Opinion: Will U.S. Face Trade Friction With China Like That With Japan in 1970s?
On a recent visit to Japan, I was told by a Tokyo-based investor that they were worried China might soon repeat a regrettable chapter in Japan’s trade history.
Between the 1970s and the 1990s, the United States had a major trade deficit with Japan, and trade between the two countries was marred by continuous friction. In 1985, pressure from the U.S. led Japan to sign the Plaza Accord, which resulted in significant appreciation of the yen and paved the way for Japan’s subsequent economic bubble. Today, the United States’ greatest trade deficit is with China — could China be heading in the same direction?
I believe the answer is no — there are currently many factors that will prevent China from falling into the same situation as Japan.
To begin with, if the United States tries to initiate a trade war with China, it will have to face the cost of potentially losing access to the Chinese market, which is far more important to U.S. businesses than Japan ever was.
In 2016, China’s total domestic retail sales amounted to 33.2 trillion yuan ($4.74 trillion), far less than the United States’ total domestic retail sales in the same period, which came up to $5.5 trillion. But disposable income in China has grown at four times the rate in the U.S. over the past 10 years, and the Chinese save a total of more than double what Americans save.
Companies around the world, including U.S. firms, are optimistic about the growth prospects of the Chinese market. China’s smartphone, civil aircraft, automobile, and travel industries have developed rapidly in recent years. China has even become the largest market by sales volume for General Motors Co., overtaking the U.S. in 2010.
In comparison, Japan’s retail market during its trade war with the U.S. was far smaller, and its consumers had a smaller appetite for imports and tended to buy more domestically manufactured products. Even at its 1985 high of $435 billion, the Japanese retail market was only one-third the size of the U.S. market in the same year. In the 1990s, after its bubble burst, Japan’s retail industry gradually shrank. In 2016, retail sales in Japan came up to a total of around $1.2 trillion, or one-third the size of sales in the U.S.
Another factor working in China’s favor is the kinds of goods the country exports to the U.S. At the moment, around half of China’s exports come from businesses with foreign investors, and nearly half of these businesses are American. If the U.S. attempts to undermine China’s exports through protectionist measures, U.S. businesses in China will suffer the indirect repercussions.
As Premier Li Keqiang told reporters at this year’s “two sessions” — the annual plenary meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference — that although China has a trade surplus with the U.S., more than 90% of the profits arising from exports by China-based U.S. companies are kept by the companies themselves, with Chinese manufacturers receiving as little as 2 to 3 percent.
Japan’s exports to the U.S., on the other hand, were mostly Japanese brands, so the impact of protectionist measures against Japan on U.S. businesses was negligible. This was partly because Japan’s higher labor costs in the late 20th century pushed U.S. companies to set up factories elsewhere, such as in “the four Asian Tigers” (Hong Kong, Taiwan, Singapore and South Korea) or neighboring Mexico.
The third factor is how China is unlikely to respond with U.S. pressure by voluntarily limiting its own exports. In contrast, the 30-year history of trade friction between Japan and the U.S. has been marked by unilateral concessions from Japan with the exception of the early 1970s.
In the early 1970s, Japanese textile makers like Asahi Kasei Corp. were engaged in a serious battle against U.S. textile companies, with neither side willing to compromise. But in January 1972, the U.S. and Japanese governments reached an agreement on the textile trade, placing strict quotas on Japanese textile exports to the U.S.
Since then, Japan has been making concessions and opening its markets in areas like steel, semiconductors, color TVs and automobiles while placing voluntary restrictions on its exports to the United States.
The trade war became an impetus for Japan’s industrial hollowing-out. As the yen appreciated in the years following the Plaza Accord, Japan began investing extensively in factories abroad, with many companies in the industries affected by trade friction heading to the U.S. to set up facilities.
China is unlikely to respond to trade friction with the U.S. by limiting its exports. Rather, the Chinese government will seek to further open the country’s markets while promoting fair competition, reform of state-owned enterprises, and opening-up of financial markets to increase imports from the United States.
The fourth point is that China and Japan’s exchange-rate policy choices will be very different. In 1985, when the Plaza Accord was signed, a dollar was worth 240 yen. Ten years later, the yen’s value had doubled and a dollar could buy you only 120 yen. The yen’s dramatic appreciation led the Japanese government to adopt an overly loose monetary policy, resulting in the bubble economy and its eventual collapse.
In contrast, the Chinese government has been striving since last year to keep the yuan’s value stable, and has avoided using changes in exchange rates to adjust trade.
Finally, the United States’ massive levels of direct investment in China, the fact that China holds $1.12 trillion in U.S. Treasury bonds, and the United States’ current $333 trillion services surplus with China all point to the conclusion that China has greater room to maneuver than Japan did.
Shen Jianguang is the chief Asia economist at Mizuho Securities.
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