Initiative for U.S.-China Dialogue on Global Issues

The trade friction between the United States and Japan culminated in the 1980s when China just started to participate in the world economy. At the time, Japan was seen as a strong Asian economic power with currency manipulation, subsidies and stiff non-tariff barriers to imports. There were main disputes in areas such as automobiles, semiconductors, and communications equipment as well as Japanese aggression in exports, which were seen as significant to national security for the United States. Despite distinctions between the 1980s Japan and current China, the concerns for tariffs and technologies in the general picture of a trade war now and then has displayed much similarity.

Economic growth in China today has analogous patterns with that of Japan in the 1980s. Both countries relied on cheap labor, accelerated exports, and productivity improvements to increase market share and then moved on to more advanced technologies. With the Plaza Accord in 1985, Japan agreed to loosen its monetary policy to allow appreciation of its currency against the U.S. dollar, which was believed to contribute to the asset price bubble leading to the “Lost Decades”. The immense consequences for Japan certainly serve as lessons for current China.

Employing this historical perspective also requires awareness of the difference between Japan and China. Today’s China has a larger trade volume: Japan had 3-fold export to import with the United States in 1985, while that of China with the United States in 2018 was close to 4.3. GDP wise, China accounts for a historically high percent of world GDP. Its GDP shows a strong momentum to match that of the United States in the coming years, catching up to the relative percentage of Japan during its peak around 1995. Compared with Japan, it does sound like China is creating a greater threat to America.

If an economic threat exists from China, how does one quantify it? Today, the economic volume generated by a population of 1.4 billion is surely immense. However, it also means that the average Chinese is much more poor than the average Japanese was back then. For volume on the individual level, the GDP per capita of China was $9633. In 2018, China ranked 73rd among world countries. This number was 84.7% of world average, 24% of Japan and 15.4% of U.S. On the whole, look at the sectors where the United States and China have been imposing tariffs on each other. With the United States imposing tariffs on “industrially significant technology”, the Chinese tariffs were mostly on agriculture products and energy. China’s need for U.S. high-tech products is undeniable beyond the massive trade surplus, and the Chinese economy is still young but inherently massive due to its demographics.

Japan paid its price for the 1980s concession in the trade conflict. China is not going to follow because of the potential consequences and what it has today. But comparisons to the 1980s suggest a lower possibility of decoupling. The increasingly interwoven world economy is demanding a higher decoupling price to pay for both China and the United States. In spite of economic leadership and dependence in high-tech, both countries are each other’s top consumer markets. To the United States, China is not only a giant supplier, but also a huge middle class market with rising purchasing power for a full spectrum of goods. Once this market is lost during a decoupling, Europe would be happy to take over and the recovery cost for United States would be huge. The world economy is no longer a bilateral zero-sum game.

Surely, the threat of U.S.-China economic decoupling is posing a question for politicians and economists of today. But it is just once again a repetition of history. U.S.-Japan trade friction is a comparative parallel to the current situation, but regardless of geography and time, there have always been fights like the smoot-hawley tariffs in the 1930s, the chicken tariff in the 1960s, and the steel tariffs in 2002 between different stakeholders. Beyond the ongoing debates between protections versus open trade, and no matter who will be players in the next round, the background of the trade wars - the world economy is displaying the pattern of convergence and an increasing state interdependence. Will countries devise new mechanisms of resolution for this evolving pattern stemming from 200 years of modern economic growth or will such problems always be dealt with in a zero-sum way? That’s the long-term question to consider.