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Opinion: China Has to Learn From Past U.S. Trade War With Japan

The risk of a full-blown U.S.-China trade war is growing each day. The trade war will essentially involve the U.S. trying to keep in check China’s industrial and technological growth. It will be a struggle involving high-tech emerging industries, with both countries’ fates at stake.

In the face of this, there are lessons China can learn from Japan’s past experience in a similar trade war with the U.S. The U.S. and China have fundamentally irreconcilable demands, and it will be difficult to reach an agreement through negotiations. A stage of even more intense trade conflict is inevitable. China should make strategic preparations for the short and medium term, as well as for a longer, protracted trade war.

Struggle for tech dominance

It is becoming increasingly clear that the U.S.’ intention is to suppress China’s technological progress and prevent it from catching up. We have seen Section 232 tariffs on China’s steel and aluminum production, a Section 301 investigation into Chinese trade practices, talk of levying $150 billion in tariffs against Chinese imports, and actions against ZTE Corp., all within the U.S.’ first year under President Donald Trump, who sees President Ronald Reagan’s unilateralism as a model to emulate. The U.S. Treasury Department is even considering using emergency laws to ban certain Chinese tech investments in the U.S. On the pretext of protecting intellectual property rights, the U.S. is restricting the export of high-tech products to China.

According to a report by the United States President’s Council of Advisors on Science and Technology titled “Ensuring U.S. Semiconductor Leadership,” the rise of China’s semiconductor industry is posing a “threat” to the United States. The council recommended that the government impose restrictions on China’s science and technology industries.

Trade friction in capital- and technology-intensive industries will become the norm as China increasingly upgrades its exports, causing intensified global competition. High-tech manufacturing and equipment manufacturing account for 23% and 52% of China’s industrial output respectively. In 2017, the value of the high-tech manufacturing industry reached 3.3 trillion yuan ($515 billion), and the value of the equipment manufacturing industry grew to 9.1 trillion yuan. China is ushering in a new-economy golden era — the very thing the U.S. is trying to curb in the ongoing trade conflict.

Lessons from the U.S.-Japan trade war

The U.S. is currently employing the same tactics against China that it used against Japan in the 1980s.

The high-tech trade conflict of that decade centered on the semiconductor industry. Semiconductors were developed by the United States in the 1950s, and helped to ensure the superiority of the country’s military and space program. After the 1970s, the U.S. semiconductor industry tried to build its own production system on a global scale. Japan also tried to develop its own semiconductor industry in the late 1970s through policies that included 32 billion yen (about $294 million at today’s exchange rates) worth of investment by the Japanese government, and the establishment of institutes dedicated to electronics and computer research.

With the transfer of U.S. production chains to developing countries, and intense efforts by rivals like Japan, the dominance of the U.S. semiconductor industry gradually diminished. From 1984 to 1987, Japan’s share of world semiconductor production rose from 14% to 20%, according to the figures from the U.S. Semiconductor Industry Association. By 1986, the world’s top three semiconductor companies by sales volume were Japanese companies.

At the same time, in the 1980s, Japan was exporting more high-tech products than it was importing, and Japanese companies’ share of the U.S. computer market increased sevenfold from 1980 to 1984. By the mid-1980s, the U.S. Department of Commerce had determined that Japan was the greatest threat to U.S. science and technology companies, and began taking measures against Japan. In 1984, the U.S. set up an intellectual property committee aimed at limiting the outflow of technology to Japan. Friction between Japan and the United States over high-tech industries became increasingly intense.

After an intense period of U.S. trade action against Japan, which included tariffs and demands that Japanese research institutes publicize details of their research programs, Japan and the United States in 1986 signed a five-year agreement under which Japan had to expand foreign companies’ access to its semiconductor market and maintain certain price levels for semiconductor exports to the U.S. and third-party countries, among other requirements. The general consensus among observers is that the 1986 agreement allowed Taiwan and South Korea to overtake Japan in semiconductor production.

The trade conflict between Japan and the U.S. had features that would be familiar to those observing U.S.-China trade frictions today. The Japanese economy developed from a dependence on primary products such as textiles and steel to a focus on advanced products like automobiles, semiconductors and electronic communications. In response to the perceived threat from Japan, the U.S.’ responses moved from import restrictions to demands for market liberalization and other deeper requirements. Friction grew from targeting specific commodities into a full-scale trade war.

The world is now experiencing a period of major transformations, major adjustments and great chaos. Since the international financial crisis of 2008, the global economy, including China’s economy, has undergone an unprecedented process of restructuring and reorganization. The competitiveness and future growth potential of each country depend on how quickly and how thoroughly a country can transition to a growth model based on technological progress and innovation. Within this context, China must promote comprehensive reflection on how it can transition from being merely a “giant” in science and technology to becoming “strong” in these sectors. Thorough planning will transform the impending trade crisis into a powerful driving force for domestic reforms.

Not just the semiconductor industry, but flexible display panels, aircraft engines, ultra-high-precision machine tools, and special types of steel produced by China are also being targeted by the U.S. Therefore, China must comprehensively sort out the list of core technologies that it has yet to fully develop and make a great effort to move past technical bottlenecks through the complete establishment of core competencies and the full ownership of core technologies. In the final analysis, China’s ability to move from independent research to independent innovation, and ultimately to the development of unique technical advantages, will depend on the strength of the country’s “hard power.”

Zhang Monan is a researcher at the China Center for International Economic Exchanges.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

Read more about China-U.S. trade tensions.

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