trade war
Published : Saturday, 25 May, 2019 at 12:03 PM Count : 433
The US won a trade war against Japan. But China is a whole new ball game.
As President Donald Trump lands in Japan Saturday amid a worsening trade war with China, he could well be thinking back to a previous economic spat between Washington and an Asian economic powerhouse.
In the 1980s, Japan was the big bad. Its economy was booming — the second largest in the world — and many in the United States feared they were about to be overtaken.
Articles were published warning of the "Japanning of America" or an "economic Pearl Harbor," as Japanese businesses bought US companies and landmarks. Lawmakers and commentators warned of a growing trade deficit between the two countries, and complained of Japanese firms stealing US intellectual property and taking advantage of unfair trade deals.
In an interview with the "Morton Downey Jr. Show" in 1989, Trump himself complained that Japan had "systematically sucked the blood out of America — sucked the blood out!"
"It's a huge problem, and it's a problem that's going to get worse," Trump said of the US-Japan trade balance. "And they're laughing at us."
By then, however, change was already happening. And far from overtaking the United States, Japan was about to fall far behind.
After President Ronald Reagan took office in 1981, the United States started pressuring Japan to open its market up to American companies and reduce the trade imbalance between the countries.
While Japan agreed to measures including a limit on the number of cars it exported to the United States, panic over Japanese trade power grew — and lawmakers on both sides demanded action.
In approving a bill calling for tough trade reprisals against Japan, Robert Packwood, then Republican head of the Senate's finance committee, promised to give Tokyo "an eye for an eye ... that is all they understand."
During a 1985 finance committee hearing, Democratic Sen. Max Baucus said that: "Reagan predicted 'a future in which commerce will be king, the eagle will soar, and America will be the mightiest trading nation on Earth.' Well, commerce may be king. And eagles may be soaring. But they're not American eagles. America's trade performance has never been worse."
That year, five countries — the United States, West Germany, France, the United Kingdom and Japan — signed the Plaza Accord, devaluing the US dollar against the Japanese yen (and the German Deutsche Mark). This was a boon for the United States, leading to an increase in exports and a lowering of its trade deficit with many Western European countries.
Yet the Plaza Accord wasn't the end of US action against Japan. In 1987, Washington imposed 100% tariffs on $300 million worth of Japanese imports, effectively blocking them from the American market.
Things quickly turned sour for Tokyo. As the yen increased in value, Japanese products became more and more expensive, and countries turned away from the one-time export powerhouse. Efforts by the country's central bank to keep the yen's value low sparked a stock price bubble, the collapse of which helped push the country into recession and a "lost decade."
"Japan's export and GDP growth essentially halted in the first half of 1986," economists Joshua Felman and Daniel Leigh wrote in a report for the International Monetary Fund. They concluded that while the Plaza Accord did not cause Japan's economic downturn by itself, it did trigger a series of events — compounded by poor decisions in Tokyo — which led to the collapse.
Some of Trump's first forays into politics involved railing against Japan during the 1980s and early 1990s. During that time, he started calling for the use of tariffs as a trade weapon.
While he has not referenced the historical US-Japan relationship during the recent China conflict, Washington's success against Tokyo could influence his thinking on how to handle Beijing. One of his key advisers on trade, Robert Lighthizer, also took part in Japan negotiations in the 1980s.
In 2011, as Trump flirted with a presidential run, Lighthizer praised his "skepticism toward pure free-trade dogma."
"The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained imports of semiconductors and automobiles, and took myriad similar steps to keep American industry strong," he wrote.
Yet while Lighthizer and Trump may take positive lessons from the 1980s trade war, Beijing is also paying attention — and China's leaders have no intention of copying Japan's mistakes.
In an editorial last year, China's Xinhua state news agency warned that "Japan was seriously hurt by its improper response" to the Plaza Accord and US trade pressure.
It blamed the US for scapegoating Japan for problems in the domestic economy, adding a "strong protectionist sentiment was the direct driving force behind the Plaza Accord."
This has been a common theme in state media coverage of the trade war -- that the US is seeking to blame Beijing for matters outside its control.
Of course 2019 is not 1985, and China is not Japan. Beijing is far stronger both economically and politically than Tokyo was in the 1980s, with Japan dependent on the United States for national security and less willing to risk Washington's ire.
"Japan was an easy target for US bashing. After the second world war, Japan has been both politically and economically dependent on the US, resulting in limited bargaining power to counteract the US," analysts Alicia Garcia-Herrero and Kohei Iwahara wrote last week. "China is in a better position to resist US pressure."
The risk in this instance isn't of a failure to learn from history, but that both parties could take the wrong lessons.
Trump and Lighthizer, having cut their teeth in the battles against Tokyo, could assume that a similarly aggressive policy will prompt Beijing to bend to their demands. Chinese negotiators have already learned what happens when you push back against Trump, with trade talks collapsing this month after Beijing reportedly attempted to alter the deal at the last minute.
The failure of those talks led to an immediate escalation in tensions, with new tariffs imposed by both sides. This could be blamed on Beijing's late changes, but equally on Washington's unwillingness to negotiate.
At the same time, China's interpretation of the 1980s could also lead it to make missteps.
On Thursday, Foreign Ministry spokesman Lu Kang said any "mutually beneficial deal must be based on mutual respect, equality and win-win outcomes." But as many observers have noted, what China's leaders regard as "win-win" often means a win on its terms, and a desire to avoid repeating Japan's mistakes could result in Beijing refusing to take a minor loss that could ultimately lead to a better overall agreement.
Japan is currently celebrating the beginning of the Reiwa era, under a new emperor, a time to wipe the slate clean and start again. US and Chinese trade negotiators might be better off copying that lesson than those of the 1980s.